SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No. 0-26224
December 31, 1999
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0317849
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
105 Morgan Lane
Plainsboro, New Jersey 08536
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 275-0500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of March 24, 2000 was approximately $134
million. (Reference is made to page 28 herein for a statement of the assumptions
upon which this calculation is based.)
The number of shares of the registrant's Common Stock outstanding as of
March 24, 2000 was 16,312,345.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement relating
to its scheduled May 16, 2000 Annual Meeting of Stockholders are incorporated by
reference in Part III of this report.
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PART I
ITEM 1. BUSINESS
The terms "we", "our", "us" and "Integra" refer to Integra LifeSciences Holdings
Corporation and its subsidiaries unless the context suggests otherwise.
Integra develops, manufactures and markets medical devices, implants and
biomaterials. Our operations consist of (1) Integra NeuroSciences, which is a
leading provider of implants, instruments, and monitors used in neurosurgery,
neurotrauma, and related critical care and (2) Integra LifeSciences, which
develops and manufactures a variety of medical products and devices, including
products based on our proprietary tissue regeneration technology which are used
to treat soft tissue and orthopedic conditions. Integra NeuroSciences sells
primarily through a direct sales organization, and Integra LifeSciences sells
primarily through strategic alliances and distributors.
Integra was founded in 1989 and over the next decade built a product portfolio
based on resorbable collagen and a product and development platform based on
technologies directed toward tissue regeneration. During 1999, we expanded into
the neurosurgical market, an attractive niche market, through acquisitions and
new products. Our 1999 revenues increased to $42.5 million as compared to $17.5
million in 1998.
In 1999, we sold over 1,000 different products to over 1,900 hospitals and other
customers in more than 60 countries. We generate revenues from product sales,
strategic alliances and royalties and invested $8.7 million in research and
development relating to new products using our biomaterials, peptide chemistry
and collagen engineering technologies.
Integra Neurosciences accounted for 54% of total revenues in 1999. We market
these products to neurosurgeons and critical care units, which comprise a
focused group of hospital-based practitioners. As a result, we are able to
access this market through a cost-effective sales and marketing infrastructure.
For the majority of the products we manufacture under Integra LifeSciences, we
partner with market leaders, which we believe allows us to achieve our growth
objectives cost effectively while enabling us to focus our management efforts on
developing new products. Our strategic alliances include Johnson & Johnson
Medical, a division of Ethicon, Inc., Sulzer Medica Ltd., the Linvatec division
of CONMED Corporation, Bionx Implants, Inc., the Genetics Institute division of
American Home Products Corporation, the Sofamor-Danek division of Medtronic,
Inc. and Baxter Healthcare.
Strategy
Our goal is to become a leader in the development, manufacture and marketing of
medical devices, implants and biomaterials in the markets in which we compete.
Our products are principally used in the diagnosis and treatment of acute or
chronic neurosurgical, soft-tissue and orthopedic conditions and we intend to
expand our presence in those markets. Key elements of our strategy include the
following:
Expand our neurosurgery market presence. Through acquisitions and internal
growth, we have rapidly grown Integra NeuroSciences into a leading provider of
devices for the neurosurgery market. We believe there exists additional growth
potential in this market through:
o Increasing market share of existing product lines;
o Expanding our product portfolio through acquisitions; and
o Continuing development and promotion of innovative products, such as our
recently introduced DuraGen(TM) Dural Graft Matrix.
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Continue to develop new and innovative medical products. As evidenced by our
development of INTEGRA(R) Artificial Skin, Biomend(R) and DuraGen(TM), we have a
leading proprietary resorbable implant franchise. INTEGRA(R) Artificial Skin is
a proprietary resorbable collagen used to enable the human body to regenerate
functional dermal tissue. In 1999, we introduced our DuraGen(TM) dural graft
matrix to close brain and spine casings. We are currently developing a variety
of innovative neurosurgical and non-neurosurgical medical products using our
resorbable collagen technology as well as expanded applications for our existing
products.
Continue to form strategic alliances for Integra LifeSciences products. We have
collaborated with leading companies to develop and market the majority of our
non-neurosurgical product lines. These products address large and diverse
markets, and we believe that they can be more cost effectively sold through
marketing partners than through developing our own sales infrastructure. We
recently partnered with Johnson & Johnson Medical to market our INTEGRA(R)
Artificial Skin and intend to pursue additional strategic alliances selectively.
Additional strategic acquisitions. Since March 1999 we have completed or entered
into contracts for three acquisitions in the neurosurgical market. We intend to
seek additional acquisitions in this market and seek strategic acquisitions in
other niche medical technology areas characterized by high margins, fragmented
competition and focused target customers.
Products
We manufacture and market a broad range of medical products for the diagnosis
and treatment of spinal and cranial disorders, soft tissue repair and orthopedic
conditions. We are also actively engaged in a variety of research and
development programs relating to new products or product enhancements utilizing
our tissue regeneration technology. Our products and products under development
are summarized in the following table.
Integra NeuroSciences
<TABLE>
<CAPTION>
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Product Application Status
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Camino(R) and Ventrix(R) fiber For continuous pressure and Marketed
optic-based intracranial temperature monitoring of the brain
pressure monitoring systems following injury, and drainage
and Clinical Neuro Systems(TM) of excess fluid
drainage systems & cranial
access kits
- ----------------------------------------------------------------------------------------------------
Heyer - Schulte(R) Specifically designed for the Marketed
neurosurgical shunts maintenance of the chronic
condition, hydrocephalus (i.e.,
excess pressure in the brain)
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</TABLE>
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Integra NeuroSciences, continued
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Product Application Status
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
DuraGen(TM) Dural Graft Graft to close brain and spine Marketed
Matrix (absorbable collagen-based) casing
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Redmond(TM) neurosurgical and Specialized surgical instruments Marketed
spinal instruments for use in brain or spinal surgery
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Neuro-Navigational(R) flexible For minimally invasive surgical Marketed
endoscopes for neurosurgery access to the brain
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Helitene(R) Microfibrillar Control of bleeding during Approved in
Hemostat surgery Europe; Pending
approval for
neurosurgical use
in U.S.
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Peripheral nerve conduit Repair of peripheral nerves Development
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</TABLE>
Integra LifeSciences
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Product Application Status Marketing/Development Partner
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEGRA(R) Artificial Skin Regenerate dermis Marketed Johnson & Johnson Medical, Century
and skin defects Medical, Inc.
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BioMend(R) and Biomend(R) Extend, Used in guided Marketed Sulzer Medica
Absorbable Collagen Membrane tissue regeneration
in periodontal
surgery
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Articular cartilage repair Regeneration of Development DePuy division of Johnson & Johnson
joint cartilage
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Collagen material for use with bone Fracture Development Genetics Institute (AHP), Medtronic
morphogenetic protein (rhBMP-2) management/enabling Sofamor Danek
spinal fusion
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Tyrosine polycarbonates for fixation Fixation or Development Linvatec (CONMED), Bionx Implants, Inc.
devices such as resorbable screws, alignment of
plates, pins, wedges and nails fractures
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</TABLE>
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Integra LifeSciences, continued
<TABLE>
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VitaCuff(TM) Provides Marketed Bard Access Systems, Inc., Arrow
protection International, Inc
against
infection
arising from
long-term
catheters
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BioPatch(TM) Anti-microbial Marketed Johnson & Johnson Medical
wound dressing
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Helitene(R) and Helistat(R) Control of Marketed Sold through various distributors
absorbable collagen hemostatic bleeding
agents
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CollaCote(R), CollaTape(R) and Used to control Marketed Sulzer Medica
CollaPlug(R) absorbable wound bleeding in
dressings dental surgery
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Sundt(R) Shunt Carotid Marketed Sold directly and through various
endarterectomy distributors
shunts for
shunting blood
during
surgical
procedures
involving
blood vessels
- ----------------------------------------------------------------------------------------------------
</TABLE>
INTEGRA NEUROSCIENCES
In General
We manufacture and market a multi-line offering of innovative neurosurgical
devices used for brain and spine injuries. We intend to be the neurosurgeon's
and intensive care unit's "one-stop shop" for these products. For the intensive
care unit, we sell the Camino(R) and Ventrix(R) lines of intracranial pressure
("ICP") monitoring systems and external drainage systems manufactured under the
Camino(R), Heyer-Schulte(R) and Clinical Neuro Systems(TM) brand names. For the
operating room, we sell a wide range of products, including cerebrospinal fluid
("CSF") shunting products, the DuraGen(TM) Dural Graft Matrix, Neuro
Navigational(R) endoscopes, and Redmond(TM) neurosurgical instruments.
We sell our neurosurgical products in the United States through a direct sales
force organized into five regions each with a region manager. We employ 27
direct sales personnel called neurospecialists covering 40 territories. We
intend to increase the number of sales personnel to 40. We also employ seven
clinical development specialists who directly educate and train both the
neurospecialists and our customers in the use of our products. In addition, we
employ a physician as medical director, and a Ph.D. in neurosciences as
scientific director. The sales organization has approximately doubled in size
since the acquisition of the first neurosciences business in early 1999. We
believe this expansion allows for smaller, more focused territories, greater
participation in trade shows and more extensive marketing efforts.
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Outside of the United States, we sell our products through approximately 60
specialized neurosurgical distributors and dealers.
Industry
Integra NeuroSciences addresses the market need created by trauma cases and
hydrocephalus through its established market positions in ICP monitoring,
neurosurgical shunting, neuroendoscopy and specialty neurosurgical
instrumentation. Integra NeuroSciences currently has more than 3,000 ICP
monitors installed worldwide.
ICP monitors are used by neurosurgeons in diagnosing and treating cases of
severe head trauma and other diseases. There are approximately 400,000 cases of
head trauma each year in the United States.
Hydrocephalus is an incurable condition resulting from an imbalance between the
amount of CSF produced by the body and the rate at which CSF is absorbed by the
brain. This condition causes the ventricles of the brain to enlarge and the
pressure inside the head to increase. Hydrocephalus often is present at birth,
but may also result from head trauma, spina bifida, intraventricular hemorrhage,
intracranial tumors and cysts. The most common method of treatment of
hydrocephalus is the insertion of a shunt into the ventricular system of the
brain to divert the flow of CSF out of the brain. A pressure valve then
maintains the CSF at normal levels within the ventricles. According to the
Hydrocephalus Association, hydrocephalus affects approximately one in 500
children born in the United States. Approximately 80% of total CSF shunt sales
address birth-related hydrocephalus with the remaining 20% addressing surgical
procedures involving excess CSF due to head trauma.
Integra NeuroSciences's design, manufacture and production of minimally invasive
neuroendoscopy products addresses what we believe is significant growth
potential in the neuroendoscopy market resulting from an increasing number of
neurosurgeons embracing minimally invasive surgical techniques. We believe that
the worldwide market for neuroendoscopy products will grow more quickly than
most other neurosurgical device lines. This growth is expected, in part, because
of the introduction of new procedures called third ventriculostomies which are
increasingly substituting for shunt placement for patients who meet the
criteria. Accordingly, we believe that our Neuro Navigational(R) line of
disposable, semi-flexible, fiber-optic scopes will continue to grow and that the
Neuro Navigational(R) line addresses the needs of neurosurgeons employing these
techniques.
Our DuraGen(TM) product line addresses the market for dural substitutes,
including cranial and spinal procedures.
Integra NeuroSciences's broad line of neurosurgery and spinal instrumentation
products, including hand-held spinal and neurosurgery instruments such as
retractors, kerrisons, dissectors and curettes, addresses the market for
neurosurgical instruments.
Products
Intracranial Pressure Product Line. Integra NeuroSciences sells the Camino(R)
and Ventrix(R) lines of intracranial pressure monitoring systems. Core
technologies in the intracranial pressure monitoring product line include the
design and manufacture of the disposable catheters used in the monitoring
systems, patented pressure transducer technology, optical detection/fiber optic
transmission technology, sensor characterization and calibration technology and
monitor design and manufacture. The research, development and manufacture of
Integra NeuroSciences's ICP monitoring products are located in San Diego,
California.
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External Drainage System Product Line. Integra NeuroSciences's external drainage
systems are manufactured under the Camino(R), Heyer-Shulte(R) and Clinical Neuro
Systems(TM) brand names. We manufacture the drainage systems in both Anasco,
Puerto Rico (for sale under the Camino(R) and Heyer-Schulte(R) brand names) and
in Exton, Pennsylvania (for sale under the Clinical Neuro Systems(TM) brand
name).
Shunts for Hydrocephalus Management. Our line of shunting products for
hydrocephalus management includes the Novus, LPV and Pudenz shunts, ventricular,
peritoneal and cardiac catheters, physician-specified hydrocephalus management
shunt kits, Ommaya CSF reservoirs and Spetzler lumbar and syringo-peritoneal
shunts. Shunts are implanted in the patient to drain excess CSF from the
ventricles of the brain into the peritoneal cavity or externally. Integra
NeuroSciences's hydrocephalus management shunt manufacturing operations are
located in the Anasco, Puerto Rico facility.
DuraGen(TM) Product Line. The DuraGen(TM) Dural Graft Matrix is a resorbable
collagen matrix indicated for the repair of the dura mater. The dura mater is
the thick membrane that contains the CSF within the brain and the spine. The
dura mater must be penetrated during brain surgery, and is often nicked or
otherwise damaged during spinal surgery. In either case, surgeons often close or
repair the dura mater with a graft. The graft may consist of other tissue taken
from elsewhere in the patient's body, or it may be one of the dural substitute
products currently on the market which are made of synthetic materials,
processed human cadaver, or bovine pericardium. We believe that each of the
prevailing methods for repairing the dura mater suffer from shortcomings
addressed by the DuraGen(TM) Dural Graft Matrix. We manufacture the DuraGen(TM)
Dural Graft Matrix product in our Plainsboro, New Jersey facility.
Our DuraGen(TM) product is an engineered resorbable collagen implant that has
been shown in clinical trials to be an effective means for closing the dura
mater without the need for suturing, which allows the neurosurgeon to conclude
the operation more efficiently. In addition, because the DuraGen(TM) product is
ultimately resorbed by the body and replaced with new natural tissue, the
patient avoids some of the risks associated with a permanent implant inside the
cranium.
Redmond(TM) Product Line. We provide neurosurgeons and spine surgeons with a
full line of specialty hand-held spinal and neurosurgical instruments sold under
the Redmond(TM) brand name. These products include retractors, kerrisons,
dissectors and curettes. Major product segments include spinal instruments,
microsurgical neuro instruments, and products customized by Integra
NeuroSciences and sold through other companies and distributors. We import most
of these instruments from Germany.
Neuro Navigational(R) Endoscope Product Line. We manufacture and sell disposable
minimally invasive neuroendoscopy products under the Neuro Navigational(R) brand
name. These fiber optic instruments are used to facilitate minimally invasive
neurosurgery. Neuroendoscopy manufacturing operations are located in San Diego,
California.
Helitene(R) Neurosurgical Hemostat Product Line. Helitene(R) hemostatic agent
consists of microfibular collagen, and is intended to control bleeding during
surgery. Outside of the United States, it is indicated for use in neurosurgery,
in addition to general surgery. During 2000, Integra NeuroSciences will begin to
sell Helitene(R) outside of the United States for use in neurosurgery.
Peripheral Nerve Conduit Product Line. Although peripheral nerves are one of the
few tissues of the body that spontaneously regenerate, in the majority of cases
they fail to make useful, functional connections. Consequently, peripheral nerve
injuries often result in permanent loss of sensation and motor control. At
present, there is no product on the market that regenerates peripheral nerves.
The conventional method of treatment for a severed peripheral nerve is
microsurgical repair or nerve grafts. Our peripheral
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nerve regeneration device is a collagen tube designed to facilitate regeneration
of the severed nerve and to act as a bridge between the severed nerve ends. The
collagen conduit supports nerve regeneration and is then absorbed into the body.
Our pre-clinical studies have demonstrated the closure of 5-cm gaps in
peripheral nerves in non-human primates with restored nerve function. Our
proprietary resorbable conduit for regenerating and reconnecting peripheral
nerves is expected to enter clinical trials in Europe in humans during the first
half of 2000.
INTEGRA LIFESCIENCES
In General
Integra LifeSciences develops and markets tissue regeneration products and sells
surgical products that are primarily sold outside of neurosurgery and
neurotrauma. Many of the current products of Integra LifeSciences are built on
our expertise in resorbable collagen products. Integra LifeSciences's research
and development programs are generally constructed around strategic alliances
with leading medical device companies.
Products
INTEGRA(R) Artificial Skin. INTEGRA(R) Artificial Skin is designed to enable the
human body to regenerate functional dermal tissue. Human skin consists of the
epidermis and the dermis. The epidermis is the thin, outer layer that serves as
a protective seal for the body and the dermis is the thicker layer underneath
that provides structural strength and flexibility and supports the viability of
the epidermis through a vascular network. The body normally responds to severe
damage to the dermis by producing scar tissue in the wound area. This scar
tissue is accompanied by contraction that pulls the edges of the wound closer
which, while closing the wound, often permanently reduces flexibility. In severe
cases, this contraction leads to a reduction in the range of motion for the
patient, who subsequently requires extensive physical rehabilitation or
reconstructive surgery. Physicians treating severe wounds, such as
full-thickness burns, seek to minimize scarring and contraction.
INTEGRA(R) Artificial Skin was designed to minimize scar formation and wound
contracture in full thickness skin defects. INTEGRA(R) Artificial Skin consists
of two layers, a thin collagen-glycosaminoglycan sponge and a silicone membrane.
The product is applied with the sponge layer in contact with the excised wound.
The sponge material serves as a template for the growth of new functional dermal
tissue. The outer membrane layer acts as a temporary substitute for the
epidermis to control water vapor transmission, prevent re-injury and minimize
bacterial contamination.
INTEGRA(R) Artificial Skin is marketed and sold, except in Japan, by Johnson &
Johnson Medical. INTEGRA(R) Artificial Skin was approved by the FDA under a
premarket approval application ("PMA") for the post-excisional treatment of
life-threatening full-thickness or deep partial-thickness thermal injury where
sufficient autograft is not available at the time of excision or not desirable
due to the physiological condition of the patient. The FDA's approval order
includes requirements to provide a comprehensive practitioner training program
and to conduct a post approval study at multiple clinical sites. We have
enrolled more than the required number of patients in the post-approval study,
and expect to file the results with the FDA this year.
We estimate that the worldwide market for use of skin replacement products (such
as INTEGRA(R) Artificial Skin) in the treatment of severe burns is only about
$75 million. However, the potential market for the use of INTEGRA(R) Artificial
Skin for reconstructive surgery and the treatment of chronic wounds is much
larger, which we estimate to be in excess of $1 billion. In June 1999, Integra
LifeSciences
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entered into a strategic alliance with Johnson & Johnson Medical to distribute
INTEGRA(R) Artificial Skin throughout the world, except Japan. As part of that
strategic alliance, Johnson & Johnson Medical has agreed to pay for clinical
trials to support applications to the FDA for these broader indications. We
cannot be certain that such clinical trials will be completed, or that
INTEGRA(R) Artificial Skin will receive the approvals necessary to permit
Johnson & Johnson Medical to promote it for such indications.
BioMend(R) Absorbable Collagen Membrane. Integra LifeSciences has also developed
the BioMend(R) Absorbable Collagen Membrane for use in guided tissue
regeneration in periodontal surgery. The BioMend(R) membrane is inserted between
the gum and the tooth after surgical treatment of periodontal disease,
preventing the gum tissue from interfering with the regeneration of the
periodontal ligament that holds the tooth in place. The BioMend(R) product is
intended to be absorbed after approximately four to seven weeks, avoiding the
requirement for additional surgical procedures to remove a non-absorbable
membrane. The BioMend(R) Absorbable Collagen Membrane is sold through the
Calcitek division of Sulzer Medica. It has been approved for marketing in the
United States and has received CE Mark certification for sales in the European
Union. Sulzer Medica is seeking regulatory approval in Japan. BioMend(R) Extend
was developed by Integra LifeSciences and has the same indication for use as
BioMend(R) except that it absorbs in approximately 16 weeks. The product has
received FDA clearance to market, and has been submitted for CE mark
certification and for approval in Canada and Japan.
Cartilage Repair Products. Damaged articular cartilage, which connects the
skeletal joints, is associated with the onset of progressive pain, degeneration
and, ultimately, long-term osteoarthritis. Normal articular cartilage does not
effectively heal. The conventional procedure for treating traumatic damage to
cartilage involves smoothing damaged portions of the tissue and removing
free-floating material from the joint using arthroscopic surgery with the
objective of reducing pain and restoring mobility. However, this therapy does
not stop joint surface degeneration, often requires two or more surgeries and
results in the formation of fibrocartilage, which is rough and non-weight
bearing over prolonged periods. Moreover, the long-term result of this procedure
often is permanent reduction of joint mobility and an increased risk of
developing osteoarthritis.
We are developing a device to allow in vivo regeneration of the patient's own
articular cartilage. This technology will allow the patient's body to regenerate
a smooth, weight-bearing surface. Our objective in developing this
cartilage-specific technology is to produce a product that provides the proper
matrix system to allow the natural regeneration of the patient's cartilage, with
full restoration of function and diminished risk of osteoarthritis.
The product under development would use our proprietary peptide technology to
encourage cells to grow into the template once implanted into the patient. Our
peptide portfolio includes bioactive agents designed to mimic natural proteins
to promote cell adhesion, cell survival and other important cellular functions.
Our product would employ proprietary designs based on multiple layers of
collagen material of varying but tightly controlled densities and pore sizes to
provide a scaffold for all proliferation and cartilage formation. Simultaneously
it would prevent the in-growth of unwanted cells that could lead to scar tissue
formation. We anticipate that the device will be absorbed into the body over a
period of several weeks. Pre-clinical studies involving several variations of
the above protocols are in progress.
Collagen matrices for use with rhBMP-2. We supply the Genetics Institute
division of American Home Products with absorbable collagen sponges for use in
developing bone regeneration implants. Since 1994, we have supplied absorbable
collagen sponges for use with Genetics Institute's recombinant human bone
morphogenic protein-2 (rhBMP-2). Recombinant human BMP-2 is a manufactured
version of human protein naturally present in very small quantities in the body.
Genetics Institute is developing rhBMP-2
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for clinical evaluation in several areas of bone repair and augmentation. Spine
applications are being developed through a related collaboration with Medtronic
Sofamor Danek in North America.
Tyrosine polycarbonates for orthopedic implants. We are continuing to develop
additional biomaterial technologies that enhance the rate and quality of healing
and tissue regeneration with synthetic biodegradable scaffolds that support cell
attachment and growth. We are developing a new class of resorbable
polycarbonates created through the polymerization of tyrosine, a naturally
occurring amino acid. A well-defined and commercially scaleable manufacturing
process prepares these materials. Device fabrication by traditional techniques
such as compression molding and extrusion is readily achieved. We believe that
this new biomaterial will be useful in promoting full bone healing when
implanted in damaged sites. This material is currently being developed for
orthopedic and tissue engineering applications where strength and bone
compatibility are critical issues for success of healing. We have entered into
agreements to supply the material to Bionx Implants, Inc. and the Linvatec
division of CONMED, in each case for specified orthopedic implants. No medical
device containing the material has yet been approved for sale.
Other Surgical Products. Other current products of Integra LifeSciences include
the VitaCuff(TM) catheter access infection control device (sold to Bard Access
Systems, Inc., Arrow International, Inc. and the Quinton division of Tyco
International Ltd.), the BioPatch(TM) anti-microbial wound dressing (sold to
Johnson & Johnson Medical), and a wide range of resorbable collagen products for
hemostasis (sold to Sulzer Calcitek for use in periodontal surgery, and to
Baxter International and other distributors under the Helistat(R) and
Helitene(R) Absorbable Collagen Hemostatic Agent names). All of the foregoing
products are manufactured at our Plainsboro, New Jersey manufacturing facility.
Finally, our line of Sundt(R) carotid endarterectomy shunts is used to divert
blood to vital organs (such as the brain) during carotid artery surgical
procedures. Carotid shunts are manufactured at our medical-grade silicone
manufacturing facility in Anasco, Puerto Rico, and sold directly and through
distributors.
SALES AND MARKETING
Our sales and marketing strategy for our product lines differ based on the type
of market and our assessment of how we can maximize our resources and make the
greatest impact on the respective market. We market our Integra NeuroSciences
products to neurosurgeons and critical care units, which comprise a focused
group of hospital-based practitioners. As a result, we are able to access this
market through a cost-effective sales and marketing infrastructure. For the
majority of the products we manufacture under Integra LifeSciences, we partner
with market leaders, which we believe allows us to achieve our growth objectives
cost effectively while enabling us to focus our management efforts on developing
new products. The non-neurosurgical products represent large, diverse markets,
and we believe that they can be more cost effectively promoted through
leveraging leading marketing partners than through developing a sales
infrastructure ourselves. Our strategic alliances include Johnson & Johnson
Medical, a division of Ethicon, Inc., Sulzer Medica Ltd., the Linvatec division
of CONMED Corporation, Bionx Implants, Inc., the Genetics Institute division of
American Home Products Corporation, the Sofamor Danek division of Medtronic,
Inc. and Baxter Healthcare.
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STRATEGIC ALLIANCES
We use distribution alliances to market the majority of our Integra LifeSciences
products. We have also entered into collaborative agreements relating to
research and development programs involving our technology. These arrangements
are described below.
In June 1999, Integra LifeSciences entered into a strategic alliance with
Johnson & Johnson Medical to distribute INTEGRA(R) Artificial Skin throughout
the world, except in Japan. Johnson & Johnson Medical is responsible for
marketing and selling the product, has agreed to make significant minimum
product purchases, and will provide $2 million annual funding for research,
development and certain clinical trials for the first five years of the alliance
and thereafter based on a percentage of net sales. In addition, Johnson &
Johnson Medical is obligated to make contingent payments to Integra LifeSciences
in the event of certain clinical developments and to assist in the expansion of
our manufacturing capacity as we achieve certain sales targets. Under the
agreement, we are obligated to manufacture the product and are responsible for
continued research and development.
In 1997, we signed an exclusive importation and sales agreement for INTEGRA(R)
Artificial Skin in Japan with Century Medical Inc., a subsidiary of ITOCHU
Corporation. Under this agreement, Century Medical, Inc. is conducting a
clinical trial in Japan at its own expense to obtain Japanese regulatory
approvals for the sale of INTEGRA(R) Artificial Skin in Japan.
In February 1998, we announced the signing of a strategic alliance with Johnson
& Johnson's DePuy division ("DePuy") to develop and market a new product to
regenerate joint cartilage. Integra LifeSciences has agreed to develop an
absorbable, collagen-based implant, designed in combination with its proprietary
RGD peptide technology, that will allow the body to repair and regenerate
articular cartilage found in the knee and other joints. DePuy will market the
product worldwide. Under the terms of the agreement, DePuy will make payments of
up to $13 million as Integra meets various milestones, and will fund all
necessary development costs beyond the pre-clinical phase. If a product is
successfully developed, we will be responsible for manufacturing the product and
for future product development.
In addition to the cartilage program, Integra LifeSciences has several other
programs oriented toward the orthopedic market. These programs include alliances
for the development of resorbable orthopedic implants made of our proprietary
tyrosine polycarbonate technology with Bionx Implants, Inc. and Linvatec and an
alliance with Genetics Institute for the development of collagen matrices to be
used in conjunction with Genetics Institute's recombinant human bone
morphogenetic protein-2 ("rhBMP-2"). If approved, rhBMP-2 is expected to be used
in conjunction with our matrices to regenerate bone. Genetics Institute is
developing products based on rhBMP-2 for applications in orthopedics, oral and
maxillofacial surgery and spine surgery. Spine applications are being developed
through a related collaboration with Medtronic Sofamor Danek in North America.
In September 1998, we announced two strategic alliances with Linvatec and Bionx
Implants, Inc. for developing fixation devices using Integra's polymer
technology. Under the agreements with Linvatec and Bionx Implants, those
companies have responsibility for clinical trials and any necessary regulatory
filings, as well as certain minimum annual purchase payments. Products covered
under the agreement with Linvatec include a resorbable line of interference
screws, as well as tacks and anchors used in reconstruction of the anterior
cruciate ligament and posterior cruciate ligament, fixation of ligaments and
tendons in the knee and shoulder, and bone-tendon-bone procedures. Linvatec also
intends to develop polymer implants for use in bladder neck suspension
procedures. Products covered under the agreement with Bionx Implants
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include a resorbable line of screws, plates, pins, wedges and nails used for the
fixation and/or alignment of fractures or osteotomies in all areas of the
musculoskeletal system except in the spine and cranium.
Sulzer Medica's dental division, Sulzer Calcitek, has marketed and sold
BioMend(R) since 1995, BioMend Extend(TM) since 1999 and CollaCote(R),
CollaPlug(R) and CollaTape(R) since 1992.
RESEARCH STRATEGY
The Company has either acquired or secured the proprietary rights to several
important scientific platforms. These technologies provide support for the
Company's critical applications in neurosciences and tissue regeneration, and
additional opportunities for generating near-term and long-term revenues from
medical applications. The Company has been able to identify and bring together
critical platform technology components from which it works to develop solutions
for both tissue regeneration and neurosciences.
The Company spent approximately $8.7 million, $8.2 million and $6.2 million
during 1999, 1998 and 1997, respectively, on research and development
activities. Research and development activities funded by government grants and
contract development revenues amounted to $1.9 million, $1.8 million and
$490,000 during 1999, 1998 and 1997, respectively.
GOVERNMENT REGULATION
Our research and development activities and the manufacturing and marketing of
our existing and future products are subject to regulation by numerous
governmental agencies in the United States and in other countries. The FDA and
comparable agencies in other countries impose mandatory procedures and standards
for the conduct of clinical trials and the production and marketing of products
for diagnostic and human therapeutic use. The FDA product approval process has
different regulations for drugs, biologics, and medical devices. The FDA
currently classifies our proposed regenerative medicine products as medical
devices.
Review Process For Medical Devices
There are two types of FDA review/approval procedures for medical devices: a
Premarket Notification Section 510(k) ("510(k)") and a PMA application. A 510(k)
requires submission of sufficient data to demonstrate substantial equivalence to
a device marketed prior to May 28, 1976, or to a device marketed after that date
which has been classified into Class I or Class II which has received premarket
notification 510(k) clearance. Although the mandated period for FDA review is 90
days, actual review times can be substantially longer, and the sponsor cannot
market the device until FDA clearance is obtained. For those devices that
involve new technology and/or that present significant safety and effectiveness
issues, 510(k) submissions may require significantly more time for FDA review
and may require submission of more extensive safety and effectiveness data,
including clinical trial data.
Among the conditions for clearance to market of a 510(k) submission is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to the FDA's current Quality System
Regulations. In complying with standards set forth in these regulations,
manufacturers must expend time, money and effort for production and quality
control to ensure full technical compliance at all times. Manufacturing
establishments, both international and domestic, are also subject to inspections
by or under the authority of the FDA. Although, at present, the FDA generally
does not inspect such establishments prior to clearance of a 510(k) submission,
it is establishing a program of conducting Quality System inspections for new
devices in the future as a standard practice.
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The Medical Device Amendments of 1976 amended the Federal Food, Drug and
Cosmetics Act to establish three regulatory classes for medical devices, based
on the level of control required to assure safety and effectiveness. Class III
Devices are defined as life-supporting and life-sustaining devices, devices of
substantial importance in preventing impairment of human health or devices that
present potentially unreasonable risk of illness or injury. Class III devices
are those for which there is insufficient information to show that Class I or
Class II controls can provide a reasonable assurance of safety or effectiveness.
The PMA application review process for Class III devices was established to
evaluate the safety and effectiveness of these devices on a product by product
basis. Manufacturers that wish to market Class III devices must submit and
receive approval of a PMA application from the FDA.
The FDA has substantial content and format requirements for PMA applications,
which include clinical and non-clinical safety and effectiveness data, labeling,
manufacturing processes and quality assurance programs. As part of the PMA
application process, the PMA application may be referred to an FDA Advisory
Panel for review. Additionally, final approval of the product is dependent on an
inspection of the manufacturing facility for compliance with FDA Quality System
Regulations.
All studies in the United States in humans for the purpose of investigating the
safety and effectiveness of an investigational significant risk medical device
must be conducted under the Investigational Device Exemption ("IDE")
regulations. An IDE application to the FDA includes all preclinical
biocompatibility testing, investigational protocols, patient informed consents,
reports of all prior investigations, manufacturing and quality control
information. It takes a number of years from initiation of the project until
submission of a PMA application to the FDA, and requires the expenditure of
substantial resources. If a PMA application is submitted, however, there can be
no assurance on the length of time for the review process at the FDA or that the
FDA will approve the PMA application.
Under either the 510(k) submission or PMA application process, manufacturing
establishments, foreign and domestic, are subject to periodic inspections by the
FDA for compliance with Quality System Regulations. The Company and each of its
operating subsidiaries are subject to such inspections. To gain approval for the
use of a product for clinical indications other than those for which the product
was initially evaluated or for significant changes to the product, further
studies, including clinical trials and FDA approvals, are required. In addition,
for products with an approved PMA application, the FDA requires postapproval
reporting and may require postapproval surveillance programs to monitor the
product's safety and effectiveness. Results of post-approval programs may limit
or expand the further marketing of the product.
International Regulatory Requirements
We are preparing for the changing international regulatory environment. "ISO
9000" is an international recognized set of guidelines that are aimed at
ensuring the manufacture and development of quality products. We were audited
under ISO standards in 1997 and received certification to ISO 9001, a full
quality system. In 1998, we underwent a surveillance audit and renewed our
certification to ISO 9001. We are required to be audited on an annual basis by a
recognized notified body to maintain certification. Companies that meet ISO
standards are internationally recognized as functioning under a quality system.
Approval of a product by regulatory authorities in international countries must
be obtained prior to the commencement of marketing of the product in such
countries. The requirements governing the conduct of clinical trials and product
approvals vary widely from country to country, and the time required for
approval may be longer or shorter than that required for FDA approval of the PMA
application. In June 1998, the European Union Medical Device Directive became
effective, and all medical devices must meet the Medical Device Directive
standards and receive CE mark certification. CE mark certification involves a
comprehensive quality system program, and submission of data on a product to the
notified body in Europe.
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Other United States Regulatory Requirements
In addition to the regulatory framework for product approvals, we are and may be
subject to regulation under federal and state laws, including requirements
regarding occupational health and safety; laboratory practices; and the use,
handling and disposal of toxic or hazardous substances. We may also be subject
to other present and possible future local, state, federal and foreign
regulations.
Our research, development and manufacturing processes involve the controlled use
of certain hazardous materials. We are subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of such materials and certain waste products. Although we believe that our
safety procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, we could be held liable for any damages that
result and any such liability could exceed our resources. Although we believe
that we are in compliance in all material respects with applicable environmental
laws and regulations, there can be no assurance that we will not incur
significant costs to comply with environmental laws and regulations in the
future, nor that our operations, business or assets will not be materially
adversely affected by current or future environmental laws or regulations.
PATENTS AND INTELLECTUAL PROPERTY
We pursue a policy of seeking patent protection of our technology, products and
product improvements both in the United States and in selected foreign
countries. When determined appropriate, we have and plan to continue to enforce
and defend our patent rights. In general, however, we do not rely on our patent
estate to provide us with any significant competitive advantages. We rely upon
trade secrets and continuing technological innovations to develop and maintain
our competitive position. We continue to develop a substantial database of
information concerning our research and development. We have taken security
measures to protect our data and are in the process of exploring ways to enhance
further the security of our data. In an effort to protect our trade secrets, we
have a policy of requiring our employees, consultants and advisors to execute
proprietary information and invention assignment agreements upon commencement of
employment or consulting relationships with us. These agreements provide that
all confidential information developed or made known to the individual during
the course of their relationship with us must be kept confidential, except in
specified circumstances.
COMPETITION
The largest competitors of Integra NeuroSciences in the neurosurgery markets are
the PS Medical division of Medtronic, Inc., the Codman division of Johnson &
Johnson, the Valleylab division of Tyco International Ltd., and NMT
Neurosciences, a division of NMT Medical, Inc. In addition, various of the
Integra NeuroSciences product lines compete with smaller specialized companies
or larger companies that do not otherwise focus on neurosurgery. The products of
Integra LifeSciences face diverse and broad competition, depending on the market
addressed by the product. In addition, certain companies are known to be
competing particularly in the area of skin substitution or regeneration,
including Organogenesis and Advanced Tissue Sciences. Finally, in certain cases
competition consists primarily of current medical practice, rather than any
particular product (such as autograft tissue as a substitute for INTEGRA(R)
Artificial Skin). Depending on the product line, we compete on the basis of our
products features, strength of our sales organization or marketing partner,
sophistication of our technology, and cost effectiveness of our solution to the
customer's medical requirements.
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EMPLOYEES
At December 31, 1999, we had approximately 450 full-time employees engaged in
production and production support (including warehouse, engineering, and
facilities personnel), quality assurance/quality control, research and
development, regulatory and clinical affairs, sales/marketing and administration
and finance. None of our current employees are subject to a collective
bargaining agreement.
RECENT DEVELOPMENTS
In March 2000, we agreed to acquire from NMT Medical, Inc. ("NMT") the
Selector(R) Ultrasonic Aspirator, Ruggles(TM) Surgical Instrumentation and
Spembly Medical Cryosurgery product lines, including certain assets and
liabilities, for an acquisition price of $12.0 million. The acquisition is
expected to close by April 15, 2000. One of our subsidiaries will acquire the
Selector(R) Ultrasonic Aspirator and Spembly Medical Cryosurgery product lines
through the purchase of the stock of certain of NMT's subsidiaries, each
organized under the laws of the United Kingdom. In addition, one of our
subsidiaries will acquire related assets located in the United States, as well
as the inventory, customer list and certain other assets of the Ruggles(TM)line
of instruments for the neurosurgeon.
The Selector(R) Ultrasonic Aspirator products and the Ruggles(TM) surgical
instruments will be sold through Integra NeuroSciences, and the Spembly Medical
Cryosurgery products will be sold through Integra LifeSciences. The Selector(R)
Ultrasonic Aspirator uses very high frequency sound waves to pulverize cancer
tumors, and allows the surgeon to remove the damaged tumor tissue by aspiration.
The Ruggles(TM) line of surgical instruments complements and supplements our
Redmond(TM) instruments line, but has historically had significantly higher
revenues. Finally, the Spembly Medical Cryosurgery products allow surgeons to
use low temperatures to more easily extract diseased tissue.
We also acquired the manufacturing facility in Andover, England that
manufactures the ultrasonic aspirator and cryosurgery products. The Andover
facility employs approximately 65 employees. The Ruggles(TM) instruments are
purchased from various manufacturers and resold under the Ruggles(TM) brand
name.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this report, including statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," which constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995 and are
subject to a number of risks, uncertainties and assumptions about Integra,
including, among other things:
o general economic and business conditions, both nationally and in our
international markets;
o our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
o anticipated trends in our business;
o existing and future regulations affecting our business;
o our ability to obtain additional debt and equity financing to fund capital
expenditures and working capital requirements;
o our ability to complete acquisitions and integrate and manage new
businesses; and
o other risk factors described below under "Risk Factors."
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You can identify these forward-looking statements by forward-looking words such
as "believe," "may," "could," "will," "estimate," "continue," "anticipate,"
"intend," "seek," "plan," "expect," "should," "would" and similar expressions in
this report.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this report may not occur and actual results could
differ materially from those anticipated or implied in the forward-looking
statements.
RISK FACTORS
The Company believes that the following important factors, among others, have
affected, and in the future could affect, the Company's business and results of
operations and could cause the Company's future results to differ materially
from its historical results and those expressed in any forward-looking
statements made by the Company. Such factors are not meant to represent an
exhaustive list of the risks and uncertainties associated with the Company's
business. These factors as well as other factors may affect the Company's future
results and the Company's stock price, particularly on a quarterly basis.
We expect to continue to incur operating losses and may never achieve
profitability.
To date, we have experienced significant operating losses in funding the
research, development, manufacturing and marketing of our products and may
continue to incur operating losses. At December 31, 1999, we had a cumulative
deficit of $94.3 million. Our ability to achieve profitability depends in part
upon our ability, either independently or in collaboration with others, to
successfully manufacture and market our products and services. There can be no
assurance that we will ever achieve a profitable level of operations or that
profitability, if achieved, can be sustained on an ongoing basis.
We may be unable to raise necessary additional financing.
We may need to raise additional funds in the future in order to implement our
business plan, to conduct research and development, to fund marketing programs
or to acquire complementary businesses, technologies or services. Our committed
sources of capital are limited. Any required additional financing may be
unavailable on terms favorable to us, or at all. If we raise additional funds by
issuing equity securities, our stockholders may experience significant dilution
of their ownership interest and these securities may have rights senior to those
of the holders of our common stock. If additional financing is not available
when required or is not available on acceptable terms, we may be unable to fund
our expansion, develop or enhance our products and services, take advantage of
business opportunities or respond to competitive pressures.
Our operating results may fluctuate from time to time, which could affect the
value of our common stock.
Our operating results have fluctuated in the past and can be expected to
fluctuate from time to time in the future. Some of the factors that may cause
these fluctuations include:
o the impact of acquisitions;
o the timing of significant customer orders;
o market acceptance of our existing products, as well as products in
development;
o the timing of regulatory approvals;
o the timing of payments received under collaborative arrangements and
strategic alliances;
o our ability to manufacture our products efficiently; and
o the timing of our research and development expenditures.
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The industry and market segments in which we operate are highly competitive, and
we may not be able to compete effectively with other companies with greater
financial resources than we have.
In general, the medical technology industry is characterized by intense
competition. We compete with established pharmaceutical and medical technology
companies. Competition also comes from early stage companies that have
alternative technological solutions for our primary clinical targets, as well as
universities, research institutions and other non-profit entities. Many of our
competitors have access to greater financial, technical, research and
development, marketing, manufacturing, sales, distribution, services and other
resources than we do. Further, our competitors may be more effective at
implementing their technologies to develop commercial products.
Our competitive position will depend on our ability to achieve market acceptance
for our products, implement production and marketing plans, secure regulatory
approval for products under development, obtain patent protection and secure
adequate capital resources. We may need to develop new applications for our
products to remain competitive. Our present or future products could be rendered
obsolete or uneconomical by technological advances by one or more of our current
or future competitors. Our future success will depend upon our ability to
compete effectively against current technology as well as to respond effectively
to technological advances. We can not assure you that competitive pressures will
not adversely affect our profitability.
Our current strategy involves growth through acquisitions, which require us to
incur substantial costs and potential liabilities for which we may never realize
the anticipated benefits.
In addition to internal growth, our current strategy involves growth through
acquisitions. There can be no assurance that we will be able to continue to
implement our growth strategy, or that this strategy will ultimately be
successful. A significant portion of our growth in net revenue has resulted
from, and is expected to continue to result from, the acquisition of businesses
complementary to our own. We engage in evaluations of potential acquisitions and
are in various stages of discussion regarding possible acquisitions, certain of
which, if consummated, could be significant to us. Acquisitions by us may result
in significant transaction expenses, increased interest and amortization
expense, increased depreciation expense and increased operating expense, any of
which could have a material adverse effect on our operating results. As we grow
by acquisitions, we must be able to integrate and manage the new businesses to
realize economies of scale and control costs. In addition, acquisitions involve
other risks, including diversion of management resources otherwise available for
ongoing development of our business and risks associated with entering new
markets with which our marketing and sales force has limited experience or where
experienced distribution alliances are not available. Our future profitability
will depend in part upon our ability to further develop our resources to adapt
to the particulars of such new products or business areas and to identify and
enter into satisfactory distribution networks. We may not be able to identify
suitable acquisition candidates in the future, obtain acceptable financing or
consummate any future acquisitions. Any failure by us to integrate acquired
operations, manage the cost of providing our products or price our products
appropriately may have a material adverse effect on our operating results. In
addition, as a result of our acquisitions of other healthcare businesses, we may
be subject to the risk of unanticipated business uncertainties or legal
liabilities relating to such acquired businesses for which we may not be
indemnified by the sellers of the acquired businesses. Future acquisitions may
also result in potentially dilutive issuances of equity securities.
To market our products under development we will first need to obtain regulatory
approval. Further, if we fail to comply with the extensive governmental
regulations that affect our business, we could be subject to penalties and could
be precluded from marketing our products.
Our research and development activities and the manufacturing, labeling,
distribution and marketing of our existing and future products are subject to
regulation by numerous governmental agencies in the United States and in other
countries. The FDA and comparable agencies in other countries impose mandatory
procedures and standards for the conduct of clinical trials and the production
and marketing of products for diagnostic and human therapeutic use. The FDA and
other regulatory authorities require that our products be manufactured according
to rigorous standards. These regulatory requirements may
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significantly increase our production or purchasing costs and may even prevent
us from making or obtaining our products in amounts sufficient to meet market
demand. If we, or a third party manufacturer, change our approved manufacturing
process, the FDA will require a new approval before that process could be used.
Failure to develop our manufacturing capability may mean that even if we develop
promising new products, we may not be able to produce them profitably, as a
result of delays and additional capital investment costs. Manufacturing
facilities, both international and domestic, are also subject to inspections by
or under the authority of the FDA.
Our products under development are subject to approval by the FDA prior to
marketing for commercial use. The process of obtaining necessary FDA approvals
can take years and is expensive and full of uncertainties. Our inability to
obtain required regulatory approval on a timely or acceptable basis could harm
our business. Further, approval may place substantial restrictions on the
indications for which the product may be marketed or to whom it may be marketed.
To gain approval for the use of a product for clinical indications other than
those for which the product was initially evaluated or for significant changes
to the product, further studies, including clinical trials and FDA approvals are
required. In addition, for products with an approved PMA application, the FDA
requires postapproval reporting and may require postapproval surveillance
programs to monitor the product's safety and effectiveness. Results of post
approval programs may limit or expand the further marketing of the product.
Approved products are subject to continuing FDA requirements relating to quality
control and quality assurance, maintenance of records and documentation and
labeling and promotion of medical devices. In addition, failure to comply with
applicable regulatory requirements could subject us to enforcement action,
including product seizures, recalls, withdrawal of clearances or approvals,
restrictions on or injunctions against marketing our product or products based
on our technology, and civil and criminal penalties.
Medical device laws and regulations are also in effect in many countries outside
the United States. These range from comprehensive device approval requirements
for some or all of our medical device products to requests for product data or
certifications. The number and scope of these requirements are increasing. The
requirements governing the conduct of clinical trials and product approvals vary
widely from country to country. Failure to comply with applicable federal, state
and foreign medical device laws and regulations would result in fines or other
censures or preclude our ability to market products. Because approximately 25%
of our 1999 revenues are derived from international sales, any delay or
withdrawal of approval or change in international regulations could have an
adverse effect on our revenues and profitability. See "Business -- Government
Regulation."
Lack of market acceptance for our products or market preference for technologies
which compete with our products would reduce our revenues and profitability.
We cannot be certain that our current products, or any other products that we
develop or market, will achieve or maintain market acceptance. Certain of the
medical indications that can be treated by our devices can also be treated by
other medical devices. Currently, the medical community widely accepts many
alternative treatments, and these other treatments have a long history of use.
We cannot be certain that our devices and procedures will be able to replace
such established treatments or that either physicians or the medical community
in general will accept and utilize our devices or any other medical products
that we may develop. In addition, our future success depends, in part, on our
ability to develop additional products. Even if we determine that a product
candidate has medical benefits, the cost of commercializing that product
candidate may be too high to justify development. In addition, competitors may
develop products that are more effective, cost less, or are ready for commercial
introduction before our products. If we are unable to develop additional,
commercially viable products, our future prospects will be adversely affected.
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Market acceptance of our products depends on many factors, including our ability
to convince prospective collaborators and customers that our technology is an
attractive alternative to other technologies, manufacture products in sufficient
quantities and at an acceptable cost and place and service, directly, or through
our strategic alliances, sufficient quantities of our products. In addition, our
technology could be harmed by limited funding available for product and
technology acquisitions by our customers, as well as internal obstacles to
customer approvals of purchases of our products. The industry is subject to
rapid and continuous change arising from, among other things, consolidation and
technological improvements. One or more of these factors may vary unpredictably,
which could materially adversely affect our competitive position. We may not be
able to compete effectively or adjust our contemplated plan of development to
meet changing market conditions.
Our business depends significantly on key relationships with third parties which
we may not be able to establish and maintain.
Our revenue stream and our business strategy depend in part on our entering into
and maintaining collaborative or alliance agreements with third parties
concerning product marketing as well as research and development programs. Our
ability to enter into agreements with collaborators depends in part on
convincing them that our technology can help achieve and accelerate their goals
and strategies. This may require substantial time, effort and expense on our
part with no guarantee that a strategic relationship will result. We may not be
able to establish or maintain these relationships on commercially acceptable
terms. Our future agreements may not ultimately be successful. Even if we enter
into collaborative or alliance agreements, our collaborators could terminate
these agreements or they could expire before meaningful developmental milestones
are reached. The termination or expiration of any of these relationships could
have a material adverse effect on our business.
Much of the revenue that we may receive under these collaborations will depend
upon our collaborators' ability to successfully commercially introduce, market
and sell new products derived from our products. Our success depends in part
upon the performance by these collaborators of their responsibilities under
these agreements.
Some collaborators may not perform their obligations as we expect. Some of the
companies we currently have alliances with or are targeting as potential
alliances offer products competitive with our products or may develop
competitive production technologies or competitive products outside of their
collaborations with us that could have a material adverse effect on our
competitive position. In addition, our role in the collaborations is mostly
limited to the production aspects.
As a result, we may also be dependent on collaborators for other aspects of the
development, preclinical and clinical testing, regulatory approval, sales,
marketing and distribution of our products. If our current or future
collaborators do not effectively market our products or develop additional
products based on our technology, our revenues from sales and royalties will be
significantly reduced.
The intellectual property rights we rely upon to protect the technology
underlying our products may not be adequate, which could enable third parties to
use our technology or very similar technology and could reduce our ability to
compete in the market.
Our ability to compete effectively will depend, in part, on our ability to
maintain the proprietary nature of our technologies and manufacturing processes,
which includes the ability to obtain, protect and enforce patents on our
technology and to protect our trade secrets. You should not rely on our patents
to provide us with any significant competitive advantage. Others may challenge
our patents and, as a result, our patents could be narrowed, invalidated or
rendered unenforceable. Competitors may develop products similar to ours which
are not covered by our patents. In addition, our current and future patent
applications may not result in the issuance of patents in the United States or
foreign countries. Further, there is a substantial backlog of patent
applications at the U.S. Patent and Trademark Office, and the approval or
rejection of patent applications may take several years.
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Our success will depend partly on our ability to operate without infringing or
misappropriating the proprietary rights of others.
We may be sued for infringing the intellectual property rights of others. In
addition, we may find it necessary, if threatened, to initiate a lawsuit seeking
a declaration from a court that we do not infringe the proprietary rights of
others or that these rights are invalid or unenforceable. If we do not prevail
in any litigation, in addition to any damages we might have to pay, we would be
required to stop the infringing activity or obtain a license. Any required
license may not be available to us on acceptable terms, or at all. In addition,
some licenses may be nonexclusive, and therefore, our competitors may have
access to the same technology licensed to us. If we fail to obtain a required
license or are unable to design around a patent, we may be unable to sell some
of our products, which could have a material adverse affect on our business,
financial condition and results of operations.
We may be involved in lawsuits to protect or enforce our intellectual property
rights, which may be expensive.
In order to protect or enforce our intellectual property rights, we may have to
initiate legal proceedings against third parties, such as infringement suits or
interference proceedings. Intellectual property litigation is costly, and, even
if we prevail, the cost of such litigation could affect our profitability. In
addition, litigation is time consuming and could divert management attention and
resources away from our business. We may also provoke these third parties to
assert claims against us.
Our competitive position is dependent in part upon unpatented trade secrets,
which we may not be able to protect.
Our competitive position is also dependent upon unpatented trade secrets. Trade
secrets are difficult to protect. We can not assure you that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, that such trade
secrets will not be disclosed, or that we can effectively protect our rights to
unpatented trade secrets.
In an effort to protect our trade secrets, we have a policy of requiring our
employees, consultants and advisors to execute proprietary information and
invention assignment agreements upon commencement of employment or consulting
relationships with us. These agreements provide that all confidential
information developed or made known to the individual during the course of their
relationship with us must be kept confidential, except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for our trade secrets or other proprietary
information in the event of the unauthorized use or disclosure of confidential
information.
We are exposed to a variety of risks relating to international sales, including
fluctuations in exchange rates, commercial unavailability of, and/or
governmental restrictions on access to, foreign exchange and delays in
collection of accounts receivable.
We generate significant sales outside the United States, a substantial portion
of which are conducted with customers who generate revenue in currencies other
than the U.S. dollar. As a result, currency fluctuations between the U.S. dollar
and the currencies in which such customers do business may impact the demand for
our products in foreign countries where the U.S. dollar has increased compared
to the local currency. We cannot predict the effects of exchange rate
fluctuations upon our future operating results because of the number of
currencies involved, the variability of currency exposure and the potential
volatility of currency exchange rates.
As a result of the announced acquisition of the NMT businesses, we will generate
revenues and incur operating expenses in British pounds sterling. To the extent
that we are unable to pay all of such operating expenses with revenues generated
in British pounds sterling or are required to exchange revenues generated in
British pounds sterling into U.S. dollars, we will experience currency exchange
risk with respect to such British pounds sterling denominated revenues or
expenses.
20
<PAGE>
Changes in the health care industry may require us to decrease the selling price
for our products or could result in a reduction in the size of the market for
our products, and limit the means by which we may discount our products, each of
which could have a negative impact on our financial performance.
Trends toward managed care, health care cost containment, and other changes in
government and private sector initiatives in the United States and other
countries in which we do business are placing increased emphasis on the delivery
of more cost-effective medical therapies which could adversely affect the sale
and/or the prices of our products. For example:
o major third-party payors of hospital services, including Medicare,
Medicaid and private health care insurers, have substantially revised
their payment methodologies during the last few years which has resulted
in stricter standards for reimbursement of hospital charges for certain
medical procedures;
o Medicare, Medicaid and private health care insurer cutbacks could create
downward price pressure in the cardiac resuscitation pre-hospital market;
o proposals were adopted recently that will change the reimbursement
procedures for the capital expenditure portion of the cost of providing
care to Medicare patients;
o numerous legislative proposals have been considered that would result in
major reforms in the U.S. health care system that could have an adverse
effect on our business;
o there has been a consolidation among health care facilities and purchasers
of medical devices in the United States who prefer to limit the number of
suppliers from whom they purchase medical products, and these entities may
decide to stop purchasing our products or demand discounts on our prices;
o there is economic pressure to contain health care costs in international
markets;
o there are proposed and existing laws and regulations in domestic and
international markets regulating pricing and profitability of companies in
the health care industry; and
o there have been recent initiatives by third party payors to challenge the
prices charged for medical products which could affect our ability to sell
products on a competitive basis.
Both the pressure to reduce prices for our products in response to these trends
and the decrease in the size of the market as a result of these trends could
adversely affect our levels of revenues and profitability of sales, which could
have a material adverse effect on our business.
In addition, there are laws and regulations that regulate the means by which
companies in the health care industry may compete by discounting the prices of
their products. Although we exercise care in structuring our customer discount
arrangements to comply with such laws and regulations, there can be no assurance
that (1) government officials charged with responsibility for enforcing such
laws will not assert that such customer discount arrangements are in violation
of such laws or regulations, or (2) government regulators or courts will
interpret such laws or regulations in a manner consistent with our
interpretation.
Our dependence on suppliers for materials could impair our ability to
manufacture our products.
Outside vendors, some of whom are sole-source suppliers, provide key components
and raw materials used in the manufacture of our products. Although we believe
that alternative sources for these components and raw materials are available,
any supply interruption in a limited or sole source component or raw material
could harm our ability to manufacture our products until a new source of supply
is identified and qualified. In addition, an uncorrected defect or supplier's
variation in a component or raw material, either unknown to us or incompatible
with our manufacturing process, could harm our ability to manufacture products.
We may not be able to find a sufficient alternative supplier in a reasonable
time period, or on commercially reasonable terms, if at all, and our ability to
produce and supply our products could be impaired.
21
<PAGE>
If any of our manufacturing facilities were damaged and/or our manufacturing
processes interrupted, we could experience lost revenues and our business could
be seriously harmed.
We manufacture our products in a limited number of facilities. Damage to our
manufacturing, development or research facilities due to fire, natural disaster,
power loss, communications failure, unauthorized entry or other events could
cause us to cease development and manufacturing of some or all of our products.
We may have significant product liability exposure and our insurance may not
cover all potential claims.
We face an inherent business risk of exposure to product liability and other
claims in the event that our technologies or products are alleged to have caused
harm. We may not be able to obtain insurance for such potential liability on
acceptable terms with adequate coverage, or at reasonable costs. Any potential
product liability claims could exceed the amount of our insurance coverage or
may be excluded from coverage under the terms of the policy. Our insurance, once
obtained, may not be renewed at a cost and level of coverage comparable to that
then in effect.
We are subject to other regulatory requirements relating to occupational health
and safety and the use of hazardous substances which may impose significant
compliance costs on us.
In addition to the regulatory framework for product approval, manufacturing and
marketing, we are and may be subject to regulation under federal and state laws,
including requirements regarding occupational health and safety, laboratory
practices, and the use, handling and disposal of toxic or hazardous substances.
Our research, development and manufacturing processes involve the controlled use
of certain hazardous materials. We are subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of such materials and certain waste products. Although we believe that our
safety procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, we could be held liable for any damages that
result and any such liability could exceed the limits or fall outside the
coverage of our insurance and could exceed our resources. We may not be able to
maintain insurance on acceptable terms, or at all. We may incur significant
costs to comply with environmental laws and regulations in the future. We may
also be subject to other present and possible future local, state, federal and
foreign regulations.
Future sales of our common stock may depress our stock price.
Sales of our common stock, or the perception that such sales could occur, could
cause the market price of our common stock to decline and impair our ability to
raise additional capital in the future through the sale of equity securities.
The loss of key personnel could harm our business.
We believe our success depends on the contributions of a number of our key
personnel, including Stuart M. Essig, President and Chief Executive Officer of
Integra. If we lose the services of key personnel, that loss could materially
harm our business. We maintain "key person" life insurance on Mr. Essig. In
addition, recruiting and retaining qualified personnel will be critical to our
success. There is a shortage in the industry of qualified management and
scientific personnel, and competition for these individuals is intense. There
can be no assurance that we will be able to attract additional and retain
existing personnel.
Our stock price may continue to be highly volatile and our stockholders may not
be able to resell their shares at or above the price they paid for them.
The stock market in general, and the stock prices of medical device companies,
biotechnology companies and other technology-based companies in particular, have
experienced significant volatility that often has been unrelated to the
operating performance of and beyond the control of any specific public
companies. The market price of Integra common stock has fluctuated widely in the
past and is likely to continue to
22
<PAGE>
fluctuate in the future. Factors that may have a significant impact on the
market price of Integra common stock include:
o shortfall in our revenues or earnings relative to the levels expected by
securities analysts;
o future announcements concerning Integra or its competitors, including the
announcement of acquisitions;
o changes in the prospects of our business partners or suppliers;
o developments regarding our patents or other proprietary rights or those of
our competitors;
o quality deficiencies in our products;
o competitive developments, including technological innovations by us or our
competitors;
o government regulation, including the FDA's review of our products and
developments;
o changes in recommendations of securities analysts and rumors that may be
circulated about Integra or our competitors;
o public perception of risks associated with our operations;
o conditions or trends in the medical device and biotechnology industries;
o additions or departures of key personnel; and
o sales of our common stock.
Any of these factors could immediately, significantly and adversely affect the
trading price of Integra common stock.
We do not intend to pay dividends in the foreseeable future.
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We intend to retain future earnings to fund our growth.
Accordingly, our stockholders will not receive a return on their investment in
our common stock through the payment of dividends in the foreseeable future and
may not realize a return on their investment even if they sell their shares. As
a result, our stockholders may not be able to resell their shares at or above
the price they paid for them. Any future payment of dividends to our
stockholders will depend on decisions that will be made by our board of
directors and will depend on then existing conditions, including our financial
condition, contractual restrictions, capital requirements and business
prospects.
Our major stockholders could make decisions adverse to the interests of other
stockholders.
The Company's directors and executive officers and affiliates of certain
directors own or control a majority of the outstanding voting securities of the
Company and are generally able to elect all directors, to determine the outcome
of corporate actions requiring stockholder approval and otherwise to control the
business. Such control could preclude any unsolicited acquisition of Integra and
consequently adversely affect the market price of the common stock. Furthermore,
we are subject to Section 203 of the Delaware General Corporation Law, which
could have the effect of delaying or preventing a change of control.
Year 2000 related system failures or malfunctions could harm our business.
As of the date of this report, our systems have operated without any apparent
Year 2000 related problems and appear to be Year 2000 compliant. We are not
aware that any of our primary vendors or systems maintained by third parties
have experienced significant Year 2000 compliance problems. However, while no
such problem has been discovered as of the date of this report, Year 2000 issues
may not become apparent immediately and, therefore, Integra may be affected in
the future. We will continue to monitor the issue and work to remediate any Year
2000 issues that may arise.
23
<PAGE>
ITEM 2. PROPERTIES
Our principal executive offices are located in Plainsboro, New Jersey. Principal
manufacturing and research facilities are located in Plainsboro, New Jersey, San
Diego, California and Anasco, Puerto Rico. In addition, we lease several smaller
facilities to support additional administrative and storage operations. Our
total manufacturing and research space approximates 82,000 square feet. Our
Integra LifeSciences products are manufactured in and distributed through the
Plainsboro facility. Our Integra NeuroSciences products are manufactured in the
Plainsboro, San Diego and Anasco facilities and are distributed through the
Plainsboro and San Diego facilities. In March 2000, we leased a warehouse
facility in Cranbury, New Jersey that will serve as the national distribution
center for all of our products in the United States. In connection with the
acquisition of the business, including certain assets and liabilities, of
Clinical Neuro Systems in January 2000, we assumed a lease for an FDA registered
and inspected manufacturing facility in Exton, Pennsylvania. All of our
facilities are leased.
All of our manufacturing and distribution facilities are FDA registered and
inspected. We believe that our manufacturing facilities are suitable for their
intended purposes and have capacities adequate for current and projected needs
for existing products. Some capacity of the plants is being converted, with any
needed modification, to meet the current and projected requirements of existing
and future products.
ITEM 3. LEGAL PROCEEDINGS
In July 1996, the Company filed a patent infringement lawsuit in the United
States District Court in San Diego against Merck KGaA, a German corporation,
Scripps Research Institute, a California nonprofit corporation, and David A.
Cheresh, Ph.D., a research scientist with Scripps seeking damages and injunctive
relief. The complaint charged, among other things, that the defendant Merck KGaA
willfully and deliberately induced, and continues to willfully and deliberately
induce, defendants Scripps Research Institute and Dr. David A. Cheresh to
infringe certain of the Company's patents. These patents are part of a group of
patents granted to The Burnham Institute and licensed by the Company that are
based on the interaction between a family of cell surface proteins called
integrins and the arginine-glycine-aspartic acid (known as "RGD") peptide
sequence found in many extracellular matrix proteins. The defendants filed a
countersuit asking for an award of defendants' reasonable attorney fees. In
March 2000 a jury returned a verdict, finding that Merck KGaA had willfully
induced infringement of the Company's patents and awarded the Company $15.0
million in damages, which may be adjusted by the court. The Company expects that
post-trial motions will be filed, and that Merck KGaA will appeal various
decisions of the court and request a new trial, a reduction in damages, or a
judgment as a matter of law notwithstanding the verdict. We cannot accurately
predict the ultimate resolution of this matter and have not reflected the
verdict in our financial statements.
Bruce D. Butler, Ph.D., Bruce A. McKinley, Ph.D., and C. Lee Parmley (the "Optex
Claimants"), each parties to a Letter Agreement (the "Letter Agreement") with
Camino NeuroCare, Inc. ("Camino") dated as of December 18, 1996, have alleged
that Camino breached the terms of the Letter Agreement prior to our acquisition
of the NeuroCare Group (Camino's prior parent company). The Letter Agreement
contains arbitration provisions and Integra and the Optex Claimants have agreed
to negotiate rather than seek arbitration for a limited time. While we believe
that Camino has valid legal and factual defenses, the Optex Claimants have
asserted unspecified significant damages, and we believe that the Optex
Claimants are likely to pursue arbitration under the Letter Agreement if the
matter is not settled otherwise. We cannot predict the outcome of such an
arbitration, were it to take place. In addition, we have asserted a
24
<PAGE>
right to indemnification from the seller of the NeuroCare businesses, but there
can be no assurance that indemnification, if any, will be obtained.
The Company is also subject to other claims and lawsuits in the ordinary course
of its business. In the opinion of management, such other claims are either
adequately covered by insurance or otherwise indemnified, and are not expected,
individually or in the aggregate, to result in a material adverse effect on the
financial condition of the Company. The Company's financial statements do not
reflect any material amounts related to possible unfavorable outcomes of the
matters above or others. However, it is possible that the Company's results of
operations, financial position and cash flows in a particular period could be
materially affected by these contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
25
<PAGE>
Additional Information:
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K.
Executive Officers
The executive officers of the Company serve at the discretion of the Board of
Directors. The only family relationship between any of the executive officers
and directors of the Company is that Mr. Holtz is the nephew of Richard E.
Caruso, Ph.D., who is Chairman of the Company's Board of Directors. The
following information indicates the position and age of the Company's executive
officers as of the date of this report and their previous business experience.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Stuart M. Essig, Ph.D. 38 President and Chief Executive Officer
George W. McKinney, III, Ph.D. 56 Executive Vice President and Chief
Operating Officer
John B. Henneman, III 38 Senior Vice President, Chief
Administrative Officer and General
Counsel
Judith E. O'Grady 49 Senior Vice President, Regulatory, Quality
Assurance and Clinical Affairs
Michael D. Pierschbacher, Ph.D. 48 Senior Vice President Research and
Development, General Manager, Corporate
Research Center
David B. Holtz 33 Vice President, Finance and Treasurer
</TABLE>
Stuart M. Essig, Ph.D. has served as President and Chief Executive Officer and a
director of the Company since December 1997. Before joining the Company, Mr.
Essig supervised the medical technology practice at Goldman, Sachs & Co. as a
managing director. Mr. Essig had ten years of broad health care experience at
Goldman Sachs serving as a senior merger and acquisitions advisor to a broad
range of domestic and international medical technology, pharmaceutical and
biotechnology clients. Mr. Essig received an A.B. degree from the Woodrow Wilson
School of Public and International Affairs at Princeton University and an MBA
and a Ph.D. degree in Financial Economics from the University of Chicago,
Graduate School of Business. Mr. Essig also serves on the Board of Directors of
Vital Signs Incorporated and St. Jude Medical Corporation.
George W. McKinney, III, Ph.D. has served the Company as Vice Chairman,
Executive Vice President and Chief Operating Officer since May 1997 and as a
member of the Board of Directors since December 1992. Between 1990 and 1997, Dr.
McKinney was Managing Director of Beacon Venture Management Corporation, a
venture capital firm. Between 1992 and 1997, Dr. McKinney also served as
President and Chief Executive Officer of Gel Sciences, Inc. and GelMed, Inc., a
privately held specialty materials firm with development programs in both the
industrial and medical products fields. From 1983 to 1989, Dr. McKinney was a
Managing Director at American Research & Development, a venture capital firm.
Between 1986 and 1989, he also served as President and Chief Executive Officer
of American Superconductor, Inc., a development stage firm in the specialty
materials field. From 1965 to 1983, Dr.
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<PAGE>
McKinney worked for Corning Glass Works (now Corning, Inc.), a specialty
materials firm, in a variety of manufacturing, engineering, and financial
positions. At Corning, he served as President of Corning Designs, a subsidiary
which he founded, as Secretary to the Management Committee, as Director of
Business Development and Planning, as Treasurer, International, as Assistant
Treasurer, Domestic, and as Financial and Control Manager for the Engineering
Division. Dr. McKinney holds an S.B. in Management from MIT and a Ph.D. in
Strategic Planning from Stanford University.
John B. Henneman, III is the Company's Senior Vice President, Chief
Administrative Officer and General Counsel. Prior to joining the Company in
August 1998, Mr. Henneman served Neuromedical Systems, Inc., a public company
developer and manufacturer of in vitro diagnostic equipment, in various
capacities for more than four years. From 1994 until June 1997, Mr. Henneman was
Vice President of Corporate Development, General Counsel and Secretary. From
June 1997 through November 1997, he served in the additional capacity of interim
Co-Chief Executive Officer and from December 1997 to August 1998 Mr. Henneman
was Executive Vice President, US Operations, and Chief Legal Officer. In March
1999, Neuromedical Systems, Inc. filed a petition under Chapter 11 of the
federal bankruptcy laws. From 1986 to 1994, Mr. Henneman practiced law in the
Corporate Department of Latham & Watkins (Chicago, Illinois). Mr. Henneman
received his A.B. (Politics) from Princeton University in 1983 and his J.D. from
the University of Michigan Law School in 1986.
Judith E. O'Grady, Senior Vice President of Regulatory Affairs, Quality
Assurance and Clinical Research, has served the Company since 1985. Ms. O'Grady
has worked in the areas of medical devices and collagen technology for over 20
years. Prior to joining the Company, Ms. O'Grady worked for Colla-Tec, Inc., a
Marion Merrell Dow Company. During her career Ms. O'Grady has held positions
with Surgikos, a Johnson & Johnson company, and was on the faculty of Boston
University College of Nursing and Medical School. Ms. O'Grady obtained the FDA
approval for INTEGRA(R) Artificial Skin, the first regenerative product approved
by the FDA. She also has obtained approvals for several other product lines for
the Company. In addition, Ms. O'Grady obtained the CE Mark Certification for
approvals in the European Union as well as a multitude of other international
approvals. She has been pivotal in the ISO 9001 Certification of the Company.
She is a member of the NIST group on standards for clinical outcomes as well as
on the Board of Directors for the New Jersey League of Nursing. Ms. O'Grady has
presented professional programs and lectures, both nationally and
internationally. She received her BS degree from Marquette University and MSN in
Nursing from Boston University.
Michael D. Pierschbacher, Ph.D. joined the Company in October 1995 as Senior
Vice President, Research and Development. In May 1998 he was named Senior Vice
President and Director of the Corporate Research Center. From June 1987 to
September 1995, Dr. Pierschbacher served as Senior Vice President and Scientific
Director of Telios Pharmaceuticals, Inc. ("Telios") which was acquired by the
Company in connection with the reorganization of Telios under Chapter 11 of the
federal bankruptcy code. He was a co-founder of Telios in May 1987 and is the
co-discoverer and developer of Telios' matrix peptide technology. Before joining
Telios as a full-time employee in October 1988, he was a staff scientist at the
Burnham Institute for five years and remained on staff there in an adjunct
capacity until the end of 1997. He received his post-doctoral training at
Scripps Clinical and Research Foundation and at the Burnham Institute. Dr.
Pierschbacher received his Ph.D. in Biochemistry from the University of
Missouri.
David B. Holtz joined the Company as Controller in 1993 and has served as Vice
President, Finance and Treasurer since March 1997. His responsibilities include
managing all accounting and information systems functions. Before joining the
Company, Mr. Holtz was an associate with Coopers & Lybrand, L.L.P. in
Philadelphia and Cono Leasing Corporation, a private leasing company. He
received a BS degree in Business Administration from Susquehanna University in
1989 and has been certified as a public accountant.
27
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq National Market under the symbol
"IART". The following table represents the high and low sales prices for the
Company's Common Stock for each quarter for the last two years. All outstanding
common share and per share amounts have been retroactively adjusted to reflect a
one-for-two reverse stock split of the Company's Common Stock on May 18, 1998.
HIGH LOW
---- ---
1999
----
First Quarter $5.188 $3.00
Second Quarter $7.50 $3.875
Third Quarter $10.375 $5.625
Fourth Quarter $6.4375 $5.375
1998
----
First Quarter $10.75 $8.125
Second Quarter $9.75 $6.125
Third Quarter $8.00 $4.375
Fourth Quarter $5.25 $3.25
The closing price for the Common Stock on March 24, 2000 was $14.75. For
purposes of calculating the aggregate market value of the shares of Common Stock
of the Company held by non-affiliates, as shown on the cover page of this
report, it has been assumed that all the outstanding shares were held by
non-affiliates except for the shares held by directors and executive officers of
the Company and stockholders owning 10% or more of outstanding shares. However,
this should not be deemed to constitute an admission that all such persons are,
in fact, affiliates of the Company. Further information concerning ownership of
the Company's Common Stock by executive officers, directors and principal
stockholders will be included in the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission.
The Company does not currently pay any cash dividends on its Common Stock and
does not anticipate paying as such dividends in the foreseeable future.
The number of stockholders of record as of March 24, 2000 was approximately 850,
which includes stockholders whose shares were held in nominee name. The number
of beneficial stockholders at that date was over 6,700.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth consolidated financial data with respect to the
Company for each of the five years in the period ended December 31, 1999. The
information set forth below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Company's consolidated financial statements and related notes included elsewhere
in this report.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
In thousands, except per share data 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data (1)
Product sales................................... $ 39,661 $ 14,076 $ 14,001 $ 11,210 $ 8,356
Other revenue................................... 2,829 3,379 745 1,938 1,873
-------- -------- -------- -------- --------
Total revenue............................... 42,490 17,455 14,746 13,148 10,229
Cost of product sales, including depreciation(2) 22,219 7,420 7,027 6,671 4,850
Research and development........................ 8,670 8,238 6,222 6,064 5,104
Selling and marketing........................... 9,481 5,953 5,458 4,304 2,455
General and administrative (3).................. 12,682 9,357 14,430 4,881 3,225
Amortization and other depreciation............. 1,818 667 520 675 504
Acquired in-process research and development (4) -- -- -- -- 19,593
-------- -------- -------- -------- --------
Total costs and expenses...................... 54,870 31,635 33,657 22,595 35,731
-------- -------- -------- -------- --------
Operating loss.................................. (12,380) (14,180) (18,911) (9,447) (25,502)
Interest income................................. 1,006 1,250 1,771 1,799 283
Interest expense................................ (712) -- -- -- (188)
Gain on disposition of product line............. 4,161 -- -- -- --
Other income.......... ......................... 141 588 176 120 5
-------- -------- -------- -------- --------
Net loss before income taxes.................... (7,784) (12,342) (16,964) (7,528) (25,402)
Income tax benefit (5).......................... 1,818 -- -- -- --
-------- -------- -------- -------- --------
Net loss........................................ $ (5,966) $(12,342) $(16,964) $ (7,528) $(25,402)
======== ======== ======== ======== ========
Basic and diluted net loss per share............ $ (.40) $ (.77) $ (1.15) $ (.54) $ (2.41)
======== ======== ======== ======== ========
Weighted average common shares outstanding...... 16,802 16,139 14,810 14,057 10,536
======== ======== ======== ======== ========
<CAPTION>
December 31,
----------------------------------------------------------
In thousands 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (1)
Cash, cash equivalents and short-term investments $ 23,612 $ 20,187 $ 26,272 $ 34,276 $ 5,710
Working capital................................ 28,014 23,898 29,407 37,936 7,476
Total assets................................... 66,253 34,707 38,356 48,741 19,378
Long-term debt................................. 7,625 -- -- -- --
Accumulated deficit............................ (94,304) (88,287) (75,945) (58,981) (51,453)
Total stockholders' equity..................... 37,989 31,366 35,755 46,384 17,427
</TABLE>
- ----------
(1) As the result of the Company's acquisitions of Telios Pharmaceuticals,
Inc. ("Telios") in August 1995, Rystan Company, Inc. ("Rystan") in
September 1998 and the NeuroCare group of companies ("NeuroCare") in March
1999, the consolidated financial results and balance sheet data for
certain of the periods presented above may not be directly comparable.
(2) The 1999 and 1998 cost of product sales include $2.4 million and $0.3
million, respectively, of fair value purchase accounting adjustments
related to inventory acquired in the NeuroCare and Rystan acquisitions.
(3) The 1997 general and administrative expense included the following two
non-cash charges: (i) $1.0 million related to an asset impairment charge;
and (ii) $5.9 million related to an equity-based signing bonus for the
Company's President and Chief Executive Officer.
(4) As a result of purchase accounting, the 1995 loss included $19.6 million
of acquired in-process research and development which was charged to
expense at the date of the Company's acquisition of Telios.
(5) The 1999 income tax benefit includes a non-cash benefit of $1.8 million
resulting from the reduction of the deferred tax liability recorded in the
NeuroCare acquisition to the extent that consolidated deferred tax assets
were generated subsequent to the acquisition.
29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements, the notes thereto and the other financial
information included elsewhere in this report.
General
The Company develops, manufactures and markets medical devices, implants and
biomaterials. The Company's operations consist of (1) Integra NeuroSciences,
which is a leading provider of implants, instruments, and monitors used in
neurosurgery, neurotrauma, and related critical care and (2) Integra
LifeSciences, which develops and manufactures a variety of medical products and
devices, including products based on our proprietary tissue regeneration
technology which are used to treat soft tissue and orthopedic conditions.
Integra NeuroSciences sells primarily through a direct sales organization and
Integra LifeSciences sells primarily through strategic alliances and
distributors.
In 1999, the Company initiated a repositioning of its business to selectively
focus on attractive niche markets. Implementation of this strategy included the
purchase of the NeuroCare Group of companies ("NeuroCare") in March 1999 and the
execution of an agreement (the "JJM Agreement") with Johnson & Johnson Medical,
Division of Ethicon, Inc. ("JJM") that provides JJM with exclusive marketing and
distribution rights to INTEGRA(R) Artificial Skin worldwide, excluding Japan. As
a result of these transactions, the Company formed its Integra NeuroSciences
segment and reorganized the remainder of the Company's products into its Integra
LifeSciences segment. The JJM Agreement allowed the Integra LifeSciences segment
to focus on strategic collaborative initiatives. A majority of the products in
the Integra NeuroSciences segment, which accounted for 54% of the Company's
total revenues in 1999, were acquired in the NeuroCare acquisition. The Integra
LifeSciences segment, which accounted for 46% of the Company's total revenues in
1999, now operates as a provider of innovative products and development
activities through strategic alliances with marketing partners and distributors.
As a result of these activities, the Company's segment financial results for
each of the years 1999, 1998 and 1997 may not be directly comparable.
The Company has incurred losses from operations since its inception and will
continue to incur such losses unless and until product sales and research and
collaborative arrangements generate sufficient revenue to fund continuing
operations. As of December 31, 1999, the Company had an accumulated deficit of
$94.3 million.
The Company's financial information discussed below should be considered in
light of the following transactions/events that occurred subsequent to December
31, 1999:
o The Company acquired the business, including certain assets and
liabilities, of Clinical Neuro Systems ("CNS") on January 17, 2000 for $6.8
million. CNS designs, manufactures and sells neurosurgical external
ventricular drainage systems including catheters and drainage bags, as well
as cranial access kits. The consideration for the CNS acquisition consisted
of $4.0 million in cash and a two-year $2.8 million note payable to the
seller.
o On March 21, 2000, the Company agreed to acquire the Selector(R) Ultrasonic
Aspirator, Ruggles(TM) hand-held neurosurgical instruments and cryosurgery
product lines, including certain assets and liabilities, from NMT Medical,
Inc. for $12.0 million in cash. The completion of this transaction is
subject to customary closing conditions and is expected to close early in
the second quarter of 2000.
o On March 29, 2000, the Company issued 54,000 shares of Series C Preferred
Stock ("Series C Preferred") and warrants to purchase 300,000 shares of
common stock at $9.00 per share to affiliates of Soros Private Equity
Partners LLC, resulting in proceeds to the Company of $5.4 million. The
Series C Preferred is convertible into 600,000 shares of our common stock
and has a liquidation preference of $5.4 million with a 10% cumulative
dividend. The Series C Preferred was issued with a beneficial conversion
feature that resulted in a nonrecurring non-cash dividend of $4.2 million
that will be reflected in earnings (loss) per share applicable to common
stock in the first quarter of 2000.
30
<PAGE>
See Note 20 to the Company's consolidated financial statements under Item 8 of
this report for additional information.
Results of Operations
1999 Compared to 1998
Overall, the Company's net loss decreased from $12.3 million in 1998 to $6.0
million in 1999. Operating results improved $1.8 million in 1999, with an
operating loss of $12.4 million in 1999 as compared to a $14.2 million operating
loss in 1998. The improvement in 1999 operating results resulted from the
successful integration of the NeuroCare acquisition and implementation of the
JJM Agreement, cost savings achieved in all business segments as compared to
1998 spending levels, and sales increases in the Company's Integra LifeSciences
product lines. The Company also recognized a non-operating gain of $4.2 million
from the sale of a product line in January 1999 and $1.8 million of non-cash
deferred tax benefits recorded in 1999 subsequent to the NeuroCare acquisition.
Total revenues increased $25.0 million from $17.5 million in 1998 to $42.5
million in 1999 primarily as a result of the NeuroCare acquisition. This
increase consists of a $25.6 million increase in product sales, offset by a $0.6
million decrease in other revenue. Product sales and cost of product sales were
as follows (in thousands):
<TABLE>
<CAPTION>
1999
- ---- Integra Integra
NeuroSciences LifeSciences Consolidated
------------- ------------ ------------
<S> <C> <C> <C>
Product sales $ 22,369 $ 17,292 $ 39,661
Cost of product sales 13,192 9,027 22,219
Gross margin on product sales 9,177 8,265 17,442
Gross margin percentage 41% 48% 44%
<CAPTION>
1998
- ---- Integra Integra
NeuroSciences LifeSciences Consolidated
------------- ------------ ------------
<S> <C> <C> <C>
Product sales $ -- $ 14,076 $ 14,076
Cost of product sales -- 7,420 7,420
Gross margin on product sales -- 6,656 6,656
Gross margin percentage -- 47% 47%
</TABLE>
Consolidated product sales increased $25.6 million to $39.7 million in 1999
primarily as a result of the sales of product lines acquired in 1999 and 1998
and increased sales of Integra LifeSciences products. Consolidated export sales
increased $6.8 million to $9.1 million in 1999, primarily as a result of the
NeuroCare acquisition.
Consolidated gross margin on product sales during 1999 decreased to 44% of
product sales primarily because of the lower gross margins on sales of
INTEGRA(R) Artificial Skin and $2.4 million of fair value inventory purchase
accounting adjustments related to business acquisitions. Cost of product sales
in 1998 included approximately $0.3 million of such fair value inventory
purchase accounting adjustments. Excluding these inventory purchase accounting
adjustments, consolidated gross margin on product sales would have been 50% and
49% in 1999 and 1998, respectively.
Integra NeuroSciences product sales and cost of product sales were generated
from the NeuroCare acquisition in March 1999 and $0.5 million of sales of the
DuraGen(TM) Dural Graft Matrix, which the Company launched in the third quarter
of 1999. Included in the cost of product sales is $1.9 million of fair value
inventory purchase accounting adjustments. Excluding these adjustments, gross
margin on Integra NeuroSciences product sales would have been 50% of product
sales in 1999.
31
<PAGE>
Integra LifeSciences product sales increased $3.2 million to $17.3 million in
1999 primarily as a result of $3.6 million of sales increases attributable to
product lines acquired in connection with business acquisitions and a $1.5
million increase in sales of the Company's hemostasis, dental, and infection
control products. These increases were offset by a $2.1 million decrease in
sales of INTEGRA(R) Artificial Skin, primarily due to the transfer of all direct
sales and marketing efforts to JJM under the JJM Agreement in June 1999. The JJM
Agreement requires that JJM make non-refundable payments to the Company each
year based upon minimum purchases of INTEGRA(R) Artificial Skin.
Gross margin on Integra LifeSciences product sales increased to 48% of product
sales in 1999 primarily because of the higher gross margins associated with the
acquired product lines. Offsetting this increase are lower margins associated
with the distribution of INTEGRA(R) Artificial Skin through JJM in the second
half of 1999 and other INTEGRA(R) Artificial Skin manufacturing and inventory
related costs. Gross margin on Integra LifeSciences product sales included $0.5
million and $0.3 million of fair value purchase accounting adjustments in 1999
and 1998, respectively, related to acquired product line sales. Excluding these
purchase accounting adjustments, gross margin on Integra LifeSciences product
sales would have been 51% and 49% of Integra LifeSciences product sales in 1999
and 1998, respectively. The long-term impact on Integra LifeSciences product
sales and related gross margin will depend on required production volumes and
our strategic partners' ability to increase sales volume.
Total other revenue decreased $0.6 million in 1999 to $2.8 million. Other
revenue in the Integra NeuroSciences segment decreased $0.5 million from $1.0
million in 1998 to $0.5 million in 1999. In 1999, other revenue consisted of
$0.5 million of royalty income related to technology acquired in the NeuroCare
acquisition. In 1998, other revenue consisted of $1.0 million of revenue from
Century Medical, Inc. ("CMI") as partial reimbursement of research and
development costs previously expended by the Company. Other revenue in the
Integra LifeSciences segment decreased $0.1 million to $2.3 million in 1999. In
1999, other revenue consisted of $0.9 million of grant revenue, $0.9 million of
payments received in connection with Integra LifeSciences development programs,
$0.3 million of license revenue associated with the JJM Agreement and $0.2
million of royalty income. In 1998, other revenue consisted of $1.0 million of
development funding received from DePuy, a Johnson & Johnson Company ("DePuy"),
in connection with Integra LifeSciences articular cartilage regeneration
development program, $0.6 million of grant revenue, $0.3 million of royalty
income and $0.5 million of license revenue.
Research and development expenses were as follows (in thousands):
1999 1998
---- ----
Integra NeuroSciences $2,028 $ 924
Integra LifeSciences 6,642 7,314
------ ------
Total $8,670 $8,238
Research and development expense in the Integra NeuroSciences segment increased
$1.1 million to $2.0 million in 1999 primarily because of the NeuroCare
acquisition. Integra NeuroSciences research and development activities in 1998
consisted of programs involving the DuraGen(TM) Dural Graft Matrix, which was
launched in the third quarter of 1999, and the peripheral nerve guide, a
bioabsorbable collagen conduit designed to support guided regeneration of
severed nerve tissues. Significant ongoing research and development programs in
the Company's Integra NeuroSciences segment include the development of the next
generation of intra-cranial pressure monitors and shunting products and the
continuation of clinical trials involving the peripheral nerve guide.
Research and development activities within the Integra LifeSciences segment
decreased $0.7 million to $6.6 million in 1999 primarily because of the
elimination of several research programs in early 1999. Significant ongoing
research and development programs in the Company's Integra LifeSciences segment
include the Company's articular cartilage regeneration program with DePuy,
clinical and development activities related to INTEGRA(R) Artificial Skin,
additional applications for the Company's orthopedic technologies and
development work being conducted to support the Genetics Institute bone
regeneration program. The JJM Agreement will provide the Company with research
funding of $2.0 million per year for INTEGRA(R) Artificial Skin beginning in the
year 2000.
32
<PAGE>
Approximately 22% of the Company's total research and development expenses in
1999 and 1998 were funded through external grants and development funding
programs.
During 1999, the Company began shifting the allocation of research and
development expenditures toward the NeuroSciences segment in line with the
repositioning of the Company. While the Company anticipates that expenditures
for research and development will remain at or above 1999 levels, the allocation
between segments and programs and the timing of expenditures will vary depending
on various factors, including the timing and outcome of pre-clinical and
clinical results, changing competitive conditions, continued program funding
levels, potential funding opportunities and determinations with respect to the
commercial potential of the Company's technologies.
Selling and marketing expenses were as follows (in thousands):
1999 1998
---- ----
Integra NeuroSciences $6,233 $ 627
Integra LifeSciences 3,248 5,326
------ ------
Total $9,481 $5,953
Integra NeuroSciences selling and marketing expense increased $5.6 million to
$6.2 million in 1999 primarily because of the NeuroCare acquisition. Additional
increases resulted from expenses related to the domestic and international
launch of the DuraGen(TM) Dural Graft Matrix in the third quarter of 1999. The
decrease of $2.1 million in Integra LifeSciences selling and marketing expenses
to $3.3 million is primarily the result of the transition of INTEGRA(R)
Artificial Skin selling and marketing activities to JJM, offset by a slight
increase in sales and marketing costs related to acquired product lines.
General and administrative expenses were as follows (in thousands):
1999 1998
---- ----
Integra NeuroSciences $ 4,499 $ 417
Integra LifeSciences 2,316 1,989
Corporate 5,867 6,951
------- -------
Total $12,682 $ 9,357
Integra NeuroSciences general and administrative expense increased $4.1 million
to $4.5 million in 1999 primarily because of the NeuroCare acquisition. Included
in this amount is $1.0 million of severance costs associated with the closure of
NeuroCare's corporate headquarters in July 1999. General and administrative
expense in the Integra LifeSciences segment increased $0.3 million to $2.3
million in 1999 primarily due to additional headcount. The decrease of $1.1
million in corporate general and administrative expenses to $5.9 million in 1999
resulted primarily from decreased legal fees and costs associated with
maintenance of the Company's intellectual property and the effects of a $0.2
million asset impairment charge recorded in 1998, offset by increases related to
additional headcount.
Amortization and other depreciation (excluding $1.2 million and $0.8 million of
depreciation included in cost of sales in 1999 and 1998, respectively) were as
follows (in thousands):
1999 1998
---- ----
Integra NeuroSciences $1,176 $ 42
Integra LifeSciences 345 288
Corporate 297 337
------ ------
Total $1,818 $ 667
33
<PAGE>
Amortization and other depreciation in the Integra NeuroSciences segment
increased to $1.2 million in 1999 as a result of the NeuroCare acquisition.
Included in the 1999 amount is $0.8 million of amortization of goodwill and
other intangibles and $0.4 million of depreciation. Amortization and other
depreciation in the Integra LifeSciences segment consisted almost entirely of
depreciation.
Interest income decreased $0.3 million to $1.0 million in 1999 because of lower
average cash and investment balances during the year. Interest expense of $0.7
million in 1999 relates to a term loan and credit facility assumed in the
NeuroCare acquisition.
The $4.2 million gain on disposition of product line was recorded in connection
with the sale of a product line in January 1999.
Other income decreased $0.5 million to $0.1 million in 1999. This decrease was
the result of a $0.6 million favorable litigation settlement recorded in 1998.
The income tax benefit of $1.8 million in 1999 consists of a $1.8 million
non-cash benefit resulting from the reduction of the deferred tax liability
recorded in the NeuroCare acquisition to the extent that consolidated deferred
tax assets were generated subsequent to the acquisition and a $0.6 million tax
benefit associated with the sale of certain state net operating losses in the
fourth quarter of 1999, both of which were offset by $0.6 million of current
income tax provisions. No additional income tax benefit is anticipated in
connection with the deferred tax liability recorded in the NeuroCare
acquisition.
1998 Compared to 1997
The Company's net loss decreased from $17.0 million in 1997 to $12.3 million in
1998. The 1997 loss included two non-cash charges totaling $6.9 million, which
were included in general and administrative expense.
Total revenues increased $2.8 million from $14.7 million in 1997 to $17.5
million in 1998, due largely to increases in other revenues. Product sales, all
of which were within the Integra LifeSciences segment, increased $0.1 million
from $14.0 million in 1997 to $14.1 million in 1998 and included $0.7 million in
sales of product lines acquired in the fourth quarter of 1998. Offsetting these
increases in sales was the elimination of $0.6 million of sales of discontinued
product lines manufactured at the Company's Westchester, Pennsylvania facility,
which was closed in January 1998. Consolidated export sales increased $0.3
million to $2.3 million in 1998, primarily as a result of increased
international distribution efforts for INTEGRA(R) Artificial Skin. INTEGRA(R)
Artificial Skin received CE Mark certification in March 1998, which included a
broader indication of use than currently granted in the United States. Gross
margin on Integra LifeSciences product sales decreased $0.3 million from $7.0
million in 1997 (50% of product sales) to $6.7 million in 1998 (47% of product
sales). In 1998, gross margin on product sales included $0.3 million of fair
value purchase accounting adjustments related to acquired product lines.
Excluding these purchase accounting adjustments, gross margin on Integra
LifeSciences product sales would have been 49% of product sales in 1998.
Total other revenue increased $2.6 million in 1998 to $3.4 million. Other
revenue in the Integra NeuroSciences segment increased $0.9 million from $0.1
million in 1997 to $1.0 million in 1998. In 1998, other revenue consisted of
$1.0 million of revenue as partial reimbursement of research and development
costs previously expended by the Company. Other revenue in the Integra
LifeSciences segment increased from $0.7 million in 1997 to $2.4 million in
1998. In 1998, other revenue consisted of $1.0 million of development funding
received from DePuy in connection with the Company's articular cartilage
regeneration development program, $0.8 million of grant revenue, $0.3 million of
royalty income and $0.3 million of license revenue. In 1997, other revenue in
the Integra LifeSciences segment consisted of grant revenue of $0.4 million and
$0.3 million of royalty income.
34
<PAGE>
Research and development expenses were as follows (in thousands):
1998 1997
---- ----
Integra NeuroSciences $ 924 $ 334
Integra LifeSciences 7,314 5,888
------ ------
Total $8,238 $6,222
Research and development expense in the Integra NeuroSciences segment increased
$0.6 million to $0.9 million in 1998. Integra NeuroSciences research and
development activities in 1998 and 1997 consisted of programs involving the
DuraGen(TM) Dural Graft Matrix and the peripheral nerve guide.
Research and development activities within the Integra LifeSciences segment
increased $1.4 million to $7.3 million in 1998. This increase was primarily
related to research funding for the Company's articular cartilage regeneration,
with additional increases in the Company's INTEGRA(R) Artificial Skin and
orthopedic programs.
Approximately 22% and 8% of the Company's total research and development
expenses in 1998 and 1997, respectively, were funded through external grants and
development funding programs.
Selling and marketing expenses were as follows (in thousands):
1998 1997
---- ----
Integra NeuroSciences $ 627 $ --
Integra LifeSciences 5,326 5,458
------ ------
Total $5,953 $5,458
Integra NeuroSciences selling and marketing expense increased to $0.6 million in
1998 primarily because of pre-launch activities for the DuraGen(TM) Dural Graft
Matrix.
General and administrative expenses were as follows (in thousands):
1998 1997
---- ----
Integra NeuroSciences $ 417 $ 102
Integra LifeSciences 1,989 1,005
Corporate 6,951 13,323
------- -------
Total $ 9,357 $14,430
Integra NeuroSciences general and administrative expense increased $0.3 million
to $0.4 million in 1998. General and administrative expense in the Integra
LifeSciences segment increased $1.0 million to $2.0 million in 1998 primarily
due to acquisition related activities in the Integra LifeSciences segment and
additional headcount. The decrease of $6.4 million in corporate general and
administrative expenses to $7.0 million in 1998 resulted primarily from the
following two non-cash charges recorded in 1997: a $1.0 million asset impairment
charge associated with certain leasehold improvements due to the closure of the
West Chester facility, and a $5.9 million charge related to a fully restated
equity-based signing bonus for the Company's President and Chief Executive
Officer. Offsetting these decreases was a $0.2 million asset impairment charge
recorded in 1998 and increased costs associated with additional headcount and
continued litigation and intellectual property maintenance expenditures incurred
in 1998. The Company settled three litigation matters during 1998, but continued
to incur significant litigation costs associated with the patent infringement
lawsuit against Merck KGaA.
35
<PAGE>
Amortization and other depreciation (excluding $0.8 million and $1.4 million of
depreciation included in cost of sales in 1998 and 1997, respectively) were as
follows (in thousands):
1998 1997
---- ----
Integra NeuroSciences $ 42 $ 14
Integra LifeSciences 288 221
Corporate 337 285
---- ----
Total $667 $520
Amortization and other depreciation in 1998 and 1997 consisted almost entirely
of depreciation.
Interest income decreased $0.5 million to $1.3 million in 1998 because of lower
average cash and investment balances during the year and lower interest rates.
Other income increased $0.4 million to $0.6 million in 1998 because of a $0.6
million favorable litigation settlement recorded in 1998.
Liquidity and Capital Resources
The Company has incurred losses from operations since its inception and will
continue to incur such losses unless and until product sales and research and
collaborative arrangements generate sufficient revenue to fund continuing
operations. As of December 31, 1999, the Company had an accumulated deficit of
$94.3 million.
The Company has funded its operations to date primarily through private and
public offerings of equity securities, product revenues, research and
collaboration funding, borrowings under a revolving credit line and cash
acquired in connection with business acquisitions and dispositions. At December
31, 1999, the Company had cash, cash equivalents and short-term investments of
approximately $23.6 million and $9.9 million in short and long-term bank loans.
The Company's principal uses of funds during 1999 were $14.9 million in the
acquisition of NeuroCare, $2.3 million in purchases of property and equipment
and $1.1 million in repayments of term loans. Net cash flows provided by
operations in 1999 were $2.5 million, which reflected $9.9 million received
under the JJM Agreement, of which $3.4 million and $5.0 million was recorded in
customer advances and deposits and deferred revenue, respectively, at December
31, 1999. During 1999, the Company also received $6.4 million in connection with
the sale of a product line, raised $10.0 million from the sale of Series B
Preferred Stock and warrants to affiliates of Soros Private Equity Partners LLC
and assumed $11.0 million of term debt from Fleet Capital Corporation ("Fleet")
in connection with the NeuroCare acquisition. As part of the assumption of the
term loan, the Company obtained a $4.0 million revolving credit facility from
Fleet, of which a de minimis amount was drawn down at December 31, 1999.
The term loan and the revolving credit facility from Fleet, as amended
(collectively, the "Fleet Credit Facility"), are collateralized by all the
assets and ownership interests of various subsidiaries of the Company including
Integra NeuroCare LLC, and NeuroCare Holding Corporation (the parent company of
Integra NeuroCare LLC) has guaranteed Integra NeuroCare LLC's obligations.
Integra NeuroCare LLC is subject to various financial and non-financial
covenants under the Fleet Credit Facility, including significant restrictions on
its ability to transfer funds to the Company or the Company's other
subsidiaries. The financial covenants specify minimum levels of interest and
fixed charge coverage and net worth, and also specify maximum levels of capital
expenditures and total indebtedness to operating cash flow, among others.
Effective September 29, 1999 and December 31, 1999, certain of these financial
covenants were amended. These amendments did not change any other terms of the
Fleet Credit Facility. While the Company anticipates that Integra NeuroCare LLC
will be able to satisfy the requirements of these amended financial covenants,
there can be no assurance that Integra NeuroCare LLC will generate sufficient
earnings before interest, taxes, depreciation and amortization to meet the
requirements of such covenants. The term loan is subject to mandatory prepayment
amounts if certain levels of cash flow are achieved. The majority of the
business acquired in the NeuroCare acquisition is reported in the Integra
NeuroSciences segment.
36
<PAGE>
In the short-term, the Company believes that it has sufficient resources to fund
its operations. However, in the longer-term, there can be no assurance that the
Company will be able to generate sufficient revenues to obtain positive
operating cash flows or profitability.
Other Matters
Net Operating Losses
At December 31, 1999, the Company had net operating loss carryforwards ("NOL's")
of approximately $50 million and $28 million for federal and state income tax
purposes, respectively, to offset future taxable income, if any. The federal and
state NOL's expire through 2018 and 2005, respectively.
At December 31, 1999, several of the Company's subsidiaries had unused NOL and
tax credit carryforwards arising from periods prior to the Company's ownership.
Excluding the Company's Telios Pharmaceuticals, Inc. subsidiary ("Telios"),
approximately $9 million of these NOL's for federal income tax purposes expire
between 2001 and 2005. The Company's Telios subsidiary has approximately $84
million of net operating losses, which expire between 2002 and 2010. The amount
of Telios' net operating loss that is available and the Company's ability to
utilize such loss is dependent on the determined value of Telios at the date of
acquisition. The Company has a valuation allowance of $42 million against all
deferred tax assets, including the net operating losses, due to the uncertainty
of realization. The timing and manner in which these acquired net operating
losses may be utilized in any year by the Company are severely limited by the
Internal Revenue Code of 1986, as amended, Section 382 and other provisions of
the Internal Revenue Code and its applicable regulations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Investments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivatives and hedging activities and supercedes
several existing standards. SFAS No. 133, as amended by SFAS No. 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company does not expect that the adoption of SFAS No. 133 will have a
material impact on the consolidated financial statements.
In December 1999 (as amended in March 2000) the staff of the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin 101, Revenue
Recognition (the "SAB"). To the extent the guidance in the SAB differs from
generally accepted accounting principles previously utilized by an SEC
registrant, the SAB indicates that the SEC staff will not object to reporting
the cumulative effect of a change in accounting principle.
Prior to promulgation of the SAB, the Company had reported some non-refundable,
up-front and milestone fees received pursuant to distribution agreements in the
period earned, which was deemed to be the date when all related material
commitments had been satisfied and no future consideration was required. While
the Company believes the related supply arrangements entered into with its
distributors provides for arms-length pricing of product sales, the SAB requires
that the distribution agreement fees now be linked to the supply arrangements
and reported as additional revenue from product sales made pursuant to those
arrangements. As a result, up-front distribution agreement fees are initially
deferred and subsequently amortized on a straight-line basis over the
contractual period of the supply arrangements.
The Company is currently assessing the full impact that the SAB will have on its
financial statements. Once the final assessment is complete, the total financial
impact of the SAB will be recorded as a cumulative effect of a change in
accounting principle in the first quarter of 2000. The Company currently
anticipates that the cumulative effect as of January 1, 2000 of the change in
accounting principle (if measured at January 1, 2000) would be approximately
$1.3 million. Such amount had previously been reported as other revenue and
represents the amount of deferred revenue that would have remained unamortized
as of January 1, 2000 with respect to payments previously received and for which
the Company expects to record future other revenue under the related supply
agreements. The unamortized deferred revenue is determined as if the above noted
accounting principle required by the SAB had always been in place.
37
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks arising from an increase in interest
rates payable on variable rate term loan. For example, based on the remaining
term loan outstanding at December 31, 1999, an annual interest rate increase of
100 basis points would increase interest expense by approximately $99,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and the financial statement schedules specified by this
Item, together with the reports thereon of PricewaterhouseCoopers LLP, are
presented following Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38
<PAGE>
PART III
INCORPORATED BY REFERENCE
The information called for by Item 10 "Directors and Executive Officers of the
Registrant" (other than the information concerning executive officers set forth
after Item 4 herein), Item 11 "Executive Compensation", Item 12 "Security
Ownership of Certain Beneficial Owners and Management" and Item 13 "Certain
Relationships and Related Transactions" is incorporated herein by reference to
the Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held on May 16, 2000, which definitive proxy statement is
expected to be filed with the Commission not later than 120 days after the end
of the fiscal year to which this report relates.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report.
1. Financial Statements. The following financial statements and financial
statement schedule are filed as a part of this report.
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998......................... F-2
Consolidated Statements of Operations and Statements of Comprehensive Loss
for the years ended December 31, 1999, 1998 and 1997................................ F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997.............................................. F-5
Notes to Consolidated Financial Statements........................................... F-6
Report of Independent Accountants on Financial Statement Schedules................... F-25
Financial Statement Schedules........................................................ F-26
</TABLE>
All other schedules not listed above have been omitted, because they are not
applicable or are not required, or because the required information is included
in the consolidated financial statements or notes thereto.
39
<PAGE>
2. Exhibits.
<TABLE>
<CAPTION>
Number Description Location
<S> <C> <C>
2.1 Purchase Agreement dated January 5, 1999 (11) (Exh. 2)
among Integra LifeSciences Corporation,
Rystan Company, Inc. and Healthpoint, Ltd.**
2.2 Asset Purchase Agreement dated March 29, (12) (Exh. 2)
1999 among Heyer-Shulte NeuroCare, L.P.,
Neuro Navigational, L.L.C., Integra NeuroCare
LLC and Redmond NeuroCare LLC.**
3.1(a) Amended and Restated Certificate of (2) (Exh. 3.1)
Incorporation of the Company
3.1(b) Certificate of Amendment to Amended and Restated (3)(Exh.3.1(b)
Certificate of Incorporation dated May 23, 1998
3.2 Amended and Restated By-laws of the Company (8) (Exh. 3.3)
4.1 Certificate of Designation, Preferences and Rights (6) (Exh. 3)
of Series A Convertible Preferred Stock as filed with the
Delaware Secretary of State on April 14, 1998.
4.2 Certificate of Designation, Preferences and Rights of Series B (3) (Exh. 4.2)
Convertible Preferred Stock as filed with the Delaware Secretary of
State on March 12, 1999
4.3 Warrant to Purchase 60,000 shares of Common (12)(Exh. 4.2)
Stock of Integra LifeSciences Corporation issued
to SFM Domestic Investments LLC.
4.4 Warrant to Purchase 180,000 shares of Common (12)(Exh. 4.3)
Stock of Integra LifeSciences Corporation issued
to Quantum Industrial Partners LDC.
10.1 License Agreement between MIT and the Company dated as of December 29, (2) (Exh. 10.1)
1993
10.2 Exclusive License Agreement between the Company and Rutgers University (2) (Exh. 10.5)
dated as of December 31, 1994
10.3 License Agreement for Adhesion Peptides Technology between La Jolla (2) (Exh. 10.6)
Cancer Research Foundation and Telios dated as of June 24, 1987
10.4 Supply Agreement between Genetics Institute, Inc. and the Company dated (2) (Exh. 10.12)
as of April 1, 1994
10.5(a) Stockholder Rights Agreement between the Company and Union Carbide (2) (Exh. 10.27(a))
dated as of April 30, 1993 ("Carbide Agreement")
10.5(b) Amendment dated November 30, 1993 to Carbide Agreement (2) (Exh. 10.27(b))
10.6(a) Real Estate Lease & Usage Agreement between BHP Diagnostics, Inc., (2) (Exh. 10.28)
Medicus Technologies, Inc., Integra, Ltd. and the Company dated as of
May 1, 1994
10.6(b) Shared Facilities Usage Agreement Between BHP Diagnostics, Inc., (2) (Exh. 10.29)
Medicus Technologies, Inc., Integra, Ltd. and the Company dated as
of May 1, 1994
10.6(c) Agreement dated June 30, 1998 by and among BHP Diagnostics, Medicus (3) (Exh. 10.18(c))
Corporation, Integra Lifesciences I, Ltd. and Integra Lifesciences
Corporation
10.7 Lease between Plainsboro Associates and American Biomaterials (2) (Exh. 10.30)
Corporation dated as of April 16, 1985, as assigned to Colla-Tec, Inc.
on October 24, 1989 and as amended through November 1, 1992
10.8 Form of Indemnification Agreement between the Company and [ ] (4) (Exh.10.37)
dated August 16, 1995, including a schedule identifying the individuals
that are a party to such Indemnification Agreements
10.9 1992 Stock Option Plan* (2) (Exh. 10.31)
10.10 1993 Incentive Stock Option and Non-Qualified Stock Option Plan* (2) (Exh. 10.32)
10.11(a) 1996 Incentive Stock Option and Non-Qualified Stock Option Plan* (5) (Exh. 4.3)
10.11(b) Amendment to 1996 Incentive Stock Option and Non-Qualified Stock Option (8) (Exh. 10.4)
Plan*
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C>
10.12 1998 Stock Option Plan* (7) (Exh. 10.2)
10.13 1999 Stock Option Plan* (1)
10.14 Employee Stock Purchase Plan* (7) (Exh. 10.1)
10.15 Deferred Compensation Plan* (1)
10.16 Registration Rights Agreement dated as of April 30, 1998 by and between (6) (Exh. 10.2)
Integra Life Sciences Corporation and Century Medical, Inc.
10.17 Registration Rights Agreement dated September 28, 1998 between the (9) (Exh. 10.1)
Company and GWC Health, Inc.
10.18 Series B Convertible Preferred Stock and Warrant (12)(Exh. 10.1)
Purchase Agreement dated March 29, 1999 among Integra
LifeSciences Corporation, Quantum Industrial Partners
LDC and SFM Domestic Investments LLC
10.19 Registration Rights Agreement dated March 29, 1999 (12) (Exh. 10.2)
among Integra LifeSciences Corporation, Quantum
Industrial Partners LDC and SFM Domestic Investments LLC
10.20 Employment Agreement dated December 27, 1997 between the Company and (8) (Exh. 10.1)
Stuart M. Essig*
10.21 Stock Option Grant and Agreement dated December 27, 1997 between the (8) (Exh. 10.2)
Company and Stuart M. Essig*
10.22 Restricted Units Agreement dated December 27, 1997 between the Company (8) (Exh. 10.3)
and Stuart M. Essig*
10.23 Indemnity letter agreement dated December 27, 1997 from the Company to (8) (Exh. 10.5)
Stuart M. Essig*
10.24 Employment Agreement between John B. Henneman, III and the Company (10) (Exh. 10)
dated September 11, 1998*
10.25 Employment Agreement between George W. McKinney, III and the Company (3) (Exh. 10.36)
dated December 31, 1998*
10.26 Employment Agreement between Judith O'Grady and the Company dated (3) (Exh. 10.37)
December 31, 1998*
10.27 Employment Agreement between David B. Holtz and the Company dated (3) (Exh. 10.38)
December 31, 1998*
10.28 Manufacturing and Distribution Agreement dated (11) (Exh. 10)
January 5, 1999 among Integra LifeSciences
Corporation, Rystan Company, Inc., Healthpoint,
Ltd. and DPT Laboratories, Inc.
10.29(a) Amended and Restated Loan and Security Agreement (12) (Exh. 10.3)
dated March 29, 1999 among the Lenders named therein,
Fleet Capital Corporation, Integra NeuroCare LLC and
other Borrowers named therein.
10.29(b) Amendment No. 1, dated September 29, 1999, to (14) (Exh. 10.1)
the Amended and Restated Loan and Security
Agreement dated March 29, 1999 among the
Lenders named therein, Fleet Capital Corporation,
Integra NeuroCare LLC and other Borrowers
named therein.
10.30 Substituted and Amended Term Note dated March 29, (12) (Exh. 10.4)
1999 by Integra NeuroCare LLC, Redmond
NeuroCare LLC, Heyer-Schulte NeuroCare, Inc. and
Camino NeuroCare, Inc. to Fleet Capital Corporation.
10.31 Supply, Distribution and Collaboration Agreement (13) (Exh. 10.1)
between Integra LifeSciences Corporation and
Johnson & Johnson Medical, a Division of Ethicon,
Inc. dated as of June 3, 1999, certain portions of
which are subject to a request for confidential
treatment under Rule 24b-2 of the Securities
Exchange Act of 1934.
10.32 Lease Contract dated June 30, 1994 between (1)
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C>
the Puerto Rico Industrial Development Company and
Heyer-Schulte NeuroCare, Inc.
10.33 Industrial Real Estate Triple Net Sublease (1)
dated April 1, 1993 between GAP Portfolio Partners
and Camino Laboratories.
10.34 Industrial Real Estate Triple Net Sublease (1)
dated January 15, 1997 between Sorrento Montana, L.P. and
Camino NeuroCare, Inc.
21 Subsidiaries of the Company (1)
23 Consent of PricewaterhouseCoopers LLP (1)
27 Financial Data Schedule (1)
</TABLE>
- ----------
* Indicates a management contract or compensatory plan or arrangement.
** Schedules and other attachments to the indicated exhibit were omitted. The
Company agrees to furnish supplementally to the Commission upon request a
copy of any omitted schedules or attachments.
(1) Filed herewith.
(2) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form 10/A (File No. 0-26224) which became
effective on August 8, 1995.
(3) Incorporated by reference to the indicated exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
(4) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-98698) which became
effective on January 24, 1996.
(5) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-8 (File No. 333-06577) which became
effective on June 22, 1996.
(6) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended March 31, 1998.
(7) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-8 (File No. 333-58235) which became
effective on June 30, 1998.
(8) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on February 3, 1998.
(9) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on October 13, 1998.
(10) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended September 30, 1998.
(11) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on January 20, 1999.
(12) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 8-K filed on April 13, 1999.
(13) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended June 30, 1999.
(14) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended September 30, 1999.
(b) Reports on Form 8-K
None.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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, as of the 30th day of March,
2000.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
By: /s/ Stuart M. Essig
-----------------------------------------
Stuart M. Essig, Ph.D.
President
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 in the capacities indicated, on the 30th day of March, 2000.
Signature Title
--------- -----
/s/ Stuart M. Essig President, Chief Executive Officer
- --------------------------------- and Director
Stuart M. Essig, Ph.D. (Principal Executive Officer)
/s/ George W. McKinney, III Executive Vice President, Chief
- --------------------------------- Operating Officer and Director
George W. McKinney, III, Ph.D.
/s/ David B. Holtz Vice President, Finance and Treasurer
- --------------------------------- (Principal Financial and Accounting
David B. Holtz Officer)
/s/ Richard E. Caruso Chairman of the Board
- ---------------------------------
Richard E. Caruso, Ph.D.
/s/ Keith Bradley Director
- ---------------------------------
Keith Bradley, Ph.D.
/s/ Neal Moszkowski Director
- ---------------------------------
Neal Moszkowski
/s/ James M. Sullivan Director
- ---------------------------------
James M. Sullivan
43
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Integra LifeSciences
Holdings Corporation and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive loss, stockholders' equity
and cash flows present fairly, in all material respects, the financial position
of Integra LifeSciences Holdings Corporation and Subsidiaries (the "Company") at
December 31, 1999 and 1998 and the results of operations, comprehensive loss and
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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 of these statements in accordance with
auditing standards generally accepted in the United States, 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 audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 1, 2000, except for Note 20,
as to which the date is March 29, 2000
F-1
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands
December 31,
----------------------------
1999 1998
---- ----
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................................... $ 19,301 $ 5,277
Short-term investments............................................. 4,311 14,910
Accounts receivable, net of allowances of $944 and $354............ 8,365 3,106
Inventories........................................................ 10,111 2,713
Prepaid expenses and other current assets.......................... 718 921
--------- ---------
Total current assets........................................ 42,806 26,927
Property and equipment, net......................................... 9,699 6,291
Goodwill and other intangible assets, net........................... 13,219 1,446
Other assets........................................................ 529 43
--------- ---------
Total assets......................................................... $ 66,253 $ 34,707
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Short-term loans and current maturities of long-term loans......... $ 2,254 $ --
Accounts payable, trade............................................ 994 573
Accrued expenses................................................... 5,540 2,207
Income taxes payable............................................... 643 --
Customer advances and deposits..................................... 3,901 249
Deferred revenue................................................... 1,460 --
--------- ---------
Total current liabilities................................... 14,792 3,029
Long-term loan...................................................... 7,625 --
Deferred revenue.................................................... 5,049 --
Other liabilities................................................... 798 312
--------- ---------
Total liabilities................................................ 28,264 3,341
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value (15,000 authorized shares; 500 Series A
Convertible shares issued and outstanding at December 31, 1999 and 1998,
$4,000 liquidation preference; 100 Series B Convertible shares issued and
outstanding at December 31, 1999, $10,000 with a 10% compounded annual
cumulative dividend liquidation preference)...................... 6 5
Common stock, $.01 par value (60,000 authorized shares; 16,131 and
15,783 issued and outstanding at December 31, 1999 and 1998,
respectively).................................................... 161 158
Additional paid-in capital......................................... 132,340 119,999
Treasury stock, at cost (1 and 52 shares at December 31, 1999 and
1998, respectively).............................................. (7) (286)
Unearned compensation related to stock options..................... (108) (148)
Notes receivable - related party................................... (35) (35)
Accumulated other comprehensive loss............................... (64) (40)
Accumulated deficit................................................ (94,304) (88,287)
--------- ---------
Total stockholders' equity...................................... 37,989 31,366
--------- ---------
Total liabilities and stockholders' equity.......................... $ 66,253 $ 34,707
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-2
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share amounts
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES
Product sales.................................... $ 39,661 $ 14,076 $ 14,001
Other revenue.................................... 2,829 3,379 745
--------- --------- ---------
Total revenue................................ 42,490 17,455 14,746
COSTS AND EXPENSES
Cost of product sales, including depreciation
of $1,286, $771 and $1,383..................... 22,219 7,420 7,027
Research and development......................... 8,670 8,238 6,222
Selling and marketing............................ 9,481 5,953 5,458
General and administrative....................... 12,682 9,357 14,430
Amortization and other depreciation.............. 1,818 667 520
--------- --------- ---------
Total costs and expenses..................... 54,870 31,635 33,657
Operating loss................................... (12,380) (14,180) (18,911)
Interest income.................................. 1,006 1,250 1,771
Interest expense................................. (712) -- --
Gain on disposition of product line.............. 4,161 -- --
Other income..................................... 141 588 176
--------- --------- ---------
Net loss before income taxes..................... (7,784) (12,342) (16,964)
Income tax benefit............................... 1,818 -- --
--------- --------- ---------
Net loss......................................... $ (5,966) $ (12,342) $ (16,964)
========= ========= =========
Basic and diluted net loss per share............. $ (0.40) $ (0.77) $ (1.15)
========= ========= =========
Weighted average common shares outstanding....... 16,802 16,139 14,810
========= ========= =========
</TABLE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
In thousands
Years Ended December 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss......................................... $ (5,966) $ (12,342) $ (16,964)
OTHER COMPREHENSIVE LOSS
Unrealized loss on investments................... (24) (14) (22)
--------- --------- ---------
Comprehensive loss............................... $ (5,990) $ (12,356) $ (16,986)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
In thousands Years Ended December 31,
----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................ $ (5,966) $ (12,342) $ (16,964)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization...................................... 3,104 1,438 1,903
Gain on sale of product line and other assets...................... (3,998) (64) (162)
Provision for impairment of assets................................. -- 145 1,021
Deferred tax benefit............................................... (1,807) -- --
Amortization of discount and interest on investments............... (291) (481) (126)
Amortization of deferred revenue................................... (610) -- --
Compensation associated with the issuance of stock options......... 370 319 123
Restricted units issued............................................ -- -- 5,875
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable.............................................. (510) (287) 122
Inventories...................................................... 2,829 527 285
Prepaid expenses and other current assets........................ 217 65 (62)
Non-current assets............................................... (80) 64 (81)
Accounts payable, accrued expenses and other current liabilities. (677) 802 187
Customer advances and deposits................................... 3,652 -- --
Deferred revenue................................................. 6,269 -- --
--------- --------- ---------
Net cash provided by (used in) operating activities................ 2,502 (9,814) (7,879)
--------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of product line and other assets................. 6,354 48 183
Proceeds from the sales/maturities of investments................... 26,000 33,020 35,500
Purchases of available for sale investments......................... (14,737) (23,274) (37,071)
Purchase of restricted equity securities............................ -- (500) --
Purchases of property and equipment................................. (2,309) (1,166) (770)
Cash acquired in a business acquisition............................. -- 1,118 --
Cash used in business acquisition, net of cash acquired............. (14,944) -- --
--------- --------- ---------
Net cash provided by (used in) investing activities................ 364 9,246 (2,158)
--------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds from revolving credit facility......................... 4 -- --
Repayments of term loan............................................. (1,125) -- --
Proceeds from sales of preferred stock.............................. 9,942 4,000 --
Proceeds from exercise of common stock purchase warrants............ 1,950 -- --
Proceeds from stock issued under employee benefit plans............. 467 95 358
Purchases of treasury stock......................................... -- (286) --
Preferred dividends paid............................................ (80) (47) --
--------- --------- ---------
Net cash provided by financing activities.......................... 11,158 3,762 358
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.................... 14,024 3,194 (9,679)
Cash and cash equivalents at beginning of period........................ 5,277 2,083 11,762
--------- --------- ---------
Cash and cash equivalents at end of period.............................. $ 19,301 $ 5,277 $ 2,083
========= ========= =========
Cash paid during the year for interest.................................. $ 654 $ -- $ --
Cash paid during the year for income taxes.............................. 124 -- --
Supplemental disclosure of non-cash investing and financing activities:
Assumption of term loan in connection with the acquisition of
the NeuroCare group of companies.................................. $ 11,000 $ -- $ --
Common stock and warrants issued in business acquisition............ -- 3,886 --
Common stock issued in settlement of obligations.................... 15 -- --
Stock purchase warrants issued in settlement of obligations......... -- 56 --
Issuance of Restricted Units........................................ -- -- 5,875
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
In thousands
Notes
Common Stock Preferred Stock Additional Receivable
------------ --------------- Treasury Paid-In Related
Shares Amount Shares Amount Stock Capital Parties
------ ------ ------ ------ ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996............ 14,276 $ 143 -- $ -- $ -- $ 105,589 $ (35)
====== ====== == ===== ===== ========= ======
Net loss.............................. -- -- -- -- -- -- --
Other comprehensive loss.............. -- -- -- -- -- -- --
Issuance of common stock under
employee benefit plans ............. 676 7 -- -- -- 352 --
Unearned compensation related
to non-employee stock options ...... -- -- -- -- -- 61 --
Amortization of unearned compensation. -- -- -- -- -- -- --
Issuance of restricted units.......... -- -- -- -- -- 5,875 --
Balance, December 31, 1997............ 14,952 150 -- -- -- 111,877 (35)
Net loss.............................. -- -- -- -- -- -- --
Other comprehensive loss.............. -- -- -- -- -- -- --
Issuance of Series A Preferred Stock.. -- -- 500 5 -- 3,995 --
Issuance of common stock under
employee benefit plans ............. 31 -- -- -- -- 95 --
Common stock and warrants issued in
connection with a business
acquisition ........................ 800 8 -- -- -- 3,878 --
Unearned compensation related to
non-employee stock options ......... -- -- -- -- -- 145 --
Amortization of unearned compensation. -- -- -- -- -- -- --
Warrant issued for services rendered.. -- -- -- -- -- 56 --
Dividends paid on Series A
Preferred Stock ($0.09 per share) .. -- -- -- -- -- (47) --
Purchases of treasury stock........... -- -- -- -- (286) -- --
Balance, December 31, 1998............ 15,783 158 500 5 (286) 119,999 (35)
====== === === = ==== ======= ===
Net loss.............................. -- -- -- -- -- -- --
Other comprehensive loss.............. -- -- -- -- -- -- --
Issuance of Series B Preferred Stock.. -- -- 100 1 -- 9,941 --
Issuance of common stock under
employee benefit plans ............. 48 -- -- -- 264 203 --
Warrants exercised for common stock... 300 3 -- -- -- 1,947 --
Issuance of stock in settlement of
obligation ......................... -- -- -- -- 15 -- --
Unearned compensation related
to non-employee stock options ...... -- -- -- -- -- 241 --
Amortization of unearned compensation. -- -- -- -- -- -- --
Compensation recorded in connection
with stock options granted to
employees .......................... -- -- -- -- -- 89 --
Dividends paid on Series A
Preferred Stock ($0.16 per share) .. -- -- -- -- -- (80) --
Balance, December 31, 1999............ 16,131 $ 161 600 $ 6 $ (7) $132,340 $ (35)
====== ====== === ====== ====== ======== ======
<CAPTION>
In thousands Unearned
Compensation
Related to Accumulated
Stock Comprehensive Accumulated Total
Options Loss Deficit Equity
------- ---- ------- ------
<S> <C> <C> <C> <C>
Balance, December 31, 1996............ $ (328) $ (4) $ (58,981) $46,384
======= ===== ========= =======
Net loss.............................. -- -- (16,964) (16,964)
Other comprehensive loss.............. -- (22) -- (22)
Issuance of common stock under
employee benefit plans ............. -- -- -- 359
Unearned compensation related
to non-employee stock options ...... (61) -- -- --
Amortization of unearned compensation. 123 -- -- 123
Issuance of restricted units.......... -- -- -- 5,875
Balance, December 31, 1997............ (266) (26) (75,945) 35,755
Net loss.............................. -- -- (12,342) (12,342)
Other comprehensive loss.............. -- (14) -- (14)
Issuance of Series A Preferred Stock.. -- -- -- 4,000
Issuance of common stock under
employee benefit plans ............. -- -- -- 95
Common stock and warrants issued in
connection with a business
acquisition ........................ -- -- -- 3,886
Unearned compensation related to
non-employee stock options ......... (145) -- -- --
Amortization of unearned compensation. 263 -- -- 263
Warrant issued for services rendered.. -- -- -- 56
Dividends paid on Series A
Preferred Stock ($0.09 per share) .. -- -- -- (47)
Purchases of treasury stock........... -- -- -- (286)
Balance, December 31, 1998............ (148) (40) (88,287) 31,366
==== === ======= ======
Net loss.............................. -- -- (5,966) (5,966)
Other comprehensive loss.............. -- (24) -- (24)
Issuance of Series B Preferred Stock.. -- -- -- 9,942
Issuance of common stock under
employee benefit plans ............. -- -- (51) 416
Warrants exercised for common stock... -- -- -- 1,950
Issuance of stock in settlement of
obligation ......................... -- -- -- 15
Unearned compensation related
to non-employee stock options ...... (241) -- -- --
Amortization of unearned compensation. 281 -- -- 281
Compensation recorded in connection
with stock options granted to
employees .......................... -- -- -- 89
Dividends paid on Series A
Preferred Stock ($0.16 per share) .. -- -- -- (80)
Balance, December 31, 1999............ $ (108) $ (64) $ (94,304) $37,989
======== ====== ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Integra LifeSciences Holdings Corporation (the "Company") develops, manufactures
and markets medical devices, implants and biomaterials. The Company's operations
consist of (1) Integra NeuroSciences, which is a leading provider of implants,
instruments, and monitors used in neurosurgery, neurotrauma, and related
critical care and (2) Integra LifeSciences, which develops and manufactures a
variety of medical products and devices, including products based on our
proprietary tissue regeneration technology which are used to treat soft tissue
and orthopedic conditions. Integra NeuroSciences sells primarily through a
direct sales organization and Integra LifeSciences sells primarily through
strategic alliances and distributors.
There are certain risks and uncertainties inherent in the Company's business. To
date, the Company has experienced significant operating losses in funding the
research, development, manufacturing and marketing of its products and may
continue to incur operating losses. The Company's ability to achieve
profitability depends in part upon its ability, either independently or in
collaboration with others, to successfully manufacture and market its products
and services. The industry and market segments in which the Company operates are
highly competitive, and the Company may not be able to compete effectively with
other companies with greater financial resources. In general, the medical
technology industry is characterized by intense competition, which comes from
established pharmaceutical and medical technology companies and early stage
companies that have alternative technological solutions for the Company's
primary clinical targets, as well as universities, research institutions and
other non-profit entities. The Company's competitive position and profitability
will depend on its ability to achieve market acceptance for its products,
implement production and marketing plans, secure regulatory approval for
products under development, obtain patent protection and secure adequate capital
resources.
The Company believes that current cash balances and funds available from
existing revenue sources will be sufficient to finance the Company's anticipated
operations for at least the next twelve months. The Company may in the future
seek to issue equity securities or enter into other financing arrangements with
strategic partners to raise funds in excess of its anticipated liquidity and
capital requirements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. All intercompany accounts and
transactions are eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less and have virtually no risk of loss in value
to be cash equivalents.
Investments
The Company's current investment policy is to invest available cash balances in
high quality debt securities with maturities not to exceed 18 months. Realized
gains and losses are determined on the specific identification cost basis. All
investments are classified as available for sale, with unrealized gains and
losses reported in other comprehensive loss.
F-6
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Inventories
Inventories, consisting of purchased materials, direct labor and manufacturing
overhead, are stated at the lower of cost, determined on the first-in, first-out
method, or market.
Property and Equipment
Property and equipment is stated at cost. The Company provides for depreciation
using the straight-line method over the estimated useful lives of the assets,
which are estimated to be between 3 and 15 years. Leasehold improvements are
amortized using the straight-line method over the minimum lease term or the life
of the asset whichever is shorter. The cost of major additions and improvements
is capitalized. Maintenance and repair costs that do not improve or extend the
lives of the respective assets are charged to operations as incurred. When
depreciable assets are retired or sold, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in operations.
Goodwill and Other Intangible Assets
Goodwill other intangible assets were recorded in connection with the
acquisition of the NeuroCare Group of companies in March 1999 and the Rystan
Company, Inc. in September 1998. Goodwill and other intangibles are being
amortized using a straight-line basis over periods ranging from two to fifteen
years.
Long-Lived Assets
Long-lived assets held and used by the Company, including goodwill and other
intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For purposes of evaluating the recoverability of long-lived assets
to be held and used, a recoverability test is performed using projected
undiscounted net cash flows applicable to the long-lived assets. If an
impairment exists, the amount of such impairment is calculated based on the
estimated fair value of the asset. Impairments to long-lived assets to be
disposed of are recorded based upon the fair value of the applicable assets.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Research and Development
Research and development costs are expensed in the period in which they are
incurred.
Revenue Recognition
Product sales are recognized when delivery has occurred or title has passed to
the customer, there is a fixed or determinable sales price, and collectibility
of that sales price is reasonably assured. Research grant revenue and contract
product development revenue are recognized when the related expenses are
incurred. Under the terms of existing research grants, the Company is reimbursed
for allowable direct and indirect research expenses. Product licensing revenue
is recognized ratably over the contract period. Royalty revenue is recognized
over the period the royalty products are sold.
F-7
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and cash equivalents and short-term
investments, which are held at major financial institutions, and trade
receivables. The Company's products are sold on an uncollateralized basis and on
credit terms based upon a credit risk assessment of each customer.
Net Loss per Share
Amounts used in the calculation of basic and diluted net loss per share were as
follows (in thousands, except per share data):
1999 1998 1997
---- ---- ----
Net loss ................................... $ (5,966) $(12,342) $(16,964)
Preferred stock dividends
Series A Convertible Preferred Stock .... (80) (47) --
Series B Convertible Preferred Stock .... (751) -- --
-------- -------- --------
Net loss applicable to common stock ........ $ (6,797) $(12,389) $(16,964)
======== ======== ========
Weighted average common shares outstanding . 16,802 16,139 14,810
======== ======== ========
Basic and diluted net loss per share ....... $ (0.40) $ (0.77) $ (1.15)
======== ======== ========
Basic loss per share is computed by dividing net loss applicable to common stock
by the weighted average number of common shares outstanding for the period.
Diluted per share amounts reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock. Options and
warrants to purchase 4,401,000, 3,095,000 and 3,778,000 shares of common stock
and preferred stock convertible into 2,868,000, 500,000 and 0 shares of common
stock at December 31, 1999, 1998 and 1997, respectively were not included in the
computation of diluted loss per share because their effect would be
antidilutive. The Restricted Units issued by the Company (see Note 11) are
included in the weighted average calculation because no further consideration is
due related to the issuance of the underlying common shares.
Stock Based Compensation
Employee stock based compensation is recognized using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees". For disclosures purposes, pro forma net loss and loss per
share are presented as if the fair value method had been applied.
F-8
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, including disclosures of
contingent assets and liabilities, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Investments
and Hedging Activities", ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivatives and hedging activities and supercedes
several existing standards. SFAS No. 133, as amended by SFAS No. 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company does not expect that the adoption of SFAS No. 133 will have a
material impact on the consolidated financial statements.
In December-1999 (as amended in March 2000) the staff of the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin 101, Revenue
Recognition (the "SAB"). To the extent the guidance in the SAB differs from
generally accepted accounting principles previously utilized by an SEC
registrant, the SAB indicates that the SEC staff will not object to reporting
the cumulative effect of a change in accounting principle.
Prior to promulgation of the SAB, the Company had reported some non-refundable
up-front and milestone fees received pursuant to distribution agreements in the
period earned, which was deemed to be the date when all related material
commitments had been satisfied and no future consideration was required. While
the Company believes the pricing under related supply arrangements entered into
with its distributors provides for arms-length pricing of product sales, the SAB
requires that the distribution agreement fees now be linked to the supply
arrangements and reported as additional revenue from product sales made pursuant
to those arrangements. As a result, up-front distribution agreement fees are
initially deferred and subsequently amortized on a straight-line basis over the
contractual period of the supply arrangements.
The Company is currently assessing the full impact that the SAB will have on its
financial statements. Once the final assessment is complete, the total financial
impact of the SAB will be recorded as a cumulative effect of a change in
accounting principle in the first quarter of 2000. The Company currently
anticipates that the cumulative effect as of January 1, 2000 of the change in
accounting principle (if measured at January 1, 2000) would be approximately
$1.3 million. Such amount had previously been reported as other revenue and
represents the amount of deferred revenue that would have remained unamortized
as of January 1, 2000 with respect to payments previously received and for which
the Company expects to record future other revenue under the related supply
agreements. The unamortized deferred revenue is determined as if the above noted
accounting principle required by the SAB had always been in place.
3. BUSINESS ACQUISITIONS AND DISPOSITIONS
On March 29, 1999 the Company acquired the business, including certain assets
and liabilities, of the NeuroCare group of companies ("NeuroCare"), a leading
provider of neurosurgical products. The $25.4 million acquisition price was
comprised of $14.4 million of cash and $11.0 million of assumed indebtedness
under a term loan from Fleet Capital Corporation ("Fleet"). The cash portion of
the purchase price was financed in part by affiliates of Soros Private Equity
Partners LLC, through the sale of $10.0 million of Series B Convertible
Preferred Stock and warrants. The convertible preferred shares are convertible
into 2,617,801 shares of the Company's common stock, have a liquidation
preference of $10.0 million with a 10% compounded cumulative annual return,
which is payable only upon the Company's conditional redemption of the preferred
shares or in the event of a liquidation or change in control, and are senior to
all other equity securities of the Company. The warrants issued are for the
right to acquire 240,000 shares of the Company's common stock at an exercise
price of $3.82 per share.
F-9
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BUSINESS ACQUISITIONS AND DISPOSITIONS, continued
The acquisition has been accounted for under the purchase method of accounting
and the results of the acquisition are included in the consolidated financial
statements since the acquisition date. The purchase price has been preliminarily
allocated based on estimated fair values at the date of acquisition. This
preliminary allocation has resulted in acquired intangibles and goodwill of
approximately $13.7 million, which is being amortized on a straight-line basis
over periods ranging from 2 to 15 years. The following is a summary of the
preliminary allocation (in thousands):
Cash ........................................................ $ 285
Accounts receivable ......................................... 4,899
Inventory ................................................... 10,553
Property and equipment ...................................... 3,601
Other assets ................................................ 582
Intangibles and goodwill .................................... 13,701
Accrued expenses and other liabilities ...................... (8,218)
Term loan ................................................... (11,000)
--------
$ 14,403
========
We do not expect the preliminary allocation to change significantly.
On September 28, 1998, the Company acquired Rystan Company, Inc. ("Rystan") for
800,000 shares of common stock of the Company and two warrants each having the
right to purchase 150,000 shares of the Company's common stock. The total
purchase price was valued at $4.0 million, which exceeded the Company's
assessment of the fair value of net assets acquired by approximately $1.5
million. This excess of purchase price over the fair value of net assets
acquired was recorded as goodwill and is being amortized on a straight-line
basis over 15 years. The acquisition was accounted for using the purchase method
of accounting and the results of the acquisition are included in the
consolidated financial statements since the acquisition date. In January 1999,
the Company subsequently sold a Rystan product line, including the brand name
and related production equipment, to Healthpoint, Ltd. for $6.4 million in cash
and recognized a pre-tax gain of $4.2 million after adjusting for the net cost
of the assets sold and for expenses associated with the divestiture, including
the closing of the Rystan facility.
The following unaudited pro forma financial information assumes that these
acquisitions had occurred as of the beginning of each period (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
Year ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Total revenue ................................... $ 50,412 $ 53,161 $ 51,122
Net loss ....................................... $ (8,666) $ (9,964) $(15,531)
Basic and diluted loss per share ................ $ (0.58) $ (0.66) $ (1.06)
</TABLE>
Excluded from the pro forma results for the year ended December 31, 1999 is the
$3.7 million gain, net of tax, ($0.22 per share) from the sale of a Rystan
product line. Included in the historical and pro forma amounts for the year
ended December 31, 1999 are inventory fair value purchase accounting adjustments
of $2.2 million, severance costs of $1.1 million and $1.8 million of deferred
tax benefits relating to the NeuroCare acquisition. The pro forma amounts for
the years ended December 31, 1998 and 1997 include $2.2 million of fair value
inventory purchase accounting adjustments and $1.8 million of deferred tax
benefits related to the NeuroCare acquisition and $0.3 million of fair value
purchase accounting inventory adjustments related to the Rystan acquisition,
respectively. These pro forma amounts are based upon certain assumptions and
estimates. The pro forma results do not necessarily represent results that would
have occurred if the acquisition had taken place on the basis assumed above, nor
are they indicative of the results of future combined operations.
F-10
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. STRATEGIC ALLIANCE
On June 3, 1999, the Company and Johnson & Johnson Medical, Division of Ethicon,
Inc. ("JJM"), signed an agreement (the "JJM Agreement") providing JJM with
exclusive marketing and distribution rights to INTEGRA(R) Artificial Skin
worldwide, excluding Japan.Under the JJM Agreement, the Company will continue to
manufacture INTEGRA(R) Artificial Skin and will collaborate with JJM to conduct
research and development and clinical research aimed at expanding indications
and developing future products in the field of skin repair and regeneration.
Upon signing the JJM Agreement, the Company received a payment from JJM of $5.3
million for the exclusive use of the Company's trademarks and regulatory filings
related to INTEGRA(R) Artificial Skin and certain other rights. This amount has
been recorded as deferred revenue and is being amortized over the ten-year term
of the JJM Agreement. The unamortized balance of $5.0 million at December 31,
1999 is recorded in deferred revenue, of which $0.5 million is classified as
short-term. Additionally, the JJM Agreement requires JJM to make non-refundable
payments to the Company each year based upon minimum purchases of INTEGRA(R)
Artificial Skin. As a result, the Company received a $1.2 million prepayment
upon signing the JJM Agreement for minimum purchases in 1999 and a $3.4 million
payment in December 1999 for minimum purchases in 2000. The entire $1.2 million
initial payment was recorded as product sales in 1999, as JJM's sales to end
customers satisfied its 1999 minimum purchase commitment, and the $3.4 million
payment is recorded in current liabilities as customer advances and deposits at
December 31, 1999.
The JJM Agreement also provides for annual research funding of $2.0 million for
the years 2000 through 2004, after which such funding amounts will be determined
based upon net sales of INTEGRA(R) Artifical Skin. Additional funding will be
received upon the occurrence of certain clinical and regulatory events and for
funding expansion of the Company's INTEGRA(R) Artificial Skin production
capacity as certain sales targets are achieved.
5. INVESTMENTS
The Company's current investment balances are classified as available for sale
and all debt securities have maturities within one year. Investment balances as
of December 31, 1999 and 1998 were as follows:
In thousands Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1999:
U.S. Government agency securities $ 3,975 $ -- $ -- $ 3,975
Equity securities ............... 400 -- (64) 336
------- --------- ------- -------
Total ........................ $ 4,375 $ -- $ (64) $ 4,311
======= ========= ======= =======
1998:
U.S. Government agency securities $14,950 $ 4 $ (44) $14,910
======= ========= ======= =======
F-11
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
---- ----
<S> <C> <C>
Finished goods............................................. $ 3,786 $ 1,433
Work-in-process............................................ 2,224 802
Raw materials.............................................. 4,101 478
--------- ---------
$ 10,111 $ 2,713
========= =========
</TABLE>
7. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Machinery and equipment.................................... $ 8,923 $ 4,952
Furniture and fixtures..................................... 559 319
Leasehold improvements..................................... 7,805 6,840
Construction in progress................................... 390 24
--------- ---------
17,677 12,135
Less: Accumulated depreciation and amortization............ (7,978) (5,844)
--------- ----------
$ 9,699 $ 6,291
========= =========
</TABLE>
Depreciation and amortization expense associated with property and equipment for
the years ended December 31, 1999, 1998 and 1997 was $2,229,000, $1,413,000 and
$1,903,000, respectively.
8. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles, net, consists primarily of identifiable
intangible assets and residual goodwill related to the NeuroCare acquisition.
The following is a summary of goodwill and other intangible balances (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Technology................................................. $ 3,730 --
Customer base.............................................. 1,810 --
Trademarks................................................. 1,570 --
Other identifiable intangible assets....................... 2,661 --
Goodwill................................................... 4,348 1,495
--------- ---------
14,119 1,495
Less: Accumulated amortization............................. (900) (49)
--------- ---------
$ 13,219 $ 1,446
========= =========
</TABLE>
F-12
<PAGE>
8. GOODWILL AND OTHER INTANGIBLES, continued
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assets sold in the disposition of the Rystan product line in January 1999
included approximately $1,031,000 of goodwill related to the product line.
Amortization expense associated with goodwill and other intangibles for the
years ended December 31, 1999, 1998 and 1997 was $875,000, $49,000 and $0,
respectively.
9. CURRENT LIABILITIES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Acquisition related costs................................... $ 658 $ --
Vacation.................................................... 533 260
Legal fees.................................................. 526 591
Contract research........................................... 378 401
Other....................................................... 3,445 955
--------- ---------
$ 5,540 $ 2,207
========= =========
</TABLE>
10. DEBT
The NeuroCare acquisition was partially funded through an $11.0 million term
loan provided by Fleet. Fleet has also provided a $4.0 million revolving credit
facility to fund working capital requirements, of which $4,000 was drawn down as
of December 31, 1999. The term loan and revolving credit facility (collectively,
the "Fleet Credit Facility") generally bear interest at a variable rate that is
based upon the prime lending rate charged for commercial loans in the United
States. At December 31, 1999, the weighted average and year-end interest rate on
the Company's debt was 9.5%. An option is available to the Company to borrow
certain portions of the Fleet Credit Facility at variable rates based upon the
London Interbank Overnight Rate ("LIBOR"), subject to certain limitations and
restrictions.
The Fleet Credit Facility is collateralized by all the assets and ownership
interests of various subsidiaries of the company including Integra NeuroCare LLC
and NeuroCare Holding Corporation (the parent company of Integra NeuroCare LLC)
has guaranteed Integra NeuroCare LLC's obligations. Integra NeuroCare LLC is
subject to various financial and non-financial covenants under the Fleet Credit
Facility, including significant restrictions on its ability to transfer funds to
the Company or the Company's other subsidiaries. At December 31, 1999,
approximately $15.6 million of Integra NeuroCare LLC's net assets were
restricted under the provisions of the Fleet Credit Facility. The financial
covenants specify minimum levels of interest and fixed charge coverage and net
worth, and also specify maximum levels of capital expenditures and total
indebtedness to operating cash flow, among others. Effective September 29, 1999
and December 31, 1999, certain of these financial covenants were amended. These
amendments did not change any other terms of the Fleet Credit Facility. While
the Company anticipates that Integra NeuroCare LLC will be able to satisfy the
requirements of these amended financial covenants, there can be no assurance
that Integra NeuroCare LLC will generate sufficient earnings before interest,
taxes, depreciation and amortization to meet the requirements of such covenants.
The majority of the business acquired in the NeuroCare acquisition is reported
in the Integra NeuroSciences segment.
F-13
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. DEBT, continued
At December 31, 1999, $9,875,000 remained outstanding on the term loan, of which
$2,250,000 is classified as short-term. The term loan is repayable as follows:
$2,250,000 in 2000, $2,500,000 in 2001, $3,250,000 in 2002 and $1,875,000 in
2003. Notwithstanding these payments, the term loan is subject to mandatory
prepayment amounts if certain levels of cash flow are achieved.
11. STOCKHOLDERS' EQUITY
Preferred Stock Transactions
In connection with the NeuroCare acquisition, the Company sold $10.0 million of
Series B Preferred Stock to affiliates of Soros Private Equity Partners LLC (see
Note 3).
During the second quarter of 1998, the Company sold 500,000 shares of Series A
Preferred Stock ("Series A Preferred") for $4.0 million to Century Medical, Inc.
("CMI"). The Preferred Stock pays an annual dividend of $0.16 per share, payable
quarterly, and has a liquidation preference of $4.0 million. Each share of
Preferred Stock is convertible at any time into one-half share of Company common
stock and is redeemable at the option of the Company after December 31, 2007.
Common Stock Transactions
In September 1998, the Company issued 800,000 shares of Company common stock and
two warrants each having the right to purchase 150,000 shares of the Company's
common stock to GWC Health, Inc., a subsidiary of Elan Corporation, plc., as
consideration for the acquisition of Rystan (See "Common Stock Warrants" below
and Note 3).
Stock Split
The Company's shareholders approved a one-for-two reverse split of the Company's
common stock at the annual shareholders meeting held on May 18, 1998. All
outstanding common share and per share amounts have been retroactively adjusted
to reflect the reverse split.
Restricted Units
In December 1997, the Company issued one million restricted units ("Restricted
Units") as a fully vested equity based signing bonus to the Company's new
President and Chief Executive Officer ("Executive"). Each Restricted Unit
represents the right to receive one share of the Company's common stock. In
connection with the Restricted Units, the Company incurred a non-cash
compensation charge of $5.9 million in the fourth quarter of 1997, which is
included in general and administrative expenses.
Common Stock Warrants
In connection with the NeuroCare acquisition, the Company issued two warrants to
affiliates of Soros Private Equity Partners LLC having the right to purchase an
aggregate of 240,000 shares of the Company's common stock at $3.82 per share.
These warrants expire on March 28, 2001.
In connection with the acquisition of Rystan, the Company issued two warrants,
each having the right to purchase 150,000 shares of the Company's common stock
at $6.00 and $7.00, respectively. Both of these warrants were exercised in
October 1999.
In conjunction with a 1993 private placement of 347,947 shares of the Company's
common stock to Boston Scientific Corporation the Company sold for additional
consideration and issued to BSC a warrant (the "BSC Warrant") to purchase
347,947 shares of the Company's common stock at an exercise price of $14.37 per
share. The BSC Warrant expired on January 31, 2000.
F-14
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCKHOLDERS' EQUITY , continued
Stockholders' Rights
As stockholders of the Company, Union Carbide Corporation, CMI and GWC Health
are entitled to certain registration rights. The Executive also has demand
registration rights under the Restricted Units agreement.
12. STOCK OPTIONS
As of December 31, 1999, the Company had stock options outstanding under five
stock option plans, the 1992 Stock Option Plan (the "1992 Plan"), the 1993
Incentive Stock Option and Non-Qualified Stock Option Plan (the "1993 Plan"),
the 1996 Incentive Stock Option and Non-Qualified Stock Option Plan (the "1996
Plan"), the 1998 Stock Option Plan (the "1998 Plan") and the 1999 Stock Option
Plan (the "1999 Plan"). As of June 30, 1997, no additional options can be
granted out of the 1992 Plan and 175,000 shares reserved under the 1992 Plan
were cancelled.
The Company has reserved 750,000 shares of common stock for issuance under each
of the 1993 and 1996 Plans, 1,000,000 shares under the 1998 Plan, and 2,000,000
shares under the 1999 Plan. The 1993 Plan, 1996 Plan, 1998 Plan and the 1999
Plan (together, "the Plans") permit the Company to grant both incentive and
non-qualified stock options to designated directors, officers, employees and
associates of the Company. Options issued under the Plans become exercisable
over specified periods, generally within four years from the date of grant, and
generally expire six years from the grant date.
In May 1997, the Company's Stock Option Committee and Board of Directors
approved an option exchange program pursuant to which employees with options
having an exercise price in excess of $8.00 per share under the Company's Stock
Option Plans could elect to exchange such options for new stock options with an
exercise price of $8.00. Under the exchange program, (i) the number of
replacement options issued in exchange for the original options was determined
by the utilization of a formula based on the percentage decrease in exercise
price from the original grant (not to exceed 25% of the original options and
excluding the first 500 options), (ii) the replacement options expiration dates
were adjusted to one year later than the original options expiration dates, and
(iii) the vesting terms of the replacement options were adjusted to
proportionately reflect the decrease in options, when applicable. Under the
exchange program, 542,242 options with exercise prices ranging from $8.50 to
$25.00 were exchanged for 445,811 options granted with an exercise price of
$8.00, which was in excess of the closing market price at the date of exchange.
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock Based Compensation" ("SFAS 123") and accordingly no
compensation cost has been recognized for the fair value of stock option grants
except the amortization of unearned compensation related to options granted to
non-employees which amounted to $281,000, $263,000 and $123,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. Had the compensation cost
for the Company's stock option plans been determined based on the fair value at
the grant date for awards in grant since 1995 consistent with the provisions of
SFAS No. 123, the Company's net loss and basic and diluted net loss per share
would have increased to the pro forma amounts indicated below:
<TABLE>
(In thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss applicable to common stock................... $ (6,797) $ (12,389) $ (16,964)
Pro forma net loss applicable to common stock......... (9,991) (15,070) (17,777)
Basic and diluted net loss per share.................. $ (0.40) $ (0.77) $ (1.15)
Pro forma basic and diluted net loss per share........ (0.59) (0.93) (1.20)
</TABLE>
F-15
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTIONS, continued
As options vest over a varying number of years and awards are generally made
each year, the pro forma impacts shown here may not be representative of future
pro forma expense amounts. The pro forma additional compensation expense was
calculated based on the fair value of each option grant using the Black-Scholes
model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend yield..................... -0- -0- -0-
Expected volatility................ 90% 80% 80%
Risk free interest rate............ 5.4% 5.2% 6.2%
Expected option lives.............. 4 years 4 years 6 years
</TABLE>
For the three years ended December 31, 1999, option activity for all the Plans
(including the 1992 Plan) was as follows:
<TABLE>
<CAPTION>
Weighted-Average
Exercise Price Shares
(Shares in thousands) --------------- --------
<S> <C> <C>
December 31, 1996, Outstanding ..................... $ 8.68 1,405
=====
December 31, 1996, Exercisable ..................... $ 5.64 950
=====
Granted ..................................... $ 7.10 1,493
Exercised ................................... $ 0.53 (676)
Canceled .................................... $ 15.52 (681)
----
December 31, 1997, Outstanding ..................... $ 7.68 1,541
=====
December 31, 1997, Exercisable ..................... $ 9.36 393
Granted ..................................... $ 4.35 1,045
Exercised ................................... $ 8.00 (1)
Canceled .................................... $ 8.21 (138)
----
December 31, 1998, Outstanding ..................... $ 6.26 2,447
=====
December 31, 1998, Exercisable ..................... $ 8.45 730
Granted ..................................... $ 5.10 1,757
Exercised ................................... $ 4.24 (61)
Canceled .................................... $ 5.56 (352)
----
December 31, 1999, Outstanding ..................... $ 5.82 3,791
=====
December 31, 1999, Exercisable ..................... $ 6.76 1,422
December 31, 1999, Available for Grant ............. 772
</TABLE>
F-16
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTIONS, continued
In June 1999, the Company granted fully vested non-qualified stock options with
an intrinsic value of $90,000 on the grant date to certain employees for which a
corresponding charge was recorded to general and administrative expense.
Otherwise, the exercise price of all other stock options granted under the 1992
Plan and the Plans was equal to or greater than the fair market value of the
common stock on dates of grant. The weighted average exercise price and fair
market value of options granted in 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Less Than Market Price Equal to Market Price In Excess of Market Price
---------------------- --------------------- --------------------------
Exercise Price Fair Value Exercise Price Fair Value Exercise Price Fair Value
-------------- ---------- -------------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1999 $ 3.46 $ 3.46 $ 5.11 $ 3.77 $ 7.61 $ 0.06
1998 -- -- $ 4.19 $ 2.59 $ 8.00 $ 1.98
1997 -- -- $ 6.44 $ 4.96 $ 8.08 $ 4.56
</TABLE>
The following table summarizes information about the outstanding and exercisable
stock options at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------
Options in thousands Weighted Weighted Weighted
Average Average Average
Range of As of Remaining Exercise As of Exercise
Exercise Prices 12/31/99 Contractual Life Price 12/31/99 Price
--------------- -------- ---------------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
$3.375 - $5.500 1,467 4.7 years $ 3.78 433 $ 3.83
$5.75 - $8.00 2,126 4.1 years $ 6.56 895 $ 7.13
$8.125 - $23.00 198 3.2 years $ 12.94 94 $ 16.72
----- -----
3,791 1,422
===== =====
</TABLE>
13. FINANCIAL INSTRUMENTS
Fair value of the Company's financial instruments are estimated as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
Fair Carrying Fair Carrying
Value Amount Value Amount
---- -------- ---- --------
<S> <C> <C> <C> <C>
Nonderivatives
Cash and cash equivalents $19,301 $19,301 $ 5,277 $ 5,277
Short-term investments 4,311 4,311 14,910 14,910
Term loans and revolving credit facility 9,879 9,879 -- --
</TABLE>
Fair values were estimated based on market prices, where available. The interest
rate on the Company's term loan and borrowings under its revolving credit
facility are reset periodically to reflect current market rates.
F-17
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. LEASES
The Company leases all of its facilities through noncancelable operating lease
agreements. In November 1992, a corporation whose shareholders are trusts whose
beneficiaries include beneficiaries of a significant shareholder acquired from
independent third parties a 50% interest in the general partnership from which
the Company leases its manufacturing, research and principal warehouse facility
in Plainsboro, New Jersey. The lease provides for rent escalations of 10.1% and
8.5% in the years 2002 and 2007, respectively, and expires in October 2012. The
total amount of the minimum lease payments related to the New Jersey facility is
being charged to expense on a straight-line basis over the term of the lease.
The Company also leases manufacturing, administrative and laboratory space in
San Diego, California, Anasco, Puerto Rico and Irvington, New Jersey under
various leases agreements expiring through 2004 that are accounted for as
operating leases. The lease agreement related to the Company's research facility
in San Diego provides for annual escalations, for which the minimum lease
payments are being charged to expense on a straight-line basis over the term of
the lease. The Company also leases facilities additional space for
administrative support activities and storage under short-term agreements in New
Jersey and California.
In May 1994, the Company entered into a 5 year lease agreement with a related
party of a significant shareholder for a facility in West Chester, Pennsylvania.
In January 1998, the Company decided to suspend its operations at this facility
and in June 1998, entered into a lease termination agreement related to the
facility that required the Company to pay $330,000 for the facility's
maintenance, certain operating costs and other commitments through April 1999.
Additionally, the Company recorded asset impairment charges of $1,021,000 in
1997 and $145,000 in 1998, respectively, related to certain leasehold
improvements made at the West Chester facility. These charges were expensed in
general and administrative expense.
Future minimum lease payments under operating leases at December 31, 1999 were
as follows:
In thousands
Related Third
Parties Parties Total
------- ------- -----
2000 $210 $1,051 $1,261
2001 210 807 1,017
2002 213 600 813
2003 231 534 765
2004 231 458 689
Thereafter 1,909 -- 1,909
------ ------ ------
Total minimum lease payments $3,004 $3,450 $6,454
====== ====== ======
Total rental expense for the years ended December 31, 1999, 1998 and 1997 was
$958,000, $780,000 and $640,000, respectively, and included $219,000, $267,000
and $390,000 in related party expense, respectively.
F-18
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES
The income tax benefit (provision) consisted of the following (in thousands):
1999 1998 1997
------------- ------------- -------------
Current:
Federal $ (100) $ -- $ --
State 113 -- --
------------- ------------- -------------
Total current 13 -- --
Deferred:
Federal 1,671 -- --
State 136 -- --
------------- ------------- -------------
Total deferred 1,807 -- --
------------- ------------- -------------
Income tax benefit $ 1,818 $ -- $ --
============= ============= =============
The temporary differences which give rise to deferred tax assets and
(liabilities) are presented below:
<TABLE>
<CAPTION>
In thousands December 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net operating loss and tax credit carryforwards $ 36,800 $ 36,679
Inventory reserves and capitalization 1,021 1,312
Other 2,615 3,086
Depreciation and amortization -- 767
Deferred revenue 2,560 --
----------- -----------
Total deferred tax assets before valuation allowance 42,995 41,844
Valuation allowance (41,465) (41,844)
Depreciation and amortization (1,562) --
Other (392) --
----------- -----------
Net deferred tax liabilities $ (392) $ --
=========== ============
</TABLE>
The Company's valuation allowance was provided against the deferred tax assets
due to the uncertainty of realization. The net change in the Company's valuation
allowance was $18,000, $4,380,000 and $8,511,000 in 1999, 1998 and 1997,
respectively. The net deferred tax liability of $392,000 at December 31, 1999 is
recorded in Other liabilities.
A reconciliation of the United States Federal statutory rate to the Company's
effective tax rate for the years ended December 31, 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Federal statutory rate (34.0%) (34.0%) (34.0%)
Increase (reduction) in income taxes resulting from:
State income taxes 6.9% -- --
Benefit from sale of state net operating loss, net
of federal effect (5.5%) -- --
Alternative minimum tax, net of state benefit 1.3% -- --
Amortization of goodwill 0.8% -- --
Other nondeductible items 7.4% 1.8% 1.4%
Change in valuation allowance (0.2%) 32.2% 32.6%
-------------- ------------- ------------
Effective tax rate (23.3%) -- --
============== ============= ============
</TABLE>
F-19
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES, continued
The 1999 change in valuation allowance includes a non-cash benefit of $1.8
million resulting from the deferred tax liabilities recorded in the NeuroCare
acquisition to the extent that consolidated deferred tax assets were generated
subsequent to the acquisition.
At December 31, 1999, the Company had net operating loss carryforwards ("NOL's")
of approximately $50 million and $28 million for federal and state income tax
purposes, respectively, to offset future taxable income, if any. The federal and
state NOL's expire through 2018 and 2005, respectively. During 1999, the Company
recognized a tax benefit of $645,000 for the sale of certain state net operating
loss carryforwards through a special program offered by the State of New Jersey.
At December 31, 1999, several of the Company's subsidiaries had unused NOL and
tax credit carryforwards arising from periods prior to the Company's ownership.
Excluding the Company's Telios Pharmaceuticals, Inc. subsidiary ("Telios")),
approximately $9 million of these NOL's for federal income tax purposes expire
between 2001 and 2005. The Company's Telios subsidiary has approximately $84
million of net operating losses, which expire between 2002 and 2010. The amount
of Telios' net operating loss that is available and the Company's ability to
utilize such loss is dependent on the determined value of Telios at the date of
acquisition. The Company's has valuation allowance of $42 million against all
deferred tax assets, including the net operating losses, due to the uncertainty
of realization. The timing and manner in which these acquired net operating
losses may be utilized in any year by the Company are severely limited by the
Internal Revenue Code of 1986, as amended, Section 382 and other provisions of
the Internal Revenue Code and its applicable regulations.
16. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Profit Sharing Plan and Trust ("401(k) Plan") for
eligible employees and their beneficiaries. The 401(k) Plan provides for
employee contributions through a salary reduction election. Employer matching
and discretionary profit sharing contributions, which are determined annually by
the Company, vest over a six-year period of service. For the years ended
December 31, 1999, 1998 and 1997, the Company's matching was based on a
percentage of salary reduction elections per eligible participant and totaled
$85,000, $48,000 and $35,000, respectively. No discretionary profit sharing
contribution was made in any year.
The Company received shareholder approval for its Employee Stock Purchase Plan
("ESPP") in May 1998. The purpose of the ESPP is to provide eligible employees
of the Company and certain of its subsidiary corporations with the opportunity
to acquire shares of common stock at periodic intervals by means of accumulated
payroll deductions. Under the ESPP, a total of 500,000 shares of common stock
have been reserved for issuance. These shares will be made available either from
the Company's authorized but unissued shares of common stock or from shares of
common stock reacquired by the Company as treasury shares.
17. DEVELOPMENT, LICENSE AND ROYALTY AGREEMENTS
The Company has various development funding agreements and grant awards under
which it receives payments to support research and development activities.
Significant development funding and grant awards include;
A strategic alliance with Johnson & Johnson Medical, Inc. that provides for
annual research funding for INTEGRA(R) Artificial Skin beginning in 2000 and
additional payments upon the occurrence of certain clinical and regulatory
events and for funding expansion of the Company's INTEGRA(R) Artificial Skin
production capacity as certain sales targets are achieved (See Note 4).
A strategic alliance with Johnson & Johnson Professional, Inc. (now known as
"DePuy") to develop and market a new product to regenerate articular cartilage.
The Company will develop an absorbable, collagen-based implant designed in
combination with a proprietary RGD peptide. DePuy will develop the arthroscopic
instrumentation used in the surgery and will market the combined products
worldwide. Under the terms of the agreement, DePuy will make payments up to $13
million as the Company meets various milestones, and will fund all necessary
development costs beyond the pre-clinical phase. Following successful
development, the Company will be responsible for manufacturing the product and
for future new product development. The Company received $300,000 and $1,000,000
in development funding for research and development expenditures under the
agreement in 1999 and 1998, respectively which were recorded as Other revenue.
F-20
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. DEVELOPMENT, LICENSE AND ROYALTY AGREEMENTS, continued
A three-year, $2 million Department of Commerce award under the National
Institute of Standards and Technology ("NIST") program for continued work on a
class of biodegradable polymers licensed from Rutgers University. This second
award began in April 1998 and the Company received $727,000 and $337,000 of
funding for research and development expenditures under it in 1999 and 1998,
respectively.
In connection with an agreement with Genetics Institute, Inc. ("GI"), the
Company receives development support payments from GI to support development of
specialized delivery matrices for the release of GI's recombinant human bone
morphogenic protein (rhBMP-2) to simulate bone growth. The Company received
$300,000 and $64,000 of funding for research and development expenditures under
the agreement in 1999 and 1998, respectively, which were recorded as Other
revenue.
In March 1998, the Company entered into a series of agreements with Century
Medical, Inc ("CMI"), a wholly-owned subsidiary of ITOCHU Corporation, under
which CMI will distribute the Company's identified neurosurgical products in
Japan. CMI made an up-front non-refundable payment as partial reimbursement of
research and development costs previously expended by the Company of $1.0
million in the first quarter of 1998, which was recorded in Other revenue, and
agreed to underwrite the costs of the Japanese clinical trials and regulatory
approval processes.
In January 1996, the Company and Cambridge Antibody Technology Limited ("CAT")
entered into an agreement consisting of a license to CAT of certain rights to
use anti-TGF-(beta) antibodies for the treatment of fibrotic diseases and the
granting of a right of first refusal to CAT for certain rights relating to
decorin, a molecule believed to mediate the production of TGF-(beta) in humans
and animals. The Company will receive royalties upon the sale by CAT of licensed
products other than those directed at dermal applications.
As consideration for certain technology, manufacturing, distribution and selling
rights and licenses granted to the Company, the Company has agreed to pay
royalties on the sales of products that are commercialized relative to the
granted rights and licenses. Royalty payments under these agreements by the
Company were not significant for any of the periods presented.
18. LEGAL MATTERS
Various lawsuits claims and proceedings are pending or have been settled by the
Company. The most significant of those are described below.
In 1997, the Company and the Massachusetts Institute of Technology ("MIT") filed
a patent infringement lawsuit against LifeCell Corporation ("LifeCell").
LifeCell filed various counterclaims and a complaint against the Company and MIT
claiming tortious interference, business and product disparagement, unfair
competition among other charges. In 1998, the Company and LifeCell entered into
a settlement agreement under the terms of which the Company agreed not to assert
certain patents against LifeCell's current technology or reasonable equivalents
thereof and LifeCell acknowledged the validity of these patents. As part of the
settlement agreement, the Company purchased LifeCell common stock for $500,000,
and LifeCell agreed to a royalty-bearing license for any possible future
biomaterials-based matrix products developed by LifeCell that may be covered by
the patents.
In 1995, the Company's subsidiary filed a complaint against a distributor
claiming the distributor breached a distribution agreement by, among other
things, not paying the Company's subsidiary for certain products delivered. In
1998, the Company and the distributor entered into a settlement agreement in
which the distributor agreed to pay an aggregate of $550,000 in installments
over the remainder of 1998. The Company recorded a net gain in other income in
1998 of $550,000 as a result of the settlement.
F-21
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. LEGAL MATTERS, continued
In July 1996, the Company filed a patent infringement lawsuit in the United
States District Court in San Diego against Merck KGaA, a German corporation,
Scripps Research Institute, a California nonprofit corporation, and David A.
Cheresh, Ph.D., a research scientist with Scripps seeking damages and injunctive
relief. The complaint charged, among other things, that the defendant Merck KGaA
willfully and deliberately induced, and continues to willfully and deliberately
induce, defendants Scripps Research Institute and Dr. David A. Cheresh to
infringe certain of the Company's patents. These patents are part of a group of
patents granted to The Burnham Institute and licensed by the Company that are
based on the interaction between a family of cell surface proteins called
integrins and the arginine-glycine-aspartic acid (known as "RGD") peptide
sequence found in many extracellular matrix proteins. The defendants filed a
countersuit asking for an award of defendants' reasonable attorney fees.
Bruce D. Butler, Ph.D., Bruce A. McKinley, Ph.D., and C. Lee Parmley (the "Optex
Claimants"), each parties to a Letter Agreement (the "Letter Agreement") with
Camino NeuroCare, Inc. ("Camino") dated as of December 18, 1996, have alleged
that Camino breached the terms of the Letter Agreement prior to our acquisition
of the NeuroCare Group (Camino's prior parent company). The Letter Agreement
contains arbitration provisions and Integra and the Optex Claimants have agreed
to negotiate rather than seek arbitration for a limited time. While we believe
that Camino has valid legal and factual defenses, the Optex Claimants have
asserted unspecified significant damages, and we believe that the Optex
Claimants are likely to pursue arbitration under the Letter Agreement if the
matter is not settled otherwise. We cannot predict the outcome of such an
arbitration, were it to take place. In addition, we have asserted a right to
indemnification from the seller of the NeuroCare businesses, but there can be no
assurance that indemnification, if any, will be obtained.
The Company is also subject to other claims and lawsuits in the ordinary course
of its business. In the opinion of management, such other claims are either
adequately covered by insurance or otherwise indemnified, and are not expected,
individually or in the aggregate, to result in a material adverse effect on the
financial condition of the Company. The Company's financial statements do not
reflect any material amounts related to possible unfavorable outcomes of the
matters above or others. However, it is possible that the Company's results of
operations, financial position and cash flows in a particular period could be
materially affected by these contingencies.
19. SEGMENT INFORMATION AND MAJOR CUSTOMER DATA
Integra develops, manufactures and markets medical devices, implants and
biomaterials. Our operations consist of (1) Integra NeuroSciences, which is a
leading provider of implants, instruments, and monitors used in neurosurgery,
neurotrauma, and related critical care and (2) Integra LifeSciences, which
develops and manufactures a variety of medical products and devices, including
products based on our proprietary tissue regeneration technology which are used
to treat soft tissue and orthopedic conditions. Integra NeuroSciences sells
primarily through a direct sales organization and Integra LifeSciences sells
primarily through strategic alliances and distributors.
In 1998, the Company's operations were comprised of two reportable business
segments, (1) medical products and (2) skin defects and burns. As a result of a
repositioning of the Company's business in 1999, including the sale of a product
line, the NeuroCare acquisition, and the transfer of all INTEGRA(R) Artificial
Skin sales and marketing activities to JJM, the Company has reorganized its
reportable segments into two segments, Integra NeuroSciences and Integra
LifeSciences. A majority of the products in the Integra NeuroSciences segment
were acquired in the NeuroCare acquisition. Prior to the reorganization, the
Company's Integra NeuroSciences business was included in the former medical
products segment. The non-neurosurgical business of the former medical products
segment and the products sold under the former skin defects and burns segment
are now reported in the Integra LifeSciences segment, as the majority of this
segment's products are sold under marketing or distribution arrangements.
F-22
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. SEGMENT INFORMATION AND MAJOR CUSTOMER DATA, continued
Selected financial information on the Company's business segments is reported
below (in thousands):
<TABLE>
<CAPTION>
Total
Integra Integra Reportable
LifeSciences NeuroSciences Segments Corporate Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
- ----
Sales $ 17,292 $ 22,369 $ 39,661 $ -- $ 39,661
Total revenue 19,671 22,819 42,490 -- 42,490
Operating costs 21,578 27,128 48,706 6,164 54,870
Operating loss (1,907) (4,309) (6,216) (6,164) (12,380)
1998
- ----
Sales 14,076 -- 14,076 -- 14,076
Total revenue 16,428 1,027 17,455 -- 17,455
Operating costs 22,337 2,010 24,347 7,288 31,635
Operating loss (5,909) (983) (6,892) (7,288) (14,180)
1997
- ----
Sales 14,001 -- 14,001 -- 14,001
Total revenue 14,696 50 14,746 -- 14,746
Operating costs 19,599 450 20,049 13,608 33,657
Operating loss (4,903) (400) (5,303) (13,608) (18,911)
</TABLE>
Product sales and the related cost of product sales between segments are
eliminated into computing segment operating results. Research and development
expense is allocated to segments based on a specific identification of program
costs within each segment. The Company allocates specifically identifiable
general and administrative expenses such as regulatory and legal expense items
to the segments, with the remaining activities reflected as corporate
activities. The Company does not disaggregate nonoperating revenues and expenses
nor identifiable assets on a segment basis.
Two customers accounted each for 15% and 12% of product sales in 1998 and 13%
and 11% of product sales in 1997, respectively.
For the years ended December 31, 1999, 1998 and 1997, the Company's foreign
export sales, primarily to Europe and the Asia Pacific regions, were 23%, 16%
and 14% of total product sales, respectively. Substantially all of the Company's
long-lived assets are located in the United States and Puerto Rico.
The Company's product sales consists of several products that make up a large
percentage of the total, including the Company's INTEGRA(R) Artificial Skin
product which accounted for 9%, 41% and 43% of product sales for the years ended
December 31, 1999, 1998 and 1997, respectively.
F-23
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. SUBSEQUENT EVENTS
The Company purchased the business, including certain assets and liabilities, of
Clinical Neuro Systems ("CNS") on January 17, 2000 for $6.8 million. CNS
designs, manufactures and sells neurosurgical external ventricular drainage
systems including catheters and drainage bags, as well as cranial access kits.
The CNS acquisition was financed with $4.0 million in cash and a two-year $2.8
million note payable to the seller.
In connection with the Company's patent infringement lawsuit brought against
Merck KgaA and other parties, the Company was awarded $15.0 million in damages
on March 17, 2000 by the jury, which found that Merck KgaA had willfully induced
infringement of the Company's patents. This award may be adjusted by the court.
The Company expects that post-trial motions will be filed, and that Merck KgaA
will appeal various decisions of the court and request a new trial, a reduction
in damages, or a judgment as a matter of law notwithstanding the verdict. No
amounts for this verdict have been reflected in the Company's financial
statements.
On March 21, 2000, the Company agreed to purchase the Selector(R) Ultrasonic
Aspirator, Ruggles(TM) hand-held neurosurgical instruments and cryosurgery
product lines, including certain assets and liabilities, from NMT Medical, Inc.
for $12.0 million in cash. The completion of this transaction is subject to
customary closing conditions and is expected to close early in the second
quarter of 2000.
On March 29, 2000, the Company issued 54,000 shares of Series C Preferred Stock
("Series C Preferred") and warrants to purchase 300,000 shares of common stock
at $9.00 per share to affiliates of Soros Private Equity Partners LLC for $5.4
million. The Series C Preferred is convertible into 600,000 shares of common
stock and has a liquidation preference of $5.4 million with a 10% cumulative
dividend. The Series C Preferred was issued with a beneficial conversion feature
that resulted in a nonrecurring non-cash dividend of $4.2 million that will be
reflected in earnings (loss) per share applicable to common stock in the first
quarter of 2000.
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and
Stockholders of Integra LifeSciences
Holdings Corporation and Subsidiaries:
Our audits of the consolidated financial statements referred to in our report
dated March 1, 2000, (except for Note 20, as to which the date is March 29,
2000) appearing in the 1999 Annual Report on Form 10-K of Integra LifeSciences
Holdings Corporation and Subsidiaries (the "Company") also included an audit of
the financial statement schedules listed in the index in Item 14 of this Form
10-K. In our opinion, this financial statement schedules presents fairly, in all
material respects, the information required to be included therein when read in
conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 1, 2000
F-25
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE I
BALANCE SHEETS
December 31, December 31,
1999 1998
------------ ------------
(in thousands)
ASSETS
Investments in and advances to
consolidated Subsidiaries.......... $ 37,989 $ 31,366
--------- ---------
Total assets.......................... $ 37,989 $ 31,366
========= =========
STOCKHOLDERS' EQUITY
Preferred stock, Preferred stock,
$.01 par value (15,000 authorized
shares; 500 Series A Convertible
shares issued and outstanding at
December 31, 1999 and 1998,
$4,000 liquidation preference;
100 Series B Convertible shares
issued and outstanding at December
31, 1999, $10,000 with a 10%
compounded annual cumulative
dividend liquidation preference)... 6 5
Common stock, $.01 par value (60,000
authorized shares; 16,131 and
15,783 issued and outstanding at
December 31, 1999 and 1998,
respectively).................... 161 158
Additional paid-in capital............ 132,340 119,999
Treasury stock, at cost (1 and
52 shares at December 31, 1999 and
1998, respectively)................ (7) (286)
Unearned compensation related to
stock options...................... (108) (148)
Notes receivable - related party...... (35) (35)
Accumulated other comprehensive loss.. (64) (40)
Accumulated deficit................ (94,304) (88,287)
--------- ---------
Total stockholders' equity............ $ 37,989 $ 31,366
========= =========
See notes to consolidated financial statements
F-26
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
1999 1998 1997
----------- ------------ ------------
(in thousands)
<S> <C> <C> <C>
Equity in loss of consolidated subsidiaries.. $ (5,966) $ (12,342) $ (16,964)
--------- --------- ---------
Net loss..................................... $ (5,966) $ (12,342) $ (16,964)
========= ========= =========
Basic and diluted loss per share............. $ (0.40) $ (0.77) $ (1.15)
========= ========= =========
</TABLE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
1999 1998 1997
----------- ------------ ------------
(in thousands)
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Proceeds from sales of product line and
Other assets.............................. $ 6,354 $ -- $ --
Capital contribution to consolidated
subsidiary................................ (16,153) -- --
Other investing activities................... (2,480) (3,762) (358)
--------- --------- ---------
Cash flows used in investing activities...... (12,279) (3,762) (358)
FINANCING ACTIVITIES:
Proceeds from sales of preferred stock....... 9,942 4,000 --
Other financing activities, net.............. 2,337 (238) 358
--------- --------- ---------
Cash flows provided by financing activities.. 12,279 3,762 358
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................... -- -- --
Cash and cash equivalents at beginning of
period.................................... -- -- --
--------- --------- ---------
Cash and cash equivalents at end of period... $ -- $ -- $ --
========= ========= =========
</TABLE>
See notes to consolidated financial statements
Notes to Financial Statement Schedule
1. The Company did not receive any cash dividends from its consolidated
subsidiaries in any period presented.
2. The Company's investments in and advances to subsidiaries are recorded
using the equity method of accounting.
F-27
<PAGE>
INTEGRA LIFESCIENCES HOLDINGS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description Of Period Expenses Accounts Deductions Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
- ----------------------------
Allowance for doubtful
Accounts............ $ 354 $ 406 $ 216 $ (32) $ 944
Obsolete inventory
Reserves............ 525 2,159 1,614 (1,161) 3,137
Year ended December 31, 1998
- ----------------------------
Allowance for doubtful
Accounts............ $ 390 $ 76 $ 15 $ (127) $ 354
Obsolete inventory
Reserves............ 1,126 522 29 (1,152) 525
Year ended December 31, 1997
- ----------------------------
Allowance for doubtful
Accounts............ $ 228 $ 315 $ -- $ (156) $ 390
Obsolete inventory
Reserves............ 548 1,413 -- (835) 1,126
</TABLE>
F-26
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
1999 STOCK OPTION PLAN
Section 1
Purpose
This INTEGRA LIFESCIENCES HOLDINGS CORPORATION 1999 STOCK OPTION
PLAN (the "Plan") is intended to provide a means whereby Integra LifeSciences
Holdings Corporation (the "Company") may, through the grant of incentive stock
options and non-qualified stock options (collectively, "Options") to purchase
common stock of the Company, par value $0.01 per share ("Common Stock") to Key
Employees and Associates (both as defined in Section 3 hereof), attract and
retain such Key Employees and Associates and motivate them to exercise their
best efforts on behalf of the Company, any Related Corporation (as defined
below), or any affiliate of the Company or a Related Corporation.
For purposes of the Plan, a "Related Corporation" shall mean either
a "subsidiary corporation" of the Company, as defined in section 424(f) of the
Internal Revenue Code of 1986, as amended ("Code"), or the "parent corporation"
of the Company, as defined in section 424(e) of the Code. Further, as used in
the Plan (a) the term "ISO" shall mean an Option which qualifies as an incentive
stock option within the meaning of section 422 of the Code; and (b) the term
"NQSO" shall mean an Option which does not qualify as an incentive stock option.
Section 2
Administration
The Plan shall be administered by the Company's Stock Option
Committee (the "Committee"), which shall consist solely of not fewer than two
directors of the Company, who shall be appointed by, and shall serve at the
pleasure of, the Company's Board of Directors (the "Board") (taking into
consideration the rules under Section 16(b) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and the requirements of Section 1621(m) of
the Code). In the event a committee has not been established in accordance with
the preceding sentence, or cannot be constituted to vote on the grant of an
Option, the "Committee" shall consist of the entire Board. Each member of such
Committee, while serving as such, shall be deemed to be acting in his capacity
as a director of the Company.
The Committee shall have full authority, subject to the terms of the
Plan, to select the Key Employees and Associates (both as defined in Section 3
hereof) to be granted ISOs and/or NQSOs under the Plan, to grant Options on
behalf of the Company, and to set the date of grant and the other terms of such
Options. The Committee may correct any defect, supply any omission and reconcile
any inconsistency in this Plan and in any Option granted hereunder in the manner
and to the extent it shall deem desirable. The Committee also shall have the
authority to establish such rules and regulations, not inconsistent with the
provisions of the Plan, for the proper administration of the Plan, and to amend,
modify or rescind any such rules and regulations, and to make such
determinations and interpretations under, or in connection with, the Plan, as it
deems necessary or advisable. All such rules, regulations,
<PAGE>
determinations and interpretations shall be binding and conclusive upon the
Company, its stockholders and all officers and employees and former officers and
employees, and upon their respective legal representatives, beneficiaries,
successors and assigns, and upon all other persons claiming under or through any
of them. Except as otherwise required by the bylaws of the Company or by
applicable law, no member of the Board or the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
Option granted under it.
SECTION 3
Eligibility
(a) In General. Key Employees and Associates shall be eligible to
receive Options under the Plan. Key Employees and Associates who have been
granted an Option under the Plan shall be referred to as "Optionees." More than
one Option may be granted to an Optionee under the Plan.
(b) Key Employees. "Key Employees" are officers, executives, and
managerial and non-managerial employees of the Company, a Related Corporation,
or an affiliate of the Company or a Related Corporation who are selected by the
Committee to receive Options. Key Employees of the Company and/or a Related
Corporation shall be eligible to receive ISOs and/or NQSOs. Key Employees of an
affiliate shall be eligible to receive only NQSOs.
(c) Associates. "Associates" are designated non-employee directors,
consultants and other persons providing services to the Company, a Related
Corporation, or an affiliate of the Company or a Related Corporation. Associates
shall be eligible to receive only NQSOs.
SECTION 4
Stock
The maximum number of shares of Common Stock that may be issued
under Options granted under the Plan shall be 2,000,000; provided, however, that
no Key Employee shall receive Options for more than 1,000,000 shares of Common
Stock over any one-year period. However, both limits in the preceding sentence
shall be subject to adjustment as hereinafter provided. Shares issuable under
the Plan may be authorized but unissued shares or reacquired shares, and the
Company may purchase shares required for this purpose, from time to time, if it
deems such purchase to be advisable.
If any Option granted under the Plan expires or otherwise terminates
for any reason whatsoever (including, without limitation, the Optionee's
surrender thereof) without having been exercised, the shares subject to the
unexercised portion of such Option shall continue to be available for the
granting of Options under the Plan as fully as if such shares had never been
subject to an Option; provided, however, that (a) if an Option is cancelled, the
shares of Common Stock covered by the cancelled Option shall be counted against
the maximum number of shares specified above for which Options may be granted to
a single Key Employee, and (b) if the exercise price of an Option is reduced
after the date of grant, the transaction shall be treated as a cancellation of
the original Option and the grant of a new Option for purposes of counting the
maximum number of shares for which Options may be granted to a Key Employee.
<PAGE>
SECTION 5
Granting of Options
From time to time until the expiration or earlier suspension or
discontinuance of the Plan, the Committee may, on behalf of the Company, grant
to Key Employees and Associates under the Plan such Options as it determines are
warranted, subject to the limitations of the Plan; provided, however, that
grants of ISOs and NQSOs shall be separate and not in tandem, and further
provided that Key Employees of an affiliate and Associates shall not be eligible
to receive ISOs under the Plan. A member of the Committee shall not participate
in a vote approving the grant of an Option to himself or herself to the extent
provided under the laws of Delaware governing corporate self-dealing. The
granting of an Option under the Plan shall not be deemed either to entitle the
Key Employee or Associate to, or to disqualify the Key Employee or Associate
from, any participation in any other grant of Options under the Plan. In making
any determination as to whether a Key Employee or Associate shall be granted an
Option, the type of Option to be granted, and the number of shares to be covered
by such Option, the Committee shall take into account the duties of the Key
Employee or Associate, his or her present and potential contributions to the
success of the Company, a Related Corporation, or an affiliate of the Company or
a Related Corporation, the tax implications to the Company and the Key Employee
or Associate of any Option granted, and such other factors as the Committee
shall deem relevant in accomplishing the purposes of the Plan. Moreover, the
Committee may provide in the Option that said Option may be exercised only if
certain conditions, as determined by the Committee, are fulfilled.
Section 6
Annual Limit
(a) ISOs. The aggregate Fair Market Value (determined as of the date
the ISO is granted) of the Common Stock with respect to which ISOs are
exercisable for the first time by a Key Employee during any calendar year
(counting ISOs under this Plan and incentive stock options under any other stock
option plan of the Company or a Related Corporation) shall not exceed $100,000.
The term "Fair Market Value" shall mean the value of the shares of Common Stock
arrived at by a good faith determination of the Committee and shall be:
(1) The quoted closing price on the last business day prior to
the specified date, if there is a market for the Common Stock on a registered
securities exchange or in an over-the-counter market;
(2) The weighted average of the quoted closing prices on the
nearest date before and the nearest date after the last business day prior to
the specified date, if there are no sales on such day but there are such sales
on dates within a reasonable period both before and after such date;
(3) The mean between the bid and asked prices, as reported by
the National Quotation Bureau on the specified date, if actual sales are not
available during a reasonable period beginning before and ending after the
specified date; or
<PAGE>
(4) If (1) through (3) above are not applicable, such other
method of determining Fair Market Value as shall be authorized by the Code, or
the rules or regulations thereunder, and adopted by the Committee.
Where the Fair Market Value of shares of Common Stock is
determined under (2) above, the average of the quoted closing prices on the
nearest date before and the nearest date after the last business day prior to
the specified date shall be weighted inversely by the respective numbers of
trading days between the dates of reported sales and such date (i.e., the
valuation date), in accordance with Treas. Reg. ss. 20.2031-2(b)(1), or any
successor thereto.
(b) Options Over Annual Limit. If an Option intended as an ISO is
granted to a Key Employee of the Company or a Related Corporation and such
Option may not be treated in whole or in part as an ISO pursuant to the
limitation in Subsection (a) above, such Option shall be treated as an ISO to
the extent it may be so treated under such limitation and as an NQSO as to the
remainder. For purposes of determining whether an ISO would cause such
limitation to be exceeded, ISOs shall be taken into account in the order
granted.
(c) NQSOs. The annual limits set forth above for ISOs shall not
apply to NQSOs.
SECTION 7
Option Agreements - Other Provisions
Options granted under the Plan shall be evidenced by written
documents ("Option Agreements") in such form as the Committee shall, from time
to time, approve. An Option Agreement shall specify whether the Option is an ISO
or NQSO; provided, however, if the Option is not designated in the Option
Agreement as an ISO or NQSO, the Option shall constitute an ISO if it complies
with the terms of section 422 of the Code, and otherwise, it shall constitute an
NQSO. Each Optionee shall enter into, and be bound by, such Option Agreements,
as soon as practicable after the grant of an Option.
In connection with the grant of any Option, the associated Option
Agreement may, in the discretion of the Committee, modify or vary any of the
terms of this Plan, including, without limitation, the terms relating to the
vesting and exercise of Options, both in general and upon termination of
employment or service, disability, and death, the terms relating to the number
of shares issuable upon the exercise of outstanding Options and the treatment of
Options upon the occurrence of certain corporate transactions; provided,
however, that any increase in the maximum number of shares which may be granted
to an individual in a one-year period pursuant to the Plan shall require such
shareholder approval as may be then required under the applicable rules and
regulations under the Code, and that with respect to any grant of an Option
which is intended to be an ISO the terms of the Plan, as in effect on the date
hereof or subsequently amended, and not the terms of the applicable Option
Agreement, shall control. In all other cases, in the event of any inconsistency
or conflict between an Option Agreement approved by the Committee and this Plan,
the terms of the Option Agreement shall control to the extent provided in the
Option Agreement. No Option Agreement may be amended except in a writing
executed by a duly authorized officer of the Company and the Optionee or his or
her permitted successors and assigns.
<PAGE>
SECTION 8
Terms and Conditions of Options
Options granted pursuant to the Plan shall include expressly or by
reference the following terms and conditions, as well as such other provisions
not inconsistent with the provisions of this Plan and, for ISOs granted under
this Plan, the provisions of section 422(b) of the Code, as the Committee shall
deem desirable:
(a) Number of Shares. A statement of the number of shares to which
the Option pertains.
(b) Price. A statement of the Option price which shall be determined
and fixed by the Committee in its discretion, but shall not be less than the
higher of 100% (110% in the case of ISOs granted to more than 10% shareholders
as discussed in Subsection (j) below) of the fair market value of the optioned
shares of Common Stock, or the par value thereof, on the date the Option is
granted.
(c) Term.
(1) ISOs. Subject to earlier termination as provided in
Subsections (e), (f) and (g) below and in Section 9 hereof, the term of each ISO
shall be not more than ten years (five years in the case of more than 10%
shareholders as discussed in Subsection (j) below) from the date of grant.
(2) NQSOs. Subject to earlier termination as provided in
Subsections (e), (f) and (g) below and in Section 9 hereof, the term of each
NQSO shall be not more than ten years from the date of grant.
(d) Exercise.
(1) General. Options shall be exercisable in such installments
and on such dates, not less than three months from the date of grant, as the
Committee may specify, provided that:
(A) in the case of new Options granted to an Optionee in
replacement for options (whether granted under the Plan or
otherwise) held by the Optionee, the new Options may be made
exercisable, if so determined by the Committee, in its discretion,
at the earliest date the replaced options were exercisable, but not
earlier than three months from the date of grant of the new Options;
and
(B) the Committee may accelerate the exercise date of
any outstanding Options, in its discretion, if it deems such
acceleration to be desirable.
Any exercisable Option may be exercised at any time up to the
expiration or termination of the Option. Exercisable Options may be exercised,
in whole or in part, from time to time by giving written notice of exercise to
the Company at its principal office, specifying the number of shares to be
purchased and accompanied by payment in full of the aggregate Option exercise
price for such shares (except that, in the case of an exercise arrangement
approved by the Committee and described in Paragraph 2(B)(iv) below, payment may
be made as soon as practicable after the exercise). Only full
<PAGE>
shares shall be issued under the Plan, and any fractional share which might
otherwise be issuable upon exercise of an Option granted hereunder shall be
forfeited.
(2) Manner of Payment. The Option price shall be payable:
(A) in cash or its equivalent;
(B) in the case of an ISO, if the Committee in its discretion
causes the Option Agreement so to provide, and in the case of an NQSO, if the
Committee in its discretion so determines at or prior to the time of exercise:
(i) in Common Stock previously acquired by the Optionee; provided
that if such shares of Common Stock were acquired through the exercise of
an incentive stock option and are used to pay the Option price of an ISO,
such shares have been held by the Optionee for a period of not less than
the holding period described in section 422(a)(1) of the Code on the date
of exercise, or if such shares of Common Stock were acquired through
exercise of a non-qualified stock option and are used to pay the option
price of an ISO, or if such shares of Common Stock were acquired through
the exercise of an incentive stock option or non-qualified stock option
and are used to pay the Option price of an NQSO, such shares have been
held by the Optionee for a period of more than 12 months on the date of
exercise;
(ii) in Common Stock newly acquired by the Optionee upon exercise of
such Option (which shall constitute a disqualifying disposition in the
case of an ISO);
(iii) in the discretion of the Committee, in any combination of (A),
(B)(i) and/or (B)(ii) above; or
(iv) by delivering a properly executed notice of exercise of the
Option to the Company and a broker, with irrevocable instructions to the
broker promptly to deliver to the Company the amount of sale or loan
proceeds necessary to pay the exercise price of the Option.
In the event the Option price is paid, in whole or in part, with shares of
Common Stock, the portion of the Option price so paid shall be equal to the Fair
Market Value on the date of exercise of the Option of the Common Stock
surrendered in payment of such Option price.
(e) Termination of Employment or Service. If an Optionee's
employment by or service with the Company (and Related Corporations and
affiliates) is terminated by either party prior to the expiration date fixed for
his or her Option for any reason other than death or disability, such Option may
be exercised, to the extent of the number of shares with respect to which the
Optionee could have exercised it on the date of such termination, or to any
greater extent permitted by the Committee, by the Optionee at any time prior to
the earlier of (i) the expiration date specified in such Option, or (ii) an
accelerated termination date determined by the Committee, in its discretion,
except that, subject to Section 9 hereof, such accelerated termination date
shall not be earlier than the date of the Optionee's termination of employment
or service, and shall not be later than one year after the date of the
Optionee's termination of employment or service.
(f) Exercise upon Disability of Optionee. If an Optionee shall
become disabled (within the meaning of section 22(e)(3) of the Code) during his
or her employment by or service with the Company (and Related Corporations and
affiliates) and, prior to the expiration date fixed for his or her Option, his
or her employment or service is terminated as a consequence of such disability,
such
<PAGE>
Option may be exercised, to the extent of the number of shares with respect to
which the Optionee could have exercised it on the date of such termination, or
to any greater extent permitted by the Committee, by the Optionee at any time
prior to the earlier of (i) the expiration date specified in such Option, or
(ii) an accelerated termination date determined by the Committee, in its
discretion, except that, subject to Section 9 hereof, such accelerated
termination date shall not be earlier than the date of the Optionee's
termination of employment or service by reason of disability, and shall not be
later than one year after the date of the Optionee's termination of employment
or service. In the event of the Optionee's legal disability, such Option may be
so exercised by the Optionee's legal representative.
(g) Exercise upon Death of Optionee. If an Optionee shall die during
his or her employment by or service with the Company (and Related Corporations
and affiliates), and prior to the expiration date fixed for his or her Option,
or if an Optionee whose employment or service is terminated for any reason,
shall die following his or her termination of employment or service but prior to
the earliest of (i) the expiration date fixed for his or her Option, (ii) the
expiration of the period determined under Subsections (e) and (f) above, or
(iii) in the case of an ISO, three months following termination of the Key
Employee's employment, such Option may be exercised, to the extent of the number
of shares with respect to which the Optionee could have exercised it on the date
of his or her death, or to any greater extent permitted by the Committee, by the
Optionee's estate, personal representative or beneficiary who acquired the right
to exercise such Option by bequest or inheritance or by reason of the death of
the Optionee, at any time prior to the earlier of (i) the expiration date
specified in such Option or (ii) an accelerated termination date determined by
the Committee, in its discretion except that, subject to Section 9 hereof, such
accelerated termination date shall not be later than one year after the date of
death.
(h) Non-Transferability. No ISO and, except to the extent provided
in the related Option Agreement, no NQSO shall be assignable or transferable by
the Optionee otherwise than by will or by the laws of descent and distribution,
and during the lifetime of the Optionee, the Option shall be exercisable only by
him or her or by his or her guardian or legal representative. If the Optionee is
married at the time of exercise and if the Optionee so requests at the time of
exercise, the certificate or certificates shall be registered in the name of the
Optionee and the Optionee's spouse, jointly, with right of survivorship.
(i) Rights as a Stockholder. An Optionee shall have no rights as a
stockholder with respect to any shares covered by his or her Option until the
issuance of a stock certificate to him or her for such shares.
(j) Ten Percent Shareholder. If, after applying the attribution
rules of Section 424(d) of the Code, the Optionee owns more than 10% of the
total combined voting power of all shares of stock of the Company or of a
Related Corporation at the time an ISO is granted to him or her, the Option
price for the ISO shall be not less than 110% of the fair market value of the
optioned shares of Common Stock on the date the ISO is granted, and such ISO, by
its terms, shall not be exercisable after the expiration of five years from the
date the ISO is granted. The conditions set forth in this Subsection (j) shall
not apply to NQSOs.
(k) Listing and Registration of Shares. Each Option shall be subject
to the requirement that, if at any time the Committee shall determine, in its
discretion, that the listing, registration or qualification of the shares
covered thereby upon any securities exchange or under any state or federal law,
or the consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the granting of such Option
or the purchase of shares
<PAGE>
thereunder, or that action by the Company, its shareholders, or the Optionee
should be taken in order to obtain an exemption from any such requirement or to
continue any such listing, registration, or qualification, no such Option may be
exercised, in whole or in part, unless and until such listing, registration,
qualification, consent, approval, or action shall have been effected, obtained,
or taken under conditions acceptable to the Committee. Without limiting the
generality of the foregoing, each Optionee or his or her legal representative or
beneficiary may also be required to give satisfactory assurance that such person
is an eligible purchaser under applicable securities laws, and that shares
purchased upon exercise of an Option are being purchased for investment and not
with a view to distribution, and certificates representing such shares may be
legended accordingly.
(l) Withholding and Use of Shares to Satisfy Tax Obligations. The
obligation of the Company to deliver shares of Common Stock upon the exercise
of any Option shall be subject to applicable federal, state and local tax
withholding requirements.
If the exercise of any Option is subject to the withholding
requirements of applicable tax laws, the Committee, in its discretion (and
subject to such withholding rules ("Withholding Rules") as shall be adopted by
the Committee), may permit the Optionee to satisfy the withholding tax, in whole
or in part, by electing to have the Company withhold (or by returning to the
Company) shares of Common Stock, which shares shall be valued, for this purpose,
at their Fair Market Value on the date of exercise of the Option (or if later,
the date on which the Optionee recognizes ordinary income with respect to such
exercise) (the "Determination Date"). An election to use shares of Common Stock
to satisfy tax withholding requirements must be made in compliance with and
subject to the Withholding Rules. The Committee may not withhold shares in
excess of the number necessary to satisfy the minimum income tax withholding
requirements. In the event shares of Common Stock acquired under the exercise of
an incentive stock option are used to satisfy such withholding requirement, such
shares of Common Stock must have been held by the Optionee for a period of not
less than the holding period described in section 422(a)(1) of the Code on the
Determination Date, or if such shares of Common Stock were acquired through
exercise of a non-qualified stock option, such shares were acquired at least 12
months prior to the Determination Date.
SECTION 9
Capital Adjustments; Corporate Transactions
The number of shares which may be issued under the Plan, the maximum
number of shares with respect to which Options may be granted to any Key
Employee under the Plan, both as stated in Section 4 hereof, and the number of
shares issuable upon exercise of outstanding Options under the Plan (as well as
the Option price per share under such outstanding Options), shall, subject to
the provisions of section 424(a) of the Code, be adjusted, as may be deemed
appropriate by the Committee, to reflect any stock dividend, stock split, share
combination, or similar change in the capitalization of the Company.
In the event of a corporate transaction (such as, for example, a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation), each outstanding Option shall be assumed by the
surviving or successor corporation; provided, however, that, in the event of a
proposed corporate transaction, the Committee may terminate all or a portion of
the outstanding Options, effective upon the closing of the corporate
transaction, if it determines that such termination is in the best interests of
the Company. If the Committee decides to terminate outstanding Options, the
Committee shall give each Optionee holding an outstanding Option to be
terminated not less than seven days' notice prior to
<PAGE>
any such termination by reason of such a corporate transaction, and any such
Option which is to be so terminated may be exercised (if and only to the extent
that it is then exercisable) up to, and including the date immediately preceding
such termination. Further, as provided in Section 8(d) hereof the Committee, in
its discretion, may accelerate, in whole or in part, the date on which any or
all Options become exercisable.
The Committee also may, in its discretion, change the terms of any
outstanding Option to reflect any such corporate transaction, provided that, in
the case of ISOs, such change is excluded from the definition of a
"modification" under section 424(h) of the Code.
SECTION 9A
Change in Control
Notwithstanding any other provision of the Plan to the contrary, all
outstanding Options shall become fully vested and exercisable upon a Change in
Control of the Company. "Change in Control" shall mean any of the following
events:
(a) An acquisition (other than directly from the Company) of any
voting securities of the Company ("Voting Securities") by any "Person" (as such
term is used for purposes of section 13(d) or 14(d) of the Exchange Act)
immediately after which such Person has "Beneficial Ownership" (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the
combined voting power of all the then outstanding Voting Securities, other than
the Company, any trustee or other fiduciary holding securities under any
employee benefit plan of the Company or an affiliate thereof, or any corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company;
provided, however, that any acquisition from the Company or any acquisition
pursuant to a transaction which complies with clauses (i), (ii) and (iii) of
paragraph (c) of this Section 9A shall not be a Change in Control under this
paragraph (a);
(b) The individuals who, as of February 25, 1999, are members of the
Company's Board of Directors (the "Incumbent Board") cease for any reason to
constitute at least two-thirds of the Board of Directors; provided, however,
that if the election, or nomination for election by the shareholders, of any new
director was approved by a vote of at least two-thirds of the members of the
Board of Directors who constitute Incumbent Board members, such new directors
shall for all purposes be considered as members of the Incumbent Board as of
February 25, 1999; provided further, however, that no individual shall be
considered a member of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened "Election Contest" (as
described in Rule 14a-11 promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors (a "Proxy Contest") including by reason of any
agreement intended to avoid or settle any Election Contest or Proxy Contest;
(c) consummation by the Company of a reorganization, merger, or
consolidation or sale or other disposition of all or substantially all of the
assets of the Company or the acquisition of assets or stock of another entity (a
"Business Combination"), unless immediately following such Business Combination:
(i) more than 50% of the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors of (x) the
corporation resulting from such Business Combination (the "Surviving
Corporation"), or (y) if applicable, a corporation which as a result of such
transaction owns the Company or all or substantially all of the Company's assets
either directly or through one or more subsidiaries (the "Parent Corporation"),
is represented, directly or indirectly, by
<PAGE>
Company Voting Securities outstanding immediately prior to such Business
Combination (or, if applicable, is represented by shares into which such Company
Voting Securities were converted pursuant to such Business Combination), and
such voting power among the holders thereof is in substantially the same
proportions as their ownership, immediately prior to such Business Combination,
of the Company Voting Securities; and (ii) at least a majority of the members of
the board of directors of the Parent Corporation (or, if there is no Parent
Corporation, the Surviving Corporation) were members of the Incumbent Board at
the time of the execution of the initial agreement, or the action of the Board,
providing for such Business Combination;
(d) approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company; or
(e) acceptance by shareholders of the Company of shares in a share
exchange if the shareholders of the Company immediately before such share
exchange do not own, directly or indirectly, immediately following such share
exchange more than 50% of the combined voting power of the outstanding Voting
Securities of the corporation resulting from such share exchange in
substantially the same proportion as their ownership of the Voting Securities
outstanding immediately before such share exchange.
SECTION 10
Acquisitions
Notwithstanding any other provision of this Plan, Options may be
granted hereunder in substitution for options held by directors, key employees,
and associates of other corporations who are about to, or have, become Key
Employees or Associates of the Company or a Related Corporation as a result of a
merger, consolidation, acquisition of assets or similar transaction by the
Company or a Related Corporation. The terms, including the option price, of the
substitute options so granted may vary from the terms set forth in this Plan to
such extent as the Committee may deem appropriate to conform, in whole or in
part, to the provisions of the options in substitution for which they are
granted.
SECTION 11
Amendment or Replacement of Outstanding Options
The Committee shall have the authority to effect, at any time and from
time to time, with the consent of the affected Optionees, the cancellation of
any or all outstanding Options under the Plan and to grant in substitution
therefor new Options under the Plan covering the same or a different number of
shares of Common Stock but having a per share purchase price not less than the
greater of par value or 100% of the Fair Market Value of a share of Common Stock
on the new date of the grant. The Committee may permit the voluntary surrender
of all or a portion of any Option to be conditioned upon the granting to the
Optionee under the Plan of a new Option for the same or a different number of
shares of Common Stock as the Option surrendered, or may require such voluntary
surrender as a condition precedent to a grant of a new Option to such Optionee.
Any new Option shall be exercisable at the price, during the period, and in
accordance with any other terms and conditions specified by the Committee at the
time the new Option is granted, all determined in accordance with the provisions
of the Plan without regard to the price, period of exercise, and any other terms
or conditions of the Option surrendered.
<PAGE>
SECTION 12
Amendment or Discontinuance of the Plan
The Board from time to time may suspend or discontinue the Plan or,
subject to such shareholder approval as may be then required under the
applicable rules and regulations of the Code or rules of the exchange or market
on which the Common Stock is listed, may amend it in any respect whatsoever.
Notwithstanding the foregoing, no such suspension, discontinuance or amendment
shall materially impair the rights of any holder of an outstanding Option
without the consent of such holder.
SECTION 13
Rights
Neither the adoption of the Plan nor any action of the Board or the
Committee shall be deemed to give any individual any right to be granted an
Option, or any other right hereunder, unless and until the Committee shall have
granted such individual an Option, and then his or her rights shall be only such
as are provided by the Option Agreement.
Any Option under the Plan shall not entitle the holder thereof to
any rights as a stockholder of the Company prior to the exercise of such Option
and the issuance of the shares pursuant thereto. Further, notwithstanding any
provisions of the Plan or the Option Agreement with an Optionee, the Company
shall have the right, in its discretion, to retire an Optionee at any time
pursuant to its retirement rules or otherwise to terminate his or her employment
or service at any time for any reason whatsoever.
SECTION 14
Indemnification of Board and Committee
Without limiting any other rights of indemnification which they may
have from the Company and any Related Corporation (and any affiliate), the
members of the Board and the members of the Committee shall be indemnified by
the Company against all costs and expenses reasonably incurred by them in
connection with any claim, action, suit, or proceeding to which they or any of
them may be a party by reason of any action taken or failure to act under, or in
connection with, the Plan, or any Option granted thereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by legal counsel selected by the Company) or paid by them in satisfaction of a
judgment in any such action, suit, or proceeding, except a judgment based upon a
finding of willful misconduct or recklessness on their part. Upon the making or
institution of any such claim, action, suit, or proceeding, the Board or
Committee member shall notify the Company in writing, giving the Company an
opportunity, at its own expense, to handle and defend the same before such Board
or Committee member undertakes to handle it on his own behalf.
<PAGE>
SECTION 15
Application of Funds
Any cash received in payment for shares upon exercise of an Option
to purchase Common Stock shall be added to the general funds of the Company. Any
Common Stock received in payment for shares upon exercise of an Option to
purchase Common Stock shall become treasury stock.
SECTION 16
Shareholder Approval
This Plan shall become effective as of February 25, 1999 (the date
the Plan was adopted by the Board); provided, however, that if the Plan is not
approved by the Company's shareholders within 12 months before or after said
date, the Plan and all Options granted hereunder shall be null and void and no
additional options shall be granted hereunder.
SECTION 17
No Obligation to Exercise Option
The granting of an Option shall impose no obligation upon an
Optionee to exercise such Option.
SECTION 18
Termination of Plan
Unless earlier terminated as provided in the Plan, the Plan and all
authority granted hereunder shall terminate absolutely at 12:00 midnight on
February 24, 2009, which date is within ten years after the date the Plan was
adopted by the Board (or the date the Plan was approved by the shareholders of
the Company, whichever is earlier), and no Options hereunder shall be granted
thereafter. Nothing contained in this Section 18, however, shall terminate or
affect the continued existence of rights created under Options issued hereunder
and outstanding on February 24, 2009, which by their terms extend beyond such
date.
SECTION 19
Governing Law
With respect to any ISOs granted pursuant to the Plan and the Option
Agreements thereunder, the Plan, such Option Agreements and any ISOs granted
pursuant thereto shall be governed by the applicable Code provisions to the
maximum extent possible. Otherwise, the laws of the state of Delaware shall
govern the operation of, and the rights of Optionees under, the Plan, the Option
Agreements and any Options granted thereunder.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
DEFERRED COMPENSATION PLAN
1. Eligibility. Eligibility for the Integra LifeSciences Holdings
Corporation Deferred Compensation Plan (the "Plan") shall be limited to the
executive officers of Integra LifeSciences Holdings Corporation (the "Company")
and its affiliates who constitute a select group of management or highly
compensated employees within the meaning of section 201(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") ("Eligible
Officers").
2. Terms of Participation.
(a) General Rule. An Eligible Officer may elect to participate in
the Plan by signing a Deferred Compensation Agreement (the "Agreement") in the
form attached hereto and incorporated by reference herein. An Eligible Officer's
participation shall commence on January 1 of the calendar year immediately
following the year in which the Eligible Officer executes the Agreement, except
that when an Eligible Officer executes an Agreement within 30 days of the Plan's
initial effective date or within 30 days of first becoming eligible to
participate in the Plan, participation shall commence with respect to services
to be performed subsequent to the date of the Agreement. By signing the
Agreement, the Eligible Officer agrees to defer any whole percentage (up to 50
percent) of his/her base compensation from the Company and its affiliates with
respect to services performed after the date of the Agreement. For purposes of
the Plan, "base compensation" means an Eligible Officer's basic salary from the
Company and its affiliates, excluding any commissions, bonuses, overtime, or
other extra or incentive pay.
(b) Termination of Participation. Participation in the Plan shall
continue until the Eligible Officer furnishes written notice to the Company that
the Eligible Officer terminates his/her participation in the Plan or until such
time as the Company terminates the Plan pursuant to Section 7 below. Termination
by an Eligible Officer shall be made by written notice delivered or mailed to
the Company's Stock Option Committee (the "Committee") (or its delegate) no
later than December 31 of the calendar year preceding the calendar year in which
such termination is to take effect.
(c) Participation after Terminating Participation. An Eligible
Officer who has terminated his/her participation may subsequently elect to
participate in the Plan by executing a new Agreement in accordance with
subsection (a) above.
(d) Changes in Amounts or Distribution Methods. An Eligible Officer
may alter the amount of deferral for any future calendar year, and/or elect a
different method by which he/she will receive amounts deferred for future
calendar years, if the Eligible Officer and the Company enter into a new
Agreement on or before December 31 of the calendar year preceding the calendar
year for which the new Agreement is to take effect. For each new Agreement which
changes the method of receipt of deferred amounts, a new record account (the
"Deferred Compensation Account" or "Account") will be established for the
Eligible Officer.
(e) Suspension of Deferrals. Notwithstanding the foregoing, an
Eligible Officer may not make deferrals under this Plan during any period for
which contributions must be suspended in accordance with Treasury Regulation
ss.1.401(k) - 1(d)(2)(iv)(B)(4) as a condition of the Eligible Officer's receipt
of a hardship withdrawal from the Company's 401(k) Plan.
<PAGE>
3. Establishment of Accounts and Crediting of Deferrals.
(a) Accounts. The Committee shall establish and maintain, or cause to be
maintained, for each Eligible Officer who elects to participate in the Plan, a
separate Deferred Compensation Account to record the deferrals made by the
Eligible Officer under an Agreement. The Committee shall also maintain, or cause
to be maintained, a record of the value of the Eligible Officer's interest in
such Account.
(b) Investment of Deferrals. Each Eligible Officer shall indicate in
his/her Agreement whether he/she would like to have his/her deferrals deemed to
be invested in phantom units of the Company's $0.01 par value common stock
("Common Stock") and/or in phantom units of various mutual funds designated by
the Committee as available under the Plan ("Mutual Funds"). An Eligible Officer
may apportion his/her deferrals among the various investment options in whole
percentages. In addition, each Eligible Officer may indicate in his/her
Agreement whether he/she would like to have amounts already credited to his/her
Account reapportioned among phantom units of Common Stock and/or Mutual Funds.
(c) Allocation of Deferrals; Reapportionment.
(i) Deferrals made by an Eligible Officer under an Agreement shall
be invested in phantom units of (and if applicable, fractional phantom units of)
Common Stock and/or Mutual Funds, as directed by the Eligible Officer. As of
each pay date that deferrals are withheld from an Eligible Officer's
compensation, such deferrals shall be converted by the Committee into such
phantom units (and, if applicable, fractional units). The amount of the
deferrals withheld from the Eligible Officer's compensation on such pay date and
designated for a particular investment option shall be divided by the per unit
value of phantom units of such investment option on such date, as determined
under (d) below. Such phantom units shall be credited to the respective Eligible
Officers' Accounts.
(ii) Any reapportionment of amounts already credited to an Eligible
Officer's Account(s) shall occur on the first pay date of the calendar year to
which the Eligible Officer's Agreement applies.
(d) Valuation of Phantom Units. As of each pay date, the Committee shall
determine the fair market value of one share of Common Stock and one share of
each Mutual Fund. With respect to the Mutual Funds, and during such time as the
Common Stock is listed upon an established stock exchange or market, the per
share "fair market value" on any relevant day shall be deemed to be the quoted
closing price on the immediately preceding business day. A phantom unit of
Common Stock shall be deemed equivalent in value to one share of Common Stock of
the Company and a phantom unit of a Mutual Fund shall be deemed equivalent in
value to one share of such Mutual Fund. The fair market value of a share and the
value of phantom units, as determined by the Committee, shall be conclusive.
(e) Adjustments to Phantom Units of Common Stock. In the event of any
change in the outstanding shares of the Common Stock by reason of any stock
dividend or split, the Committee shall make appropriate adjustments in the
number of phantom units of Common Stock theretofore allocated to Eligible
Officers' Accounts. In the event of a corporate transaction, such as a
recapitalization, merger, consolidation, separation, reorganization, or similar
corporate change, the Plan shall be assumed by the surviving or successor
corporation and the Committee (or its successor) shall make appropriate
adjustments in the number of phantom units theretofore allocated to Eligible
Officers' Accounts. For example, if the Company is acquired by another
corporation and shareholders of the Company receive
<PAGE>
two shares of the acquirer's stock for each share of Common Stock, the Committee
(or its successor) shall convert each phantom unit of Common Stock into two
phantom units of the acquirer's stock.
(f) Dividend Payments and Distributions. Each Eligible Officer's Account
shall be credited, for each phantom unit of Common Stock and/or each phantom
unit of a Mutual Fund in his/her Account, an amount equal to the actual amount
of any cash dividend paid on a share of Common Stock of the Company and/or of
any cash distribution paid with respect to a share of the Mutual Fund,
respectively. A dividend amount on Common Stock shall be reinvested in phantom
units of Common Stock on the pay date coinciding with or immediately following
the date the dividend amount is credited to the Account. A distribution amount
with respect to a Mutual Fund shall be immediately reinvested in phantom units
of the Mutual Fund.
(g) No Shareholder Rights. The crediting of phantom units of Common Stock
or of a Mutual Fund shall not entitle any Eligible Officer to voting rights or
any other rights of a shareholder with respect to such units.
(h) Vesting. An Eligible Officer's interest in amounts and phantom units
of Common Stock or of a Mutual Fund credited to his/her Account shall be fully
vested and nonforfeitable at all times.
(i) Limit on Number of Units and Shares. Unless this Plan has been
approved by the Company's shareholders, the aggregate number of phantom units of
Common Stock allocated to Accounts under this Section 3 and of shares of Common
Stock distributed under Section 4 hereof shall not exceed 25,000.
(j) Annual Reports. The Committee shall provide each participating
Eligible Officer with an annual statement of his/her Deferred Compensation
Account balance(s).
4. Distribution.
(a) Form. All distributions of amounts invested in phantom units of Common
Stock under the Plan shall be made in the form of Common Stock. An Eligible
Officer shall receive one share of Common Stock for each phantom unit of Common
Stock credited to his/her Account. However, the value of any fractional phantom
unit shall be distributed in cash. Distributions of amounts invested in phantom
units of a Mutual Fund shall be made in cash.
(b) General Rule. As of January 31 of the year following the year in which
the Eligible Officer dies, retires, resigns, becomes disabled or otherwise
ceases to be an employee of the Company and its affiliates, the total amount of
phantom units credited to the Eligible Officer's Account under the Plan shall be
distributed to the Eligible Officer (or upon his/her death, to his/her
designated beneficiary) in accordance with one of the alternatives set forth
below:
(i) one single payment; or
(ii) any number of annual installments (as calculated in the
following paragraph) for a period of two to 10 years. Installments shall be paid
annually as of January 31 until the balance in the Eligible Officer's Account is
exhausted.
Selection of a distribution alternative shall be made at the time the Eligible
Officer executes the Agreement. Except as provided in the following paragraph,
each installment payment, other than the final payment, shall include:
<PAGE>
(1) the number of shares of Common Stock shall be equal to 1/n
multiplied by the number of phantom units of Common Stock in the Eligible
Officer's Account as of the previous December 31, where "n" equals the number of
payments yet to be made;
(2) the amount to be paid in cash shall be equal to 1/n
multiplied by the value of the phantom units of Mutual Funds in the Eligible
Officer's Account as of the previous December 31, where "n" equals the number of
payments yet to be made.
The final payment will equal the balance in the Eligible Officer's Account as of
the final January 31 payment date, and such payment shall be made as soon as
practicable after such date. For example, if payments are to be made in 10
annual installments commencing on January 31, 2000, the first payment shall be
equal to 1/10th of the number of phantom units of Common Stock in the Account on
December 31, 1999 plus 1/10th of the value of the Mutual Fund phantom units in
the Account as of December 31, 1999, the following year's payment would be equal
to 1/9th of the number of phantom units of Common Stock on December 31, 2000
plus 1/9th of the value of the Mutual Fund phantom units as of December 31,
2000, etc.
If the total value of Eligible Officer's Account as of the date of the first
scheduled payment does not exceed $5,000, the Company shall instead distribute
such Account in a single payment as of that date. Further, the Eligible Officer
may not select a period of time which will cause the value of an annual payment
to be less than $1,000. Notwithstanding the foregoing, in the event the Eligible
Officer ceases to be an employee of the Company and its affiliates and becomes a
proprietor, officer, partner, or employee of, or otherwise becomes affiliated
with, any business or entity that is in competition with the Company or any of
its affiliates, the Company reserves the right at the sole discretion of the
Committee to make an immediate single payment to the Eligible Officer of the
balance of the Eligible Officer's Account at that time.
(c) Hardship Distributions. Notwithstanding the preceding two paragraphs,
the Company may at any time make a single payment to the Eligible Officer (or
surviving beneficiary) equal to a part or all of the balance in the Eligible
Officer's Account upon a showing of an unforeseeable (i.e., unanticipated)
financial emergency caused by an event beyond the control of the Eligible
Officer (or surviving beneficiary) which would result in severe financial
hardship to the Eligible Officer (or surviving beneficiary) if such payment were
not made. The determination of whether such emergency exists shall be made at
the sole discretion of the Committee (with the Eligible Officer requesting the
payment not participating in the discussion or the decision, if he/she is also a
member of the Committee). The amount of the payment shall be limited to the
amount necessary to meet the financial emergency, and any remaining balance in
the Eligible Officer's Account shall thereafter be paid at the time and in the
manner otherwise set forth in this Section.
(d) Delay of Payments. Notwithstanding the foregoing, the Committee may
delay payment of all or a portion of an amount payable from an Eligible
Officer's Account in order to render all such payments deductible by the
Company. In addition, if the Committee determines that the listing,
registration, or qualification of any Common Stock issuable under the Plan upon
any securities exchange or under any state or Federal law, or the consent of any
regulatory body, is necessary in connection with the operation of the Plan, the
issuance of Common Stock under the Plan may be deferred until such listing,
registration, qualification, or consent is obtained.
5. Designation of Beneficiary. An Eligible Officer may designate in
writing any person or legal entity as his/her beneficiary to receive any amounts
payable from his/her
<PAGE>
Account(s) upon his/her death. If there is no beneficiary designation in effect
at the Eligible Officer's death or the designated beneficiary does not survive
the Eligible Officer, any amounts in the Eligible Officer's Account shall be
paid in a single payment to the Eligible Officer's estate. If the designated
beneficiary dies after beginning to receive installment payments, any amounts
payable from the Eligible Officer's Account shall be paid in a single payment to
the beneficiary's estate at the beneficiary's death.
6. Claims Procedure The procedure for presenting claims under the Plan and
appealing denials thereof is set forth in this Section 6.
(a) Filing of Claims. Any Eligible Officer or beneficiary (the "claimant")
may file a written claim for a Plan benefit with the Committee or its delegate.
(b) Notice of Denial of Claim. In the event of a denial of any benefit
requested by any claimant, the claimant shall be given a written notification
containing specific reasons for the denial. The written notification shall
contain specific reference to the pertinent Plan provisions on which the denial
is based. In addition, it shall contain a description of any additional material
or information necessary for the claimant to perfect a claim and an explanation
of why such material or information is necessary. Further, the notification
shall provide appropriate information as to the steps to be taken if the
claimant wishes to submit his/her claim for review.
The written notification shall be given to the claimant within 90 days after
receipt of his/her claim by the Committee (or its delegate) unless special
circumstances require an extension of time for processing, in which case written
notice of the extension shall be furnished to the claimant prior to the
termination of the original 90-day period, and such notice shall indicate the
special circumstances which make the postponement appropriate. In no event may
the extension exceed a total of 180 days from the date of the original receipt
of the claim.
(c) Right of Review. In the event of a denial of benefits, the claimant
shall be permitted to review the pertinent documents and to submit to the
Committee (or its delegate) issues and comments in writing. In addition, the
claimant may make a written request for a full and fair review of his/her claim
and its denial by the Committee (or its delegate). Such written request must be
received by the Committee (or its delegate) within 60 days after receipt by the
claimant of written notification of the denial of the claim.
(d) Decision on Review
(i) Time Within Which Decision to be Rendered. A decision shall be
rendered by the Committee (or its delegate) within 60 days after the receipt of
the request for review. However, where special circumstances make a longer
period for decision necessary or appropriate, the decision of the Committee (or
its delegate) may be postponed on written notice to the claimant (prior to the
expiration of the initial 60-day period) for an additional 60 days. In no event
shall the decision of the Committee (or its delegate) be rendered more than 120
days after the receipt of the request for review.
(ii) Written Decision Required. Any decision by the Committee (or
its delegate) shall be furnished to the claimant in writing in a manner
calculated to be understood by the claimant and shall set forth the specific
reason(s) for the decision and the specific Plan provision(s) on which the
decision is based.
(e) Deemed Denial. If a decision on a claim is not rendered within the
time period prescribed in (b) or (d) above, the claim shall be deemed denied.
<PAGE>
7. Amendment and Termination of the Plan. The Company reserves the right
to amend or terminate the Plan at any time. The balance in the Eligible
Officer's Account(s) shall remain subject to the provisions of the Plan and
distribution will not be accelerated because of the termination of the Plan.
8. Non-Assignability. The right of the Eligible Officer or any other
person to receive payments under this Plan or any Agreement hereunder shall not
be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, attachment, or garnishment by creditors of the
Eligible Officer or any beneficiary.
9. Miscellaneous.
(a) No Funding. The Company shall not be required to fund or secure in any
way its obligations hereunder. Nothing in the Plan or in any Agreement hereunder
and no action taken pursuant to the provisions of the Plan or of any Agreement
hereunder shall be construed to create a trust or a fiduciary relationship of
any kind. Payments under the Plan and any Agreement hereunder shall be made when
due from the general assets of the Company. Neither an Eligible Officer nor
his/her designated beneficiary shall acquire any interest in such assets by
virtue of the Plan or any Agreement hereunder. This Plan constitutes a mere
promise by the Company to make payments in the future, and to the extent that an
Eligible Officer or his/her designated beneficiary acquires a right to receive
any payment from the Company under the Plan, such right shall be no greater than
the right of any unsecured general creditor of the Company. The Company intends
for this Plan to be unfunded for federal income tax purposes and for the
purposes of Title I of ERISA.
(b) Administration and Interpretation. The Plan shall be administered by
the Committee, which shall consist of at least two directors of the Company, who
shall be appointed by, and shall serve at the pleasure of, the Company's Board
of Directors (the "Board"). In the event a committee has not been established in
accordance with the preceding sentence, the "Committee" shall consist of the
entire Board. Each member of such Committee, while serving as such, shall be
deemed to be acting in his/her capacity as a director of the Company.
The Committee shall have full power, authority, and discretion to
interpret, construe, and administer this Plan and any Agreement hereunder and
its interpretation and construction thereof, and actions hereunder, including
any determination of eligibility to participate and valuation of an Eligible
Officer's Account(s), or the amount or recipients of the payment to be made
therefrom, shall be binding and conclusive on all persons for all purposes. The
Committee shall not be liable to any person for any action taken or omitted in
connection with the interpretation and administration of this Plan and any
Agreement hereunder unless attributable to its own willful misconduct or lack of
good faith. The Committee shall be the Plan Administrator and the "Named
Fiduciary" within the meaning of section 402 of ERISA.
(c) Withholding. To the extent required by law, the Company shall withhold
federal or state income or employment taxes with respect to any payments under
the Plan or any Agreement hereunder and shall furnish the Eligible Officer (or
beneficiary) and the applicable governmental agency or agencies with such
reports, statements or information as may be required in connection with such
payments. As a condition of receiving a payment under the Plan, the Eligible
Officer (or beneficiary) must remit to the Company an amount in cash equal to
such amount of income and/or employment taxes required to be withheld, if the
cash to be distributed is insufficient to cover the amount required to be
withheld.
(d) Incapacity of Payee. If the Committee shall find that any person to
whom any payment is payable under this Plan or any Agreement hereunder is unable
to care for his/her affairs because of
<PAGE>
illness or accident, or is a minor, any payment due (unless a prior claim
therefor shall have been made by a duly appointed guardian, committee or other
legal representative) may be paid to the spouse, a parent, or a brother or
sister, or to any person deemed by the Committee to have incurred expense for
the person who is otherwise entitled to payment, in such manner and proportions
as the Committee may determine. Any such payment shall serve to discharge the
liability of the Company under this Agreement to make payment to the person who
is otherwise entitled to payment.
(e) Expenses. All expenses incurred in administering this Plan and any
Agreement hereunder shall be paid by the Company.
(f) No Additional Rights. Nothing in this Plan or any Agreement hereunder
shall be construed as conferring any right on the part of the Eligible Officer
to be or remain an employee of the Company or its affiliates or to receive any
particular amount of compensation.
(g) Binding Nature. This Plan and any Agreement hereunder shall be binding
upon, and inure to the benefit of, the Company, its successors and assigns, and
each Eligible Officer and his/her heirs, executors, administrators, and legal
representatives.
(h) Gender and Number. In interpreting the Plan, masculine gender may
include the feminine, neuter gender may include the masculine or feminine, and
the singular may include the plural, unless the context clearly indicates
otherwise.
(i) Headings. The headings of this Plan are for reference only. In the
event of a conflict between a heading and the context of the Section or
subsection, the content of the Section or subsection shall control.
(j) Governing Law. This Plan and any Agreement hereunder shall be governed
by and construed under the laws of the State of Delaware.
(k) Effective Date. This Plan shall be effective as of July 1, 1999.
Exhibit 10.32
PUERTO RICO INDUSTRIAL DEVELOPMENT COMPANY
LEASE CONTRACT
PROJECT No.: T-0810-0-68 &
L-154-2-62-06-0 (LOT #6)
LOCATION : ANASCO, PUERTO RICO
THIS AGREEMENT ENTERED into on June 30, 1994 by: AS "LANDLORD", THE PUERTO RICO
INDUSTRIAL DEVELOPMENT COMPANY, AND AS "TENANT", HEYER-SCHULTE NEUROCARE, INC.
WITNESSETH
WHEREAS, LANDLORD is the owner of certain landsite and building,
identified in the Epigraph, hereinafter referred to as the Premises. WHEREAS,
LANDLORD has agreed to lease to TENANT, and TENANT has agreed to hire from
LANDLORD the Premises. NOW THEREFORE, in consideration of the foregoing
premises, the parties herein agree on this Lease subject to the following:
TERMS AND CONDITIONS
ONE: LANDLORD hereby demises and lets unto TENANT, and TENANT hereby
leases from LANDLORD the Premises which are fully described in Schedule "A"
hereto annexed and made a part hereof. The Premises are subject to the
encumbrances, liens and/or restrictions, if any, that may appear from said
Schedule "A". Furthermore, the air rights of the Premises, are excepted and
reserved to LANDLORD.
TWO: Premises shall be used and occupied exclusively in the manufacture of
neurosurgical devices and other medical products. (SIC. #03841).
THREE: TENANT shall hold the Premises for a period of ten (10) years to
commence on July 1st, 1994. TENANT agrees to accept possession of the demised
premises, under the provisions of this Contract, in their present condition and
further agrees and undertakes to put them in thorough repair, good order and
safe conditions in coordination with LANDLORD'S Maintenance Department as
detailed in Schedule "B" hereto annexed and made a part hereof.
FOUR: Commencing on July 1st, 1994, TENANT shall pay to LANDLORD an annual
rental of $2.20 per square foot of gross building area during the first sixty
(60) months of the term of this lease and of $2.75 per square foot of gross
building area during the last sixty (60) months. This rental shall be paid in
equal monthly installments of $2,094.64 for the first sixty (60) months and of
$2,618.30 for the last sixty (60) months. The monthly installments for rent
specified herein, shall be paid in advance on the first day of each month at
LANDLORD'S
<PAGE>
office, or at any other place that LANDLORD may notify. In the event that the
date of commencement does not fall on the first of the month, TENANT further
agrees to pay the first partial monthly installments, prior to, or on the date
of commencement.
FIVE: Simultaneously herewith TENANT shall deposit with LANDLORD the
amount of $3,016.28 in Certified Check.
This deposit shall guarantee the compliance by TENANT of its
obligations, under this Contract, particularly, but not limited to, the payment
of rent, the compliance of the environmental clauses herein included and the
return of the Premises in proper condition at the termination of this Lease. On
said termination, if TENANT is not in default of any of the terms and conditions
of this Contract, LANDLORD will return to TENANT the sum of money, if any, held
pursuant to this provision, after LANDLORD'S Environmental Office certifies that
there are not environmental deficiencies as a result of TENANT'S manufacturing
operation on the demised Premises.
SIX: TENANT agrees to have on the date of commencement of the term of this
Lease a capitalization of $900,000.00 Likewise TENANT agrees to install within
six (6) months from the same date manufacturing machinery and equipment with a
value of at least $900,000.00. This shall not include the cost of transportation
and installation thereof, nor its ordinary depreciation after installation; and
within eighteen (18) months from the date of commencement of the term, to employ
a minimum of eighty (80) production workers. The aforementioned levels, shall be
maintained throughout the term of this Lease or any extension thereof.
SEVEN: All notices, demands, approvals, consents and/or communications
herein required or permitted shall be in writing. If by mail should be certified
and to the following addresses, to LANDLORD: PO BOX 362350, SAN JUAN, PUERTO
RICO 00936-2350. To
TENANT:
ANTONIO J. RODRIGUEZ, ESQ. MR. JOSEPH CELUSAK
MCCONNELL & VALDES HEYER-SCHULTE NEUROCARE, INC.
PO BOX 364225 STATE ROAD 402, KM. 1.2.
SAN JUAN, PUERTO RICO 00936-4225 PO BOX 1386
TELF- (809) 250-5663 ANASCO, PUERTO RICO 00610
EIGHT: Net Lease - This Lease shall be interpreted as a net lease; it
being the exclusive responsibility of TENANT to pay for all operating expenses,
utilities, maintenance, expenses, insurance, taxes or any other costs, expenses
or charges of any nature not specifically assumed by LANDLORD hereunder.
NINE: Warranty as to use - LANDLORD does hereby warrant that at the time
of the commencement of the term of this Lease, the Premises may be used by
TENANT for the manufacturing purposes herein intended which are deemed
consistent with the design and construction in accordance with the corresponding
plans and specifications.
TEN: Alterations - TENANT shall make no alterations, additions or
improvements to the Premises without the prior consent of LANDLORD and all such
alterations,
-2-
<PAGE>
additions or improvements made by or for TENANT, shall be at TENANT'S own cost
and expenses and shall, when made, be the property of LANDLORD without
additional consideration and shall remain upon and be surrendered with the
Premises as a part thereof at the expiration or earlier termination of this
Lease, subject to any right of LANDLORD to require removal or to remove as
provided for hereinafter.
In the event TENANT asks for LANDLORD'S consent for any alteration;
LANDLORD may at its option, required from TENANT to submit plans and
specifications for said alteration. Before commencing any such work, said plans
and specifications, if required, shall be filed with and approved by all
governmental agencies having jurisdiction thereof, and the consent of any
mortgagee having any interest in or lien upon this Lease shall be procured by
TENANT and delivered to LANDLORD if required by the term of the mortgage.
Before commencing any such work, TENANT shall at TENANT'S own cost and
expense, deliver to LANDLORD a General Accident Liability Policy more
particularly described in Article THIRTY (30) hereof, but said policy shall
recite and refer to such work, and in addition thereto, if the estimated cost of
such work is more than FIVE THOUSAND DOLLARS ($5,000.00), TENANT shall, at
TENANT'S own cost and expense, deliver to LANDLORD a surety bond, or a
performance bond from a company acceptable to LANDLORD, or a similar bond or
other security satisfactory to LANDLORD, in an amount equal to the estimated
cost of such work, guaranteeing the completion of such work within a reasonable
time, due regard being had to conditions, free and clear of materialmen liens,
mechanics liens or any other kind of lien, encumbrances, chattel mortgages and
conditional bills of sale and in accordance with said plans and specifications
submitted to and approved by LANDLORD. At LANDLORD'S option TENANT shall provide
a blanket written guarantee in an amount sufficient to satisfy LANDLORD as to
all alterations, changes, additions and improvements to the Premises n lieu of
separate guarantee for each such project.
TENANT shall pay the increased premium, if any, charged by the insurance
companies carrying insurance policies on said building, to cover the additional
risk during the course of such work.
ELEVEN: Power Substation - If required by TENANT'S operations, TENANT
shall, at its own cost and expense, construct and/or install a power substation
and connect it to the PUERTO RICO ELECTRICAL POWER AUTHORITY (PREPA)
distribution lines, for voltages up to 13.2 KV; and to PREPA transmission lines
for voltages of 38 KV, all in conformity to PREPA'S requirements. Such
construction shall, in no event, be undertaken by TENANT until after LANDLORD
has approved the location thereof, as well as the routing of the power line
extension.
TWELVE: Repairs and Maintenance - TENANT shall, at its own cost and
expense, put, keep and maintain in thorough repair and good order and safe
condition the building and improvements standing upon the Premises at the
commencement of the term hereon or thereafter erected upon the premises, or
forming part of the Premises, and their full equipment and appurtenances, the
side walks areas, sidewalk hoists, railings, gutters, curbs and the like in from
of the adjacent to the Premises, and each and every part thereof, both inside
and outside, extraordinary and ordinary, and shall repair the whole and each and
every part thereof in order to keep the same at all times during the term hereof
in through repair and good order and safe conditions, whenever the necessity or
desirability therefor may occur, and whether or not the
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same shall occur, in whole or in part, by wear, tear, obsolescence or defects,
and shall use all reasonable precautions to prevent waste, damage or injury,
except as provided hereinafter.
LANDLORD and not TENANT, shall be responsible for and shall promptly
correct any defects in the building on the Premises which are due to faulty
design, or to errors of construction not apparent at the time the Premises were
inspected by TENANT for purposes of occupancy by TENANT; this shall not be
interpreted to relieve TENANT of any responsibility or liability herein
otherwise provided, including among others, for structural failure due to the
fault or negligence of TENANT.
TENANT shall also, at TENANT'S own cost and expense, maintain the landsite
in thoroughly clean condition; free from solid waste (which includes liquid and
gaseous as defined by the Resource Conservation and Recovery Act), and the
Regulation on Hazardous and Non-Hazardous Waste of the Environmental Quality
Board, as amended, rubbish, garbage and other obstructions. Specifically, TENANT
shall not use said landsite, nor permit it to be used, as a deposit or as dump
for raw materials, waste materials, hazardous, toxic or non-toxic substances, or
substances of whichever nature. TENANT shall neither make any excavation for the
purpose of storing, putting away and/or concealing raw materials or waste
materials of any kind. Underground storage of hazardous and/or toxic substances
is specifically prohibited.
TENANT shall not do or cause to be done, nor permit on the Premises
anything deemed extra hazardous, nor shall it store in the Premises flammable or
toxic products of any class or kind without taking the proper precautions and
complying with applicable federal and Commonwealth laws and regulations.
In case TENANT needs to store in the landsite raw materials of a hazardous
and/or toxic nature or hazardous and/or toxic wastes, TENANT shall notify
LANDLORD and secure its prior authorization. LANDLORD shall be furnished with a
copy of any permit issued for such storage.
Although it is not intended that TENANT shall be responsible for any
decrease in value of the Premises due to the mere passing of time, or for
ordinary wear and tear of surfaces and other structural members of the building,
nevertheless TENANT shall: (i) replace, with like kind and quality, doors,
windows; electrical, sanitary and plumbing, fixtures; building equipment and/or
other facilities or fixtures in the Premises which through TENANT'S use, fault
or negligence, become too worn out to repair during the life of this Lease, (ii)
paint the property inside and outside as required.
In addition to the foregoing, TENANT shall indemnify and safe harmless
LANDLORD from and against any and all cost, expenses, claims, losses, damages,
or penalties, including counsel fees, because of or due to TENANT'S failure to
comply with the foregoing, and TENANT shall not call upon LANDLORD for any
disbursement or outlay of money whatsoever, and hereby expressly releases and
discharges LANDLORD of and from any liability or responsibility whatsoever in
connection therewith.
THIRTEEN: Roof Care - TENANT, without the prior consent of LANDLORD, shall
not: (i) erect or cause to be erected on the roof any bill board, aerial sign,
or structure of any kind, (ii) place any fixture, equipment or any other load
over the roof, (iii) drill any hole on the roof for whichever purpose, (iv) use
the roof for storage, nor (v) correct any leaks whatsoever, this being
LANDLORD'S sole responsibility. Furthermore, TENANT shall take all reasonable
precautions to insure that the drainage facilities of the roof are not clogged
and are in good and operable conditions at all times.
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FOURTEEN: Floor Loads - TENANT hereby acknowledges that it has been
informed by LANDLORD that the maximum floor load of the Premises herein demised
is 150 pounds per sq. ft. Therefore, TENANT hereby agrees that in the event the
load of the machinery and equipment to be installed thereat exceeds such maximum
load, it shall, at its own cost and expense, carry out any improvements to the
floor of the Premises which may be necessary to support such additional load; it
being further agreed and understood that construction and/or installation of
such improvements shall not be commenced until after LANDLORD'S approval of the
plans to be prepared therefor by TENANT and thereafter, after completion of
construction and/or installation of said facilities, they shall be deemed
covered by and subject to the applicable provisions of this Contract; it being
further specifically agreed and understood that upon termination of this Lease,
such facilities shall be removed by TENANT, at its own cost and expense, or in
the alternative, and upon request by LANDLORD, they shall remain as part of the
Premises with no right whatsoever on the part of TENANT to be reimbursed and/or
compensated therefor.
FIFTEEN: Fixtures - TENANT shall not affix to the ceiling, nor to its
supporting joists or columns, nor to any of its walls, any air conditioning
unit, nor any other fixture, without the prior consent of LANDLORD.
SIXTEEN: Environmental Protection and Compliance - TENANT agrees, as a
condition hereof, that it will not discharge its solid, liquid or gaseous
industrial and/or sanitary effluent or discharges, either into the sewer system
and/or into any other place until after required authorizations therefor has
been obtained from the Puerto Rico Aqueduct and Sewer Authority, and/or the
Department of Health of Puerto Rico and/or Environmental Quality Board, and/or
any other governmental agency having jurisdiction thereof and TENANT further
agrees and undertakes to pre-treat any such effluent, prior to discharge thereof
as required by the said Authority, Department and/or governmental agency with
jurisdiction, and/or to install any equipment or system required, and to fully
abide by and comply with any and all requisites imposed thereby, and upon
request by LANDLORD to submit evidence of such compliance; it being agreed that
non-compliance thereof by TENANT for a period of ninety (90) days after notice,
shall be deemed an additional event of default under the provisions hereof.
Provided, that no construction and/or installation shall be made until LANDLORD
has approved of it.
TENANT shall also, at TENANT'S own cost and expense, construct and
maintain Premises, processes and/or operating procedures in compliance with the
terms, conditions and commitments specified in any Environmental Impact
Statement, Environmental Assessment or any other analogous document produced by
the Commonwealth of Puerto Rico, Economic Development Administration/LANDLORD as
lead agency/ or by any other governmental agency in connection with the approval
or operation of the project.
TENANT shall also serve LANDLORD with a copy of any lawsuit, notice of
violation, order to show cause or any other regulatory or illegal action against
TENANT in any environmental-related case or issue.
TENANT shall also serve LANDLORD with a copy of any permit granted to
TENANT for air emissions, water discharge, solid waste generation, storage,
treatment and/or disposal, and for any hazardous and/ or toxic waste raw
materials or by-products used or generated, stored, treated and/or disposed or
any other endorsement, authorization or permit required to be obtained by
TENANT.
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TENANT shall also serve LANDLORD with a copy of any filing or notification
to be filed by TENANT with any regulatory agency or any environmentally related
case or issue, especially in any situation involving underground or surface
water pollution, hazardous and/or toxic waste spillage and ground contamination.
The notification to LANDLORD shall take place not later than the actual filing
of the pertinent documents with the regulatory agency.
SEVENTEEN: Improper Use - TENANT, during the term of this Lease and of any
renewal or extension thereof, agrees not to use or keep or allow the leased
Premises or any portion thereof to be used or occupied for any unlawful purpose
or in violation of this Lease or of any certificate of occupancy or certificate
of compliance covering or affecting the use of the Premises or any portion
thereof, and will not suffer any act to be done or any condition to exist on the
Premises or any portion thereof, or any article to be brought thereon, which may
be dangerous, unless safeguarded as required by law, or which may in law,
constitute a nuisance, public or private, or which may made void or voidable any
insurance then in force on the leased Premises.
EIGHTEEN: Government Regulations - TENANT agrees and undertakes to abide
by and comply with any and all rules, regulations and requirements of the
Planning Board of Puerto Rico, the Department of Health, the Environmental
Quality Board, the Environmental Protection Agency (EPA), where applicable
and/or of any other governmental agency, having jurisdiction thereon applicable
to TENANT'S operations at the Premises and/or products to be manufactured
thereat, and if requested by LANDLORD, TENANT shall submit evidence of such
compliance; it being agreed and understood that noncompliance with any and all
such rules, regulations and requisites shall be deemed an additional event of
default under the provisions of this Contract, unless remedied within thirty
(30) days after receipt of notice thereof.
Any and all improvements to the Premises required by any governmental
agency, having jurisdiction thereon so as to carry TENANT'S operations in
accordance with the regulations and requisites thereof, shall be at TENANT'S own
cost and expense, except for any improvements that may be required as a result
of any violation by LANDLORD that may exist at the effective date hereof other
than violations caused by TENANT or TENANT'S agents.
TENANT further agrees and undertakes to install in the Premises, at its
own costs and expense, such devices as may be necessary to prevent any hazard,
which may be caused or created by its operations from affecting the
environmental integrity of the landsite or causing any nuisance to adjacent
TENANTS and/or the community in general; it being agreed and understood that
creating or causing any such nuisance, shall be deemed an additional event of
default under the provisions of this Contract.
TENANT further agrees and undertakes to abide by and comply with any and
all rules, regulations and requisites of the Fire Department relative to the use
and storage of raw materials, finished products and/or inflammable materials,
and/or of any other governmental agency, having jurisdiction thereon applicable
to TENANT'S operations at the Premises, and if requested by LANDLORD, TENANT
shall submit evidence of such compliance; it being agreed and understood that
noncompliance by TENANT with any of the aforementioned rules, regulations and
requisites shall be deemed, in each of such cases, an additional event of
default under the provisions of this Contract, unless remedied within thirty
(30) days after receipt of notice thereof.
If as a consequence of the foregoing dispositions, TENANT need to make
alterations to the Premises, the same shall be done subject to the dispositions
of Article TEN hereof.
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NINETEEN: Use Permit - TENANT agrees to abide by and comply with any and
all conditions and requisites included in the Use Permit which may be issued by
the Puerto Rico Permits and Regulations Administration (ARPE), and if requested
by LANDLORD, shall submit evidence of such compliance; it being agreed and
understood that noncompliance by TENANT with any and all such conditions and
requisites and/or the cancellation of the said Use Permit shall, in each of such
cases, be deemed an additional event of default under the provisions of this
Contract.
TWENTY: Inspection - TENANT shall permit LANDLORD or LANDLORD'S agents to
enter the Premises at all reasonable time for the purpose of inspecting the
same, or of making repairs that TENANT has neglected or refused to make as
required by the terms, covenants and conditions of this Lease, and also for the
purpose of showing the Premises to persons wishing to purchase the same, and
during the year next preceding the expiration of this Lease, shall permit
inspection thereof by or on behalf of prospective TENANTS. If, at a reasonable
time, admission to the Premises for the purposes aforesaid cannot be obtained,
or if at any time an entry shall be deemed necessary for the inspection or
protection of the property, or for making any repairs, whether for the benefit
of TENANT or LANDLORD, LANDLORD'S agents or representatives may enter the
Premises by force, or otherwise, without rendering LANDLORD, or LANDLORD'S
agents or representative liable to any claim or cause of action or damage by
reason thereof, and accomplish such purpose.
The provisions contained in this Article are not to be construed as an
increase of LANDLORD'S obligations under this Lease; it being expressly agreed
that the right and authority hereby reserved does not impose, nor does LANDLORD
assume, by reason thereof, any responsibility or liability whatsoever for the
repair, care of supervision of the Premises, or any building, equipment or
appurtenance on the Premises.
TWENTY ONE: LANDLORD'S entry for repairs and alterations - LANDLORD
reserves the right to make such repairs, changes alterations, additions or
improvements in or to any portion of the building and the fixtures and equipment
which are reputed part thereof as it may deem necessary or desirable and for the
purpose of making the same, to use the street entrances, halls, stairs and
elevators of the building provided that there be no unnecessary obstruction of
TENANT'S right of entry to and peaceful enjoyment of the Premises, and TENANT
shall make no claim for rent abatement compensation or damages against LANDLORD
by reason of any inconvenience or annoyance arising therefrom.
TWENTY TWO: LANDLORD excused in certain instances - If, by reason of
inability to obtain and utilized labor, materials or supplies, or by reason of
circumstances directly or indirectly the result of any state of war, or of
emergency duly proclaimed by the corresponding governmental authority, or by
reason of any laws, rules orders, regulations or requirements of any
governmental now or hereafter in force or by reason of strikes or riots, or by
reason of accidents, in damage to or the making of repairs, replacements or
improvements to the building or any of the equipment thereof, or by reason of
any other cause reasonable beyond the control of LANDLORD, LANDLORD shall be
unable to perform or shall be delayed in the performance of any covenant to
supply any service, such non-performance or delay in performance shall not be
ground to any claim against LANDLORD for damages or constitute a total or
partial eviction,
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constructive or otherwise. it being agreed and understood that the time for
completion of any such construction, shall be extended for a period of time
equal to the number of days of any such delay.
TWENTY THREE: Quiet Enjoyment - TENANT on paying the full rent and keeping
and performing the conditions and covenants herein contained, shall and may
peaceably and quietly enjoy the Premises for the term aforesaid, subject,
however, to the terms of this Lease and to the mortgages hereinafter mentioned.
TWENTY FOUR: Leasehold Improvements - If leasehold improvements made by or
for the benefit of TENANT in the Premises at his request or other personal
property to TENANT are assessable or taxable and a tax liability is imposed to
TENANT or LANDLORD, it is understood that it shall be the sole responsibility of
TENANT to pay such taxes and in no event shall such taxes be the liability of or
be transferable to LANDLORD. In the event that by operation of law, such taxes
became a liability of LANDLORD, TENANT shall pay such taxes as they become due
and payable and shall promptly reimburse LANDLORD for any payments or expenses
incurred or disbursed by LANDLORD by reasons of any such assessment. Said amount
shall be due and payable, as additional rent, with the next installment of rent.
In the event that TENANT fails to make this payment when due, it shall be
subject to the dispositions of Article THIRTY SEVEN hereof.
TWENTY FIVE: Stoppage of Operations - It is understood by the parties
hereto that this Lease is made by LANDLORD in furtherance of the
industrialization plans of the Commonwealth of Puerto Rico, and it is
accordingly understood that TENANT will use all reasonable efforts while this
Lease is in effect to maintain a manufacturing operation upon the Premises, but
nothing contained in this paragraph shall be deemed to require TENANT to
maintain such an operation otherwise than in accordance with sound principles of
business management, or (without limiting the generality of the foregoing) to
prevent TENANT from curtailing such operation or from shutting it down, whenever
and as often as TENANT may, in the exercise of sound business judgment, deem
such action advisable. However, TENANT shall give to LANDLORD notice of any
necessary or convenient curtailment and/or shut-down, at least seven (7) days
prior to the date fixed therefor except in cases of an emergency shut-down, in
which case such notice shall be given at the earliest possible time. No
curtailment of operations or shut-down in accordance with the provisions of this
paragraph shall constitute a default under the provisions of this Contract which
will enable LANDLORD to terminate it, unless such plants shall have been
shut-down for a period of six (6) consecutive months. A shut-down on account of
unforeseeable event or events which although foreseeable could not be prevented,
shall not constitute a breach of this agreement. Nothing in his paragraph
contained shall relieve TENANT from the payment of rent during the period of any
shut-down or curtailments of operations.
TWENTY SIX: Assignment and Subletting - TENANT shall not assign this Lease
nor let or sublet the Premised or any part thereof except to its parent company,
to a wholly owned subsidiary, to an affiliate of TENANT, wholly owned by
TENANT'S parent company or to a corporation to be organized by TENANT. In any of
these cases, TENANT shall promptly notify LANDLORD of said assignment or
subletting, it being agreed and understood that no such
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assignment or subletting shall. (i) reduce or, in any way, affect the
obligations of TENANT under this Lease, nor (ii), release TENANT from liability
under this Lease.
TWENTY SEVEN: Successors in Interest - This Lease Contract and every
provision thereof, shall bind and inure to the benefit of the legal
representatives, successors and assigns on the parties. However, the term
"LANDLORD", as used in this Contract, so far as any covenants or obligations on
the part of LANDLORD under this Lease are concerned, shall be limited to mean
and include only the owner or lessor, at the time in question, of the Premises,
so that in the event hereafter of a transfer of the title to the Premises,
whether any such transfer be voluntary or by operation of law or otherwise, the
person, natural or juridical, by whom any such transfer is made, shall be and
hereby is entirely freed and relieved of all personal liability as respects the
performance of the covenants and obligations of LANDLORD under this Lease from
and after the date of such transfer.
TWENTY EIGHT: No Representation by LANDLORD - LANDLORD, LANDLORD'S agents
or employees, or the agents, executives or employees of the Economic Development
Administration, have made no representations or promises with respect to the
Premises except as herein expressly set forth and no rights, easements or
licenses are acquired by TENANT by implication or otherwise except as expressly
set forth in the provisions of this Contract. The taking possession of the
Premises by TENANT, shall be conclusive evidence, as against TENANT, that TENANT
accepts same "AS IS" and that said Premises, particularly the building which
forms a part of the same, were in good and satisfactory conditions at the time
such possession was so taken.
TWENTY NINE: Damages - LANDLORD shall not be responsible for any latent
defect or change of conditions in the Premises resulting in damage to the same,
or the property or person therein, except to the extent of LANDLORD'S gross
negligence, and provided such claims or loss is not covered by insurances herein
required from TENANT. TENANT shall promptly notify LANDLORD of any damage to or
defects in the Premises, particularly in any part of the building's sanitary,
electrical, air conditioning or other systems located in our passing through the
Premises, and the damage or defective conditions, subject to the provisions of
Article TWENTY ONE (21) hereof, shall be remedied by LANDLORD with reasonable
diligence.
THIRTY: General Liability Insurance - TENANT shall indemnify, have
harmless and defend LANDLORD and agents, servants and employees of LANDLORD
against and from any and all liability, fines, suits, claims, demands, expenses,
including attorneys' fees, and actions of any kind or nature arising by reason
of injury to person or property including the loss of use resulting thereof or,
violation of law occurring in the Premises occasioned in whole or in part by any
negligent act or omission on the part of TENANT or an employee (whether or not
acting within the scope of his employment) , servant, agent, licensee, visitor,
assignor or undertenant of TENANT, or by any neglectful use or occupancy of the
Promises or any breach, violation or non-performance of any covenant in this
Lease on the part of TENANT to be observed or Performed.
Pursuant to the foregoing, TENANT shall, maintain during the term of this
lease, at its own cost and expense, a Comprehensive General Liability Policy.
Said policy shall: (i) be for a
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combined single limit of no less than $500,000.00 per accident, (ii) hold
LANDLORD harmless against any and all liability as hereinbefore stated, and
(iii) the care, custody & control exclusion shall be deleted from this coverage.
LANDLORD may require additional reasonable limits of public liability insurance
and coverages, when changing circumstances so require.
THIRTY ONE: Property Insurance - TENANT recognizes that the rent provided
for herein does not include any element to indemnify, repair, replace or make
whole TENANT, his employees, servants, agents, licensees, visitors, assignees,
or undertenant for any loss or damage to any property or injury to any person in
the Premises.
Accordingly, during the term of this Lease, TENANT shall keep the building
standing upon the Premises at the commencement of the term hereof or thereafter
erected upon the Premises, including all equipment appurtenant to the Premises
and all alterations, changes, additions and improvements, insured for the
benefit of LANDLORD and TENANT, as their respective interest may appear, in an
amount at least equal to the percentages stated below (as LANDLORD may from time
to time determine) . The basis of the Property Insurance shall be Replacement
Cost and the coverage an "All Risks" Property Insurance Policy. Coverages
included All Risks Form:
1. Fire - "Building & Contents Form"
(a) Building - 100% of insurable value exclusive of
foundations
(b) Contents - All equipment appurtenant to the Premises
(State value of Policy)
2. Additional Coverages under the Fire Policy
(a) Extended Coverage Endorsement - 100% of insurable value
exclusive of foundations
(b) Earthquake - 100% of insurable value including
foundations
(c) Vandalism and Malicious Mischief Endorsement
(d) Improvements and Betterments - For all alterations,
changes, additions and improvements
3. Landsite and Flood whenever applicable and/or necessary
4. Boiler and machinery (if any) - 100% of insurable value
5. Pollution Liability Policy - if necessary.
THIRTY TWO: Multifactory Building Specific Dispositions - In the event
that the Premises constitute a section or sections of an industrial building and
landsite in which other operations are conducted by other TENANTS: (i) the
insurance coverage herein required, shall be acquired by LANDLORD for the whole
of the industrial building and TENANT shall
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reimburse LANDLORD, for its proportionate share in the total cost of said
policies, (ii) if, because of anything done, caused or permitted to be done,
permitted or omitted by TENANT, the premium rate for any kind of insurance
affecting the Promises shall be increased, TENANT shall pay to LANDLORD the
additional amount which LANDLORD may be thereby obligated to pay for such
insurance, and if LANDLORD shall demand that TENANT remedy the condition which
cause the increase in the insurance premiums rate, TENANT will remedy such
conditions within five (5) days after such demand, and (iii) the insurance
policies required in the preceding Articles THIRTY (30) & THIRTY ONE (3l) shall
be endorsed to include a waiver of subrogation against TENANT. All amounts to be
reimbursed by TENANT under this Article, shall be due and payable, as additional
rent, with the next installment of rent. In the event that TENANT fails to make
this payment, when due, it shall be subject to the dispositions of Article
THIRTY SEVEN (37) hereof.
THIRTY THREE: Additional Dispositions about Insurance - All the Insurance
policies herein required from TENANT, shall be taken in form and substance
acceptable to LANDLORD with insurance companies duly authorized to do business
in Puerto Rico, having a "A" and a higher financial fatting according to Best's
Insurance Report; and shall include LANDLORD as additional insured. TENANT shall
instruct the corresponding insurer to deliver such policies or certified copies
of Certificates of Insurance, in lieu of, directly to LANDLORD. LANDLORD
reserves the right not to deliver possession of the Premises to TENANT, unless,
and until two (2) days after such original policies, or certified copies or
certificates have been deposited with LANDLORD.
Furthermore, said policies, shall: (i) provide that they may not be
cancelled by the insurer for nonpayment of premium or otherwise, until at least
thirty (30) days after services of notice by registered or certified mail of the
proposed cancellation upon LANDLORD, and (ii) be promptly renewed by TENANT upon
expiration and TENANT shall, within thirty (30) days after such renewal, deliver
to LANDLORD adequate evidence of the payment of premiums thereon. If such
premiums or any of them shall not be so paid, LANDLORD may procure the same in
the manner set forth for governmental agencies, and TENANT shall reimburse
LANDLORD any amount so paid. This reimbursement being due and payable with the
next installment of rent. In the event that TENANT fails to make this payment
when due, it shall be subject to the dispositions of Article THIRTY SEVEN (37)
hereof. It is expressly agreed and understood, that payment by LANDLORD of any
such premiums shall not be deemed to waive or release the default in the payment
thereof by TENANT nor the right of LANDLORD to take such action as may be
available hereunder as in the case of default in the payment of rent.
Upon the commencement of the term hereof, TENANT shall pay to LANDLORD the
apportioned unearned premiums on all such policies of insurance then carried by
LANDLORD in respect of the Premises in the event TENANT continues with the
insurance policies placed in LANDLORD.
TENANT shall not violate nor permit to be violated any of the conditions
or provisions of any of said policies, and TENANT shall so perform and satisfy
the requirements of the companies writing such policies that at all times
companies of good standing and acceptable to LANDLORD shall be willing to write
and continue such insurance.
TENANT shall cooperate with LANDLORD in connection with the collection of
any insurance monies that may be due in the event of loss and shall execute and
deliver to LANDLORD such proofs of loss and other instruments that may be
required for the purpose of
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facilitating the recovery of any such insurance monies, and in the event that
TENANT shall fail or neglect so to cooperate or to execute, acknowledge and
deliver any such instrument, LANDLORD, in addition to any other remedies, may as
the agent or attorney-in fact of TENANT, execute and deliver any proof of loss
or any other instruments as may seem desirable to LANDLORD and any mortgagee for
the collection of such insurance monies. This shall not be interpreted as any
waiver of the obligations of TENANT under Articles THIRTY, THIRTY ONE , THIRTY
TWO and THIRTY THREE hereof or exclusively in favor of LANDLORD under Article
THIRTY NINE hereof.
THIRTY FOUR: Waivers - The receipt by LANDLORD of the rent, additional
rent, or any other sum or charges payable by TENANT with or without knowledge of
the breach of any covenant of this Contract, shall not be deemed a waiver of
such breach. No act or omission of LANDLORD or its agent during the term of this
Lease shall be deemed an acceptance of a surrender of the Premises and to
agreement to accept a surrender of the Premises shall be valid unless it be made
in writing and subscribed by LANDLORD. This Contract contains all the agreements
and conditions made between the parties hereto with respect to the Premises and
it cannot be changed orally. Any additions to, or charges in this Lease must be
in writing, signed by the party to be charged.
Failure on the part of LANDLORD to act or complain of any action or
nonaction on the part of TENANT shall not be deemed to be a waiver of any of its
respective rights hereunder nor constitute a waiver at any subsequent time of
the same provision. The consent or approval by LANDLORD to, or of any action by
the other requiring consent or approval, shall not be deemed to waive or render
unnecessary the consent or approval by LANDLORD of any subsequent similar act.
THIRTY FIVE: Reinstatement - No receipt of monies by LANDLORD for TENANT
after the termination or cancellation hereof in any lawful manner shall
reinstate, continue or extend the term hereof, or affect any notice theretofore
given to TENANT, or operate as a waiver of the right of LANDLORD to enforce the
payment of rent, additional rent, or other charges then due or thereafter
falling due, or operate as a waiver of the right of LANDLORD to recover
possession of the Premises by proper suit, action, proceeding or remedy; it
being agreed that, after the service of notice to terminate or cancel this
Lease, and the expiration of the time therein specified, if the default has not
been cured in the meantime, or after the commencement of suit, action or summary
proceedings or of any other remedy, or after a final order, warrant of judgment
of the possession of the Premises, LANDLORD may demand, receive and collect any
monies then due, or thereafter becoming due, without in any manner affecting
such notice, proceeding, suit, action, order,, warrant or judgment; and any and
all such monies so collected shall be deemed to be payments for the use and
occupation of the Premises, or at the election of LANDLORD, on account of
TENANT'S liability hereunder. Delivery or acceptance of the keys to the
Premises, or any similar act, by the LANDLORD, or its agents or employees,
during the term hereof, shall not be deemed to be a delivery or an acceptance of
a surrender of the Promises unless LANDLORD shall explicity consent to it, in
the manner set forth hereinbefore.
THIRTY SIX: Subordination -and Attornment - This Lease is and shall be
subject and subordinate to all liens, or mortgages which may now or hereafter
affect the Premises and to all renewals, modifications, consolidations,
replacements and extensions thereof and, although this
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subordination provision shall be deemed for all purposes to be automatic and
effective without any further instrument on the part of TENANT, TENANT shall
execute any further instrument requested by LANDLORD to confirm such
subordination.
TENANT further covenants and agrees that if by reason of a default upon
the part of LANDLORD of any mortgage affecting the Premises, the mortgage is
terminated or foreclosed by summary proceedings or otherwise, TENANT will attorn
to the mortgagee or the purchaser in foreclosure proceedings, as the case may
be, and will recognize such mortgage or purchaser, as the TENANT'S landlord
under this Lease. TENANT agrees to execute and deliver, at any time and from
time to time, upon the request of LANDLORD or of the mortgagee or the purchaser
in foreclosure proceedings, as the case may be, any reasonable instrument which
may be necessary or appropriate to evidence such attornment. TENANT further
waives the provision of any statute or rule of law now or hereafter in effect
which may give or purport to give TENANT any right of election to terminate this
lease or to surrender possession of the Premises demised hereby in the event any
such proceeding is brought by the holder of any such mortgage, and TENANT'S
obligations hereunder shall not be affected in any way whatsoever by any such
proceeding.
TENANT, covenants and agrees, upon demand of the holder of any mortgage
duly recorded or recordable in the corresponding Registry of the Property or of
any receiver duly appointed by the foreclose any such mortgage, to pay to the
holder of any such mortgage or to such receiver, as the case may be, all rent
becoming due under this Lease after such demand, provided such holder of any
such mortgage or any such receiver complies with the obligations of LANDLORD
under this Lease.
TENANT, upon request of LANDLORD or any holder of any mortgage or lien
affecting the Premises, shall from time to time, deliver or cause to be
delivered to LANDLORD or such lien holder or mortgagee, within ten (10) working
days from date of demand a certificate duly executed and acknowledged in form
for recording, without charges, certifying, if true, or to extent true, that
this Lease is valid and subsisting and in full force and effect and LANDLORD is
not in default under any of the terms of this Lease.
THIRTY SEVEN: Late Payments and Payment by LANDLORD - In the event that
(i) TENANT makes late payment, or fails to make payments to LANDLORD, in whole
or in part, of the rent, or of the additional rent, or of any of the other
payments of money required to be paid by TENANT to LANDLORD, as stipulated in
this Lease, when and as due and payable; of if (ii) LANDLORD, without assuming
any obligation to do so, after any notice or grace period provided hereunder,
performs or causes to be performed, at the cost and expense of TENANT, any of
the acts or obligations agreed to be performed by TENANT, as stipulated in this
Lease, and TENANT fails to refund LANDLORD any amounts of money paid or incurred
by LANDLORD in performing of causing the performance of such acts or
obligations, when and as due and payable, TENANT undertakes and agrees to pay
LANDLORD as additional rent, interest on such lately paid or unpaid rents,
additional rent, and/or on such other payments of money required to be paid,
and/or such amounts of money required to be refunded, from and after the date
when payment thereof matured or became due and payable, until full payment, at
the rate of twelve (12%) per cent per annum, or if such 12% interest, is
unlawful, then and in such event, at the highest maximum prevailing rate of
interest on commercial unsecured loans as fixed by the board of Regulatory Rates
of Interest and Financial Charges, created under Law #1, approved October 15,
1973 (10 LPRA 998), as amended, or by any successor statute or regulation
thereof.
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THIRTY EIGHT: Abatement - If any substantial service or facility to be
provided by LANDLORD is unavailable for a period exceeding thirty (30) days and
LANDLORD has been notified of the same, should time unavailability of such
service render all or any portion of the Premises untenable, TENANT after the
aforesaid thirty (30) days, shall be entitled to an abatement of a portion of
the rent that shall reflect that portion of the Premises which is untenable,
provided the damage to the service or facility is not attributable to the act or
neglect of TENANT or the employees, servants, licensees, visitors, assigns or
undertenants of TENANT.
THIRTY NINE: Fire or other Casualty - If before or during the term of this
Lease, the Premises shall be damaged by fire or other casualty, LANDLORD after
written notice thereof is given by TENANT, shall repair the same with reasonable
dispatch after notice to it of the damage, due allowances being made for any
delay due to causes beyond the LANDLORD'S reasonable control, provided, however,
that LANDLORD shall not be required to repair or replace any furniture,
furnishings or other personal property which TENANT may have placed or installed
or which it may be entitled or required to remove from the Premises. LANDLORD
shall proceed with due diligence to obtain the corresponding insurance
adjustment of the loss and TENANT shall fully cooperate with LANDLORD and assist
in the adjustment of the loss. Until such repairs are completed, and provided
such damage or other casualty is not attributable to the act or neglect of
TENANT or the employees, servants, licensees, visitors, assigns or undertenants
of TENANT, the rent required to be paid pursuant to Article FOUR hereof, shall
be abated in proportion to the part of the Premises which are untenable. If the
building, be so damaged that LANDLORD shall decide to demolish and/or to
reconstruct the building, in whole or in part, LANDLORD may terminate this Lease
by notifying TENANT within a reasonable time after such damage of LANDLORD'S
election to terminate this Lease, such termination to be effective immediately
if the term shall not have commenced or on a date to be specified in such notice
if given during the term. In the event of the giving of such notice during the
term of this Lease, the rent shall be apportioned and paid up to the time of
such fire or other casualty if the Premises are damaged, or up to the specified
date of termination if the Premises are not damaged and LANDLORD shall not be
otherwise liable to TENANT for the value of the unexpired term of this Lease.
FORTY: Default Provisions - If, during the term of this Lease, TENANT
shall: (i) apply for or consent in writing to, the appointment of a receiver,
trustee or liquidator of TENANT or of all or substantially all of its assets or
(ii) seek relief under the Bankruptcy Act, or admit in writing its inability to
pay its debts as they become due, or (iii) make a general assignment for the
benefit of this creditors, or (iv) file a petition case or an answer seeking
relief (other than a reorganization not involving the liabilities of TENANT) or
arrangement with creditors, or take advantage of any insolvency law, or (v) file
an answer admitting the material allegations of a case filed against it in any
bankruptcy, reorganization or insolvency proceeding or, if an order, judgment or
decree shall be entered by any court of competent jurisdiction on the
application of TENANT or creditor adjudicating TENANT a bankrupt or insolvent,
or approving a petition seeking reorganization of TENANT (other than a
reorganization not involving the liabilities of TENANT) or appointment of a
receiver, trustee or liquidator of TENANT, or of all or substantially all its
assets, and such order, judgment or decree, shall continue stayed and in effect
for any period of sixty (60) consecutive days, their term of this Lease and all
right, title and interest of TENANT hereunder shall expire as fully and
completely as if that day were the date
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herein specifically fixed for the expiration of the term, and TENANT will then,
quit and surrender the Premises to LANDLORD, but TENANT shall remain liable as
hereinafter provided.
If, during the term of this Lease: (i) TENANT shall default in fulfilling
any of the covenants of this Lease (other than the covenants for the payment of
rent or additional rent), or of any other standing contract with LANDLORD or
(ii) if, during the term of this Lease TENANT shall abandon, vacate, or remove
from the Premises the major portion of the goods, wares, equipment, or
furnishings usually kept on said premises, of (iii) this Lease, without the
prior consent of LANDLORD, shall be encumbered, assigned or transferred in any
manner in whole or in part or shall, by operation of law, pass to or devolve
upon any third party, except as herein provided, or (iv) if TENANT is in
violation of laws, rules and regulations regarding minimum wages of its
employees, or of any other law, rules and regulations applicable to his
operations, but which have not been specifically mentioned in this Lease,
LANDLORD may give to TENANT notice of any such default or the happening of any
event referred to above and if at the expiration of thirty (30) days after the
service of such an notice the default or event upon which said notice was based
shall continue to exist, or in the case of a default which cannot with due
diligence be cured within a period of thirty (30) days, if TENANT fails to
proceed promptly after the service of such notice and with all due diligence to
cure the same and thereafter to prosecute the curing of such default with all
due diligence (it being intended that in connection with a default not
susceptible of being cured with due diligence within thirty (30) days that the
time of TENANT within which to cure the same shall be extended for such period
as may be necessary to complete the same with all due diligence), LANDLORD may
give to TENANT a notice of expiration of the term of this Lease as of the date
of the service of such second notice, and upon the giving of said notice of
expiration the term of this Lease and all right, title and interest of TENANT
hereunder shall expire as full and completely as if that day were the date
herein specifically fixed for the expiration of the term, and TENANT or any
party holding under his will then quit and surrender the Premises to LANDLORD,
but TENANT shall remain liable as hereinafter provided.
If, (i) TENANT shall default in the payment of the rent, the additional
rent, or of any other payment as required under this Lease and such default
shall continue for ten (10) working days after notice thereof by LANDLORD, of
(ii) if the default of the payment of the rent, continues for thirty (30) days
from the date any such payment became due and payable (AUTOMATIC DEFAULT
TERMINATION), or (iii) if this Lease shall terminate as in Paragraph one and two
of this Article provided, this lease shall terminate and TENANT will then quit
and surrender the Premises to LANDLORD, but TENANT shall remain liable as
hereinafter provided, LANDLORD or LANDLORD'S agents and servants may immediately
or at any time thereafter re-enter the Premises and remove all persons and all
or any property therefrom, whether by summary dispossess proceedings or by any
suitable action or proceeding at law, or with the license and permission of
TENANT, which shall under this Contract be deemed given upon expiration of the
strict thirty (30) days notice period of subdivision of paragraph Two of this
Article, without LANDLORD being liable to indictment, prosecution or damages
therefor and repossess and enjoy the Premises with all additions, alterations,
and improvements.
If TENANT shall fail to take possession of the Premises within ten
(10) days after the commencement of the term of this Lease, of if TENANT shall
vacate and abandon the
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Premises, LANDLORD shall have the right, at LANDLORD'S option, to terminate this
Lease and the term hereof, as well as all the right, title and interest of
TENANT hereunder, by giving TENANT five (5) days notice in writing of such
intention, and upon the expiration of the time fixed in such latter notice, if
such default be not cured prior thereto, this lease and the term hereof, as well
as all the right, title and interest of TENANT hereunder, shall wholly cease and
expire in the same manner and with the same force and effect (except as to
TENANT'S liability) as if the date fixed by such latter notice were the
expiration of the term herein originally granted; and TENANT shall immediately
quit and surrender to LANDLORD the Premises and each and every part thereof and
LANDLORD may enter into or repossess the Premises, either by force, summary
proceedings or otherwise. The right granted to LANDLORD in this Article or any
other Article of this Lease to terminate this Lease, shall apply to any
extension or renewal of the term hereby granted, and the exercise of any such
right by LANDLORD during the term hereby granted, shall terminate any extension
or renewal of the term hereby granted and any right on the part of TENANT
thereto.
Upon the termination of this Lease by reason of any of the foregoing
event, or in the event of the termination of this Lease by summary dispossess
proceedings or under any provisions of law, nor or at any time hereafter, in
force by reason of, or based upon, or arising out of a default under or breach
of this Lease on the part of TENANT, or upon LANDLORD recovering possession of
the Premises in the manner or in any of the circumstances hereinbefore
mentioned, or in any other manner or circumstances whatsoever, whether with or
without legal proceedings, by reason of, or based upon, or arising out of a
default under or breach of this Lease on the part of TENANT, LANDLORD, at its
option, but without assuming any obligation to do so in any case, may at any
time, and from time to time, relet the Premises or any part or parts thereof for
the account of TENANT or otherwise on such terms as LANDLORD may elect,
including the granting of concessions, and receive and collect the rents
therefor, applying the same at a rental not higher than the one stipulated in
this Contract, first to the payment of such reasonable expenses as LANDLORD may
have incurred in recovering possession of the Premises, including reasonable
legal expenses, and for putting the same into good order or condition or
preparing or altering the same for re-rental, and expenses, commissions and
charges paid, assumed, or incurred by LANDLORD in and about the reletting of the
Premises or any portion thereof and then to the fulfillment of the covenants of
TENANT hereunder. Any such reletting herein provided for, may be for the
remainder of the term of this Lease or for a longer or shorter period or at a
higher or lower rental. In any such case, whether or not, the Premises or any
part thereof be relet, TENANT shall pay to LANDLORD the rent required to be paid
by TENANT up to the time of such termination for this Lease, and/or the full
rent provided for in the agreement for any holdover of such period after
termination and up to the surrender or recovery of possession of the Premises by
LANDLORD, as the case may be, and thereafter TENANT covenants and agrees, to pay
to LANDLORD until the end of the term of this Lease as originally demised the
equivalent of any deficiency amount of all the rent reserved herein, less the
net avails of reletting, if any, as specified hereinabove in this Article and
the same shall be due and payable by TENANT to LANDLORD as provided herein, that
is to say, TENANT shall pay to LANDLORD the amount of any deficiency then
existing.
FORTY ONE: LANDLORD'S Remedies - In the event TENANT shall default in the
performance of any of the terms, covenants or provisions herein contained,
LANDLORD
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may , but without the obligation to do so, perform the same for the account of
TENANT and any amount paid or expense incurred by LANDLORD in the performance of
the same shall be repaid by TENANT on demand. In the event of a breach or
threatened breach by TENANT or any subtenant or other person holding or claiming
under TENANT of any of the covenants, conditions or provisions hereof, LANDLORD
shall have the right of injunction to restrain the same, and the right to invoke
any remedy allowed by law or in equity as if specific remedies, indemnity or
reimbursement were not herein provided for. The rights and remedies given to
LANDLORD in this Lease are distinct, separate and cumulative, and no one of
them, whether or not exercised by LANDLORD, shall be deemed to be a waiver, or
an exclusion of any of the others.
FORTY TWO: Notice of Default - Anything in this Lease to the contrary
notwithstanding, it is specifically agreed that there shall be no enforceable
default against LANDLORD under any provision of this Lease, unless notice of
such default be given by TENANT to LANDLORD in which TENANT shall specify the
default or omission complained of, and LANDLORD shall have thirty (30) days
after receipt of such notice in which to remedy such default, or if said default
or omission shall be of such a nature that the same cannot be cured within said
period, then the same shall not be an enforceable default if LANDLORD shall have
commenced taking the necessary steps to cure or remedy said default within the
said thirty (30) days and diligently proceeds with the correction thereof.
FORTY THREE: Capitalization - For the purpose of this Contract,
specifically of Article SIX, Capitalization includes the total of owner's equity
sources (preferred stock, common stock and surplus accounts)plus long-term
debts, it being agreed and understood that the amortization of any such debt
shall in no way diminish the amount originally determined as capitalization.
FORTY FOUR: Disclosure of Information - TENANT agrees to furnish to
LANDLORD within ninety (90) days after the expiration of each fiscal year of
TENANT, an annual statement certified by an independent Certified Public
Accountant showing as of the end of each such fiscal year: (i) TENANT'S paid-in
capital, (ii) long-term debts and capitalization as required by Articles SIX and
FORTY THREE hereof, (iii) investment in machinery and its capacity to provided
employment, (iv) taxes (including Social Security taxes) paid, and (v) any other
information as required by this Lease.
In the event such statement is not field with LANDLORD as herein
provided, LANDLORD may obtain such information from TENANT at TENANT'S expense,
and for such purpose TENANT shall make available to LANDLORD'S designated
representatives, its books of accounts and other necessary data and facilities,
all of which shall be provided and made available at TENANT'S principal office
in Puerto Rico.
FORTY FIVE: Automatic Renewal - In the event TENANT does not vacate the
Premises in the manner and under the conditions hereinbefore provided, within
ninety (90) days after the normal expiration of the term hereof, LANDLORD shall
have the option to be exercised at any time thereafter, to notify TENANT that
the lease herein has been renewed for an additional term of ten (10) years from
the date of the last normal expiration of the term hereof and, in such
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event, the parties agree that this Contract shall be held to have been renewed
and to continue in full force and effect for such additional term of ten (10)
years upon the mere mailing of such notice by LANDLORD to TENANT. This provision
shall in no way prejudice, affect or deny any right which LANDLORD may otherwise
have because, or at the time, of any such termination of the term hereof,
particularly whenever LANDLORD does not exercise such option; it being agreed
and understood that such renewal shall be upon the same terms and conditions
contained herein except that the rental rate to be charged shall be the rate
then currently being charged by LANDLORD for similar building in the area, but
in no event shall it be less than the rate herein stipulated.
FORTY SIX: Partial Invalidity and Applicable Law - If any term or
provisions of this Lease or the application thereof to any person or
circumstances shall, to any extent, be invalid or unenforceable, the remainder
of this Lease and the application of such term or provision to persons or
circumstances other than those as to which it is held invalid or unenforceable,
shall not be affected thereby, and each term and provision of this Lease shall
be valid and be enforceable to the fullest extent permitted by law. This
Contract is entered into and shall be interpreted in accordance with the laws of
the Commonwealth of Puerto Rico.
FORTY SEVEN: Lease Termination and Holding Over - Upon the expiration or
termination of this Lease:
(i) TENANT shall inform LANDLORD in writing of TENANT'S activities
affecting each or any environmental area of concern during the period of
TENANT'S operation, including a description from an environmental standpoint of
the physical conditions of the premises and landsite. TENANT shall also inform
to LANDLORD in writing of any environmental regulatory violations, compliance
plans, permits, closure plans, cleanup actions or any other regulatory
procedures related to the operation. In the event that the information reveals
TENANT'S noncompliance of any of the above, or in the event that a physical
inspection of the Premises and adjacent areas by LANDLORD, or any other source
of information reveal the possibility of contamination, in that event, TENANT
shall, at LANDLORD'S request submit a plan of action with the appropriate
financial provisions to execute it. LANDLORD shall hold TENANT responsible for
any and all environmental damage, or any damage to third parties as a result of
any environmental damage, or any remedial action (including monitoring) to be
performed at landsite or otherwise as a result of TENANT'S operations after
termination of Lease and until such a time as complete remediation or
fulfillment of TENANT'S obligations is effected. In case TENANT fails to comply
with the foregoing provisions, LANDLORD may elect to effect them at TENANT'S
expense and responsibility.
(ii) TENANT shall remove all hazardous and toxic substances belonging to
TENANT or to a third party. TENANT shall also remove all other property of
TENANT and that of any third party and failing so to do, TENANT hereby appoints
LANDLORD its agent so that LANDLORD may cause all of the said property to be
removed at the expense and risk of TENANT. TENANT covenants and agrees to give
full and timely observance and compliance to this covenant to remove all its
property and surrender the Premises broom clean. TENANT hereby agrees to pay all
reasonable necessary cost and expenses thereby incurred by LANDLORD. If, as the
sole result of the removal of TENANT'S property any portion of the
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Additional Premises or of the building of which they are a part, are damaged,
TENANT shall pay to LANDLORD the reasonable cost of repairing such damages
unless due to the gross negligence of LANDLORD, its agents, servants, employees
and contractors. TENANT'S obligation to observe or perform this covenant shall
survive the expiration or other termination of the term of this Lease.
FORTY EIGHT: Change of Address - TENANT shall promptly notify LANDLORD of
any change it the addresses other than those required from it in Article SEVEN
hereof.
FORTY NINE: TENANT will indemnify LANDLORD for any and all liability,
loss, damages, expenses, penalties and/or fines, and any additional expenses
including any attorney fees LANDLORD may suffer as a result of claims, lawsuits,
demands, administrative orders, costs, resolutions or judgements against it
arising out of negligence and/or failure of TENANT or those acting under TENANT
to conform to the statutes, ordinances, or other regulations or requirements of
any governmental authority, be it Federal, of the Commonwealth of Puerto Rico,
its instrumentalities or public corporations, in connection with the performance
of this Lease.
FIFTY: Anything contained in this Contract to the contrary
notwithstanding, in the event that TENANT requires additional volume of water
and/or pressure as is now available within the area wherein the demised premises
are located, it shall be at its own cost and expense the construction and/or
installation of such improvements and/or facilities as may be necessary to or
convenient and/or required by the Puerto Rico Aqueduct and Sewer Authority to
increase such volume and/or pressure; it being agreed and understood, however,
that such construction and/or installation shall in no event be commenced until
after LANDLORD'S written approval has first been requested and obtained.
FIFTY-ONE: TENANT hereby acknowledges that in the industrial park there
are other industries; therefore TENANT hereby specifically agrees and undertakes
to take such steps and install such equipment as may be necessary to prevent
that any hazard and/or noise which may be created by its operations may in any
way or manner unduly affect the operations of the other industries and therefore
TENANT hereby releases and saves LANDLORD harmless from any and all claims or
demands arising therefrom or in connection therewith.
FIFTY-TWO: TENANT shall, at its own cost and expense, install a fire
protection system and shall obtain the endorsement and approval from said Fire
Department for such installation. TENANT must also provide security measures to
prevent or reduce fire hazard due to the storage of inflammable materials and
products.
FIFTY-THREE: TENANT shall procure and obtain a permit for the operation of
a solid waste emission source from the Environmental Quality Board and
authorization for the Office of Solid Waste and/or from the Municipality of
Anasco for the final disposition of wastes.
FIFTY-FOUR: TENANT, at its own cost and expense, shall implement the
necessary measures and install the control equipment to maintain the atmospheric
air quality levels in compliance with the environmental laws and regulations of
the Environmental Quality
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Board and the Environmental Protection Agency, as promulgated by any succeeding
law or regulations.
FIFTY-FIVE: It is hereby agreed and understood that TENANT shall take the
necessary steps to comply with the regulations and law requirements of the
PUERTO RICO OCCUPATIONAL SAFETY AND HEALTH OFFICE (PROSHO).
FIFTY-SIX: TENANT shall, at its own cost and expense, construct and/or
install all necessary equipment required to connect the building's electrical
system to the Puerto Rico Electrical Power Authority's electrical distribution
lines, such connection to be made in compliance with the requirement of PREPA.
FIFTY-SEVEN: TENANT must comply with the rules and regulations of
pre-treatment established by the Puerto Rico Aqueduct and Sewer Authority, the
Environmental Quality Board and the Environmental Protection Agency related to
the effluent industrial discharge in the sanitary sewer system and their final
disposition. Also, any improvement necessary to provide pre-treatment facilities
for the above mentioned effluents shall be at TENANT'S own cost and expense and
in coordination and with the approval of LANDLORD'S Engineering and Maintenance
Departments.
FIFTY-EIGHT: It is hereby agreed and understood that TENANT, at its own
cost and expense, shall install an air conditioning system in the demised
premises, in the event TENANT needs to use and/or install it in his process.
Such air conditioning system shall be considered as a special facility from
LANDLORD, and it shall be installed in coordination with LANDLORD'S Engineering
and Maintenance Departments.
FIFTY-NINE: TENANT shall obtain a permit from the Public Service
Commission to situate the propage gas and diesel tank. The installation of said
tank shall be in coordination with LANDLORD'S (MAINTENANCE OR ENGINEERING)
Department.
SIXTY: Inasmuch as TENANT represented that in order to carry out its
operations it is necessary to install and operate a emergency generator; it is
hereby specifically agreed and understood that:
(1) Such installation shall be made in coordination and with the
approval of LANDLORD;
(2) TENANT shall request and obtain from the Environmental Quality
Board,, the necessary permit to operate the said installation and, thereafter,
shall abide by and comply with all requisites imposed by the said Board for such
operations.
It being further agreed and understood that non-compliance by TENANT
with the foregoing provisions shall constitute an additional event of default
under the provisions of this Contract.
SIXTY-ONE: If applicable, TENANT also, shall at its own cost and expense,
obtain the endorsement and approval from the FEDERAL DRUG AND FOOD
ADMINISTRATION concerning the salubrity aspects to be implanted in its
operations.
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SIXTY-TWO: Anything contained in this Contract to the contrary
notwithstanding, if required by TENANT, it shall be at TENANT'S own cost and
expense the construction and/or installation of a sprinkler system; it being
agreed and understood that such construction shall be accordance with the
provisions hereof.
SIXTY-THREE: LANDLORD agrees to indemnify and save harmless TENANT,
TENANT'S successors and assigns and TENANT's present and future officers,
directors, employees and agents (collectively "Indemnitees") from and against
any and all liabilities, penalties, fines, forfeitures, demands, damages,
losses, claims, causes of action, suits, judgments, and costs and expenses
incidental thereto (including cost of defense, Settlement, reasonable attorney's
fees, reasonable consultant's fees and reasonable expert fees), which TENANT or
any or all of the indemnitees may hereafter suffer, incur, be responsible for or
disburse as a result of:
1. any governmental action, order, directive, administrative proceeding
or ruling;
2. personal or bodily injuries (including death) or damage (including
loss of use) to any premises (public or private);
3. cleanup, remediation, investigation or monitoring of any pollution
or contamination of or adverse effects on human health or the
environment; or
4. any violation or alleged violation of laws, statutes, ordinances,
orders, rules or regulations of any governmental entity or agency
(collectively "Environmental Liabilities") directly or indirectly caused by or
arising out of any Environmental Hazards existing on or about the premises
except to the extent that any such existence is caused by TENANT'S activities on
the premises. The term "Environmental Hazardous" shall be defined as hazardous
substances, hazardous wastes, pollutants, asbestos, polycholinated biphenyls
(PCBs), petroleum or other fuels (including crude oil or any faction or
derivative thereof) and underground storage tanks. The term "hazardous
substances" shall be as defined in the Comprehensive Environmental Response,
Compensation, and Liability Act (42 U.S.C. Section 9601 et sq.) (CERCLA), and
any regulations promulgated pursuant thereto. The term "hazardous wastes" shall
be as defined in the Resource Conservation and Recovery Act (42 U.S.C. Section
6901 et seq.) (RCRA), and any regulations promulgated pursuant thereto. The term
"pollutants" shall be as defined in the Clean Water Act (33 U.S.C. Section 1251
et seq.), and any regulations promulgated pursuant thereto. This provision shall
survive termination of the lease.
TENANT agrees to indemnify and save harmless LANDLORD, LANDLORD's
successors and assigns and LANDLORD'S present and future officers, directors,
employees and agents (collectively "Indemnities") from and against any and all
liabilities, penalties, fines, forfeitures, demands, damages, losses, claims,
causes of action, suits, judgments, and costs and expenses incidental thereto
(including cost of defense, settlement, reasonable attorney's fees, reasonable
consultant fees and reasonable expert fees), which LANDLORD or any or all of the
Indemnities may hereafter suffer, incur, be responsible for or disburse as a
result of any Environmental Liabilities directly or indirectly caused by or
arising out of any Environmental Hazardous existing on or about the premises but
only to the extent that any such existence is caused by TENANT'S activities on
the premises. This provision shall survive termination of the Lease.
In the event any Environmental Hazards are found at any time to be in
existence or about the premises other than any Environmental Hazards whose
existence is caused by TENANT'S activities on the premises, TENANT shall have
the right to terminate this Lease by so notifying
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LANDLORD in writing. Notwithstanding anything to the contrary contained herein,
TENANT shall not be required to pay for any environmental Liability as operating
expenses, additional rental or otherwise if TENANT is not responsible for such
expenses pursuant to this paragraph.
SIXTY-FOUR: LANDLORD hereby leases to TENANT in its present condition and
during the term of this lease Lot Number 6 (L-154-2-62-06-00). Such Lot shall be
used by TENANT exclusively for parking purposes. Also, it is agreed that TENANT
shall provide and/or construct at its own cost and expense such improvements as
may deem necessary to operate said parking. However, TENANT shall not use said
lot for profit purposes, sublet the same, nor permit the use of same or part of
same to any public or private entity without the previous written consent of
LANDLORD with the exception of LANDLORD's authorization to sublease part of said
Lot to Baxter Healthcare Corp., established in Lot Number 5, for parking
facilities for Baxter's employees. It is also agreed that TENANT shall always
maintain, provide and keep in force the necessary insurance coverage required by
LANDLORD's Insurance Department during the term of the lease.
SIXTY-FIVE: In is hereby agreed and understood that any special facilities
property of LANDLORD, installed on the demises, shall be included, as part of
the Contract by Supplenent and Amendment to Lease, once Landlord's Conservation
and Engineering Offices make the necessary inspection and inventory of said
facilities in coordination with TENANT.
SIXTY-SIX: This Contract may be resolved by LANDLORD previous notification
to TENANT after the first sixty (60) days of the term of this Lease, if TENANT
does not obtain a favorable recommendation or endorsement of the lease and or
use of the premises from the Puerto Rico Environmental Quality Board, the Puerto
Rico Aqueduct and Sewer Authority (PRASA) and LANDLORD's Planning and
Environmental Offices. LANDLORD's undertaking under this terms and conditions in
no event is to be considered as a precedent or as creating a custom of leasing
its properties under such conditions.
SIXTY-SEVEN: TENANT certifies and guarantees that at the date of
subscribing this Contract it does not have any tax debt pending with the
Commonwealth of Puerto Rico.
TENANT also certifies and guarantees that at the date of execution of this
contract it has paid unemployment insurance compensation, temporary disability
insurance, and the driver's social security (as applicable); or is complying
with a payment plan duly approved.
TENANT acknowledges that this is an essential condition of the Contract
and if the above certification is incorrect in any of its parts, LANDLORD may
cancel this contract.
SIXTY-EIGHT: LANDLORD reserves the right to audit the leased premises from
time to time during the term of this contract, as LANDLORD may deem necessary,
in order to assess all aspects of the environmental condition of said premises
and TENANT'S compliance with all environmental legislation and regulations,
under Commonwealth and federal law; TENANT hereby agrees to provide access to
all areas and structures of the promises for these purposes, upon LANDLORD's
request, and to also provide access to all books, records, documents and
instruments which LANDLORD may deem necessary in order to fully audit the
premises as herein stated.
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SIXTY-NINE: TENANT shall furnish to LANDLORD, in addition to any other
information, documents or instruments that may be required in this contract:
a) Prompt written notice of the occurrence of any event that by law or
regulation would require any oral, telephonic or written notice or
communication to the US Environmental Protection Agency and/or to
the Puerto Rico Environmental Quality Board, or any successor
agency, and copies of all orders, notices or other communications
and reports received, made or given in connection with any such
event, and any enforcement action taken against TENANT or against
any property owned, occupied or used by TENANT;
b) Annually certifications subscribed by an authorized representative
designated by TENANT, as to the environmental condition of the
leased premises, containing the information required by LANDLORD,
which is specified in the form included as schedule "B" of this
contract, or any subsequent modification thereto;
c) Any other information and documents relating to TENANT'S compliance
with environmental legislation and regulations under federal and
commonwealth laws.
SIXTY-NINE: TENANT hereby guarantees to LANDLORD that, neither he, or any
of its stockholders, in case of a corporation, owes any money to LANDLORD under
its corporate name or any other corporate name and/or person.
SEVENTY: TENANT shall not transfer, lease, burden or dispose of in any way
of the equipment used on its operations without the previous written notice of
LANDLORD, except in the ordinary course of business and provided that TENANT is
not on default.
SEVENTY-ONE: TENANT agrees to submit to LANDLORD within thirty (30) days
from the date of execution of this Contract: (a) evidence of its registration in
the Department of State of the Commonwealth of Puerto Rico and the name and
address of its resident agent; and (b) a certificate of a resolution of its
Board of Directors either authorizing or ratifying the execution of this
Contract.
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IN WITNESS WHEREOF, LANDLORD and TENANT have respectively signed upon
proper authority this Lease, this 30th day of June , 1994.
PUERTO RICO INDUSTRIAL DEVELOPMENT COMPANY
SSP-66-0292871
BY: [signed]
-----------------------------------
HEYER-SCHULTE NEUROCARE, INC.
SSP-36-3951590
BY: [signed]
-----------------------------------
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SCHEDULE "A"
DESCRIPTION OF LANDSITE AND BUILDING
LOCATED AT ANASCO, PUERTO RICO
(L-154-3-69-07-0)
SITE FOR PROJECT NO. T-08100-68
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LANDSITE:
Parcel of land located at Anasco Industrial Park in the municipality of
Anasco, Puerto Rico with a surface area of 4,395.49 square meters, equivalent to
1.1183 "cuerdas".
It bounds: by the NORTH, with land owned by Francisco Lugo Lugo and Milton
Guzman Garcia; by the SOUTH, with a park street; by the EAST; with State Road
No. 402; and by the WEST, with lot No. 9 of the same industrial park.
ENCUMBRANCES:
It is affected by a 5.0 ft. wide right of way in favor of P.R.E.P.A.
running along its western boundary.
BUILDING NO. T-0810-0-68:
The building is a pitched roof type consisting of reinforced concrete
foundations, steel columns and steel girders supporting 30 feet long steel
joists which in turn support gage #22 standard galvanized steel deck covered by
1" fiberglass insulation and a 3 ply built-up roof.
The structure consists of a main floor 120'-11" x 90'-6" out to out
dimensions with an area of 10,943.26 sq. ft. of manufacturing space; one lean-to
30'-8" x 10'-6" for an area of 322.04 sq. ft. for sanitary facilities and a
loading platform 16'-0" x 10'-0" for an area of 160.00 sq. ft. All amounts to a
total area of 11,425.30 sq. ft. of covered floor space.
The floor consists of a 3 1/2" thick reinforced concrete slab with a
monolithic cement finish designed for a live load of 150 p.s.f.
Exterior walls are of concrete block plastered and painted, a 6'-1"
sprayed-on glazed finish is provided as wainscoat.
Windows are aluminum miami louvers throughout the building.
Clearance in the manufacturing area from finished floor to lowest part of
beams at the side eaves is 12'-2".
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DESCRIPTION OF LOT NO. 6
PUBLIC USE LOT L-154-2-62-06-0
LOCATED AT ANASCO INDUSTRIAL PARK
ANASCO, PUERTO RICO
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LANDSITE:
Parcel of land lot No. 6 (public use lot) located at Anasco, Puerto Rico.
It bounds: by the NORTH, with access street of the same industrial park;
by the SOUTH, with land owned by Sunc. Arraras; by the EAST; with State Road No.
402; and by the WEST, with lot No. 8 of the same industrial park,
It has a surface area of 2518.707 square meters, equivalent to 0.6408
cuerdas.
ENCUMBRANCES:
It is affected by a 5.0 ft. wide right of way in favor of P.R.E.P.A.
running along its western boundary.
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<PAGE>
SCHEDULE "B"
COMPLIANCE REPORT OF WITH
ENVIRONMENTAL REQUIREMENTS
In the period of ___________ to ___________
I. PERMITS
EXPIRATION RENEWAL DATE
PERMITS NUMBER DATE (IF APPLY)
II. COMPLIANCE ACTIONS
RESPONSE OF
REFERENCE/CASE NUMBER DATE DATE OF
III. CERTIFICATION
I certify, under penalty of law, that this document was prepared under my
supervision and direction; and that was based in my investigation by the persons
directly responsible of gathering the information, that the information here
submitted is, according to my best judgment, certain, complete and precise.
---------------------------
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SORRENTOVIEW
Industrial Real Estate Triple Net Sublease
(Lease Extension)
ARTICLE I
BASIC TERMS
This Article One contains the Basic Terms of this Sublease between the Landlord
and Tenant named below. This Sublease is subject to the Master Lease identified
in Section 2.1 below. Other Articles, Sections and Subsections of the Sublease
referred to in this Article One explain and define the Basic Terms and are to be
read in conjunction with the Basic Terms.
1.1 DATE OF SUBLEASE. April 1, 1993
1.2 LANDLORD. GAP Portfolio Partners, a New York general partnership.
Address of Landlord: c/o Richardson Partners, Inc., 10211 Pacific Mesa Blvd.,
Suite 4067, San Diego, CA 92121.
1.3 TENANT. Camino Laboratories, a Delaware corporation.
Address of Tenant: 5955 Pacific Center Blvd., San Diego, CA 92121
1.4 PREMISES. In consideration of the rents, covenants and agreement on the part
of the Tenant to be paid and performed, the Landlord subleases to the Tenant,
and Tenant subleases from Landlord those certain Premises identified on Exhibit
"A" attached hereto and by this reference incorporated herein. The Premises
contain approximately 19,897 square feet of space, and are situated within that
certain building ("Building") known as Building 6 (Entire Building) and located
at 5955 Pacific Center Blvd., San Diego, CA 92121. The Building is situated
within that certain project ("Project") known as SORRENTOVIEW, located at the
eastside of Pacific Mesa Boulevard, between Pacific Mesa Court and Pacific
Center Boulevard, San Diego, California, more particularly identified on Exhibit
"B" attached hereto and by this reference incorporated herein.
1.5 SUBLEASE TERM. Fifty-one (51) Months, beginning on April 1, 1993 or such
date as is specified in this Sublease, and ending on June 30, 1997 (See Article
Two).
1.6 PERMITTED USES. The Premises shall be used and occupied only for general
office, and medical equipment laboratory, assembly, and warehousing purposes.
(See Section 5.1).
1.7 TENANT'S GUARANTOR. (If none, so state.) None.
1.8 INITIAL SECURITY DEPOSIT. (See Section 3.3) Thirteen thousand one hundred
nine dollars ($13,109.00)
<PAGE>
1.9 RENT AND OTHER CHARGES PAYABLE BY TENANT.
1.9.1 BASE RENT. Thirteen thousand one hundred nine dollars ($13,109.00)
per month for the first twelve (12) months, as provided, in Section 3.1, and
shall be increased on each annual anniversary of the Commencement Date,
beginning one (1) year after the Commencement Date, by three percent (3%) of the
Base Rent in effect during the immediately preceding one year period.
1.9.2 OTHER PERIODIC PAYMENTS: ADDITIONAL RENT. (i) Real Property Taxes;
(ii) Utilities; (iii) Insurance Premiums; (iv) Common Area Charges; (v) Impounds
for Insurance Premiums and Property Taxes; (vi) Maintenance, Repairs and
Alterations (See Articles Four and Six). See Additional Provision Sublease
Rider.
1.10 RIDERS. The following Riders are attached to and made a part of this
Sublease. (If none, so state.)
1. Additional Provisions
2. Tenant Improvement
3. Option to Extend
ARTICLE II
SUBLEASE TERM
2.1 MASTER LEASE. Landlord is the ground lessee of the real property improved
with and identified as the Project under that certain Lease dated August 25,
1987, by and between the San Diego Unified School District ("District") as
lessor and Landlord as lessee (the "Master Lease"). The Master Lease provides
that Landlord may construct improvements and sublease portions thereof to
tenants. Accordingly, and subject to the Master Lease, Landlord is entering into
this sublease with Tenant.
2.2 SUBLEASE OF PREMISES FOR SUBLEASE TERM. Landlord subleases the Premises to
Tenant and Tenant subleases the Premises from Landlord for the Sublease Term.
The Sublease Term is for the period stated in Section 1.5 above and shall begin
and end on the dates specified in Section 1.5 above, unless the beginning or end
of the Sublease Term is changed under any provision of this Sublease. The
"Commencement Date" shall be the date specified in Section 1.5 above for the
beginning of the Sublease Term, unless advanced or delayed under any provision
of this Sublease.
2.3 DELAY IN COMMENCEMENT. Landlord shall not be liable to Tenant if Landlord
does not deliver possession of the Premises to Tenant on the first date
specified in Section 1.5 above. Landlord's non-delivery of the Premises to
Tenant on that date shall not affect this Sublease or the obligations of Tenant
under this Sublease. However, the Commencement Date shall be delayed until
possession of the Premises is delivered to Tenant. The Sublease Term shall be
extended for a period equal to the delay in delivery of possession of the
Premises to Tenant, plus the number of days necessary to end the Sublease Term
on the last day of a month. If Landlord does not deliver possession of the
Premises to Tenant within ninety (90) days after
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<PAGE>
the first date specified in Section 1.5 above, Tenant may elect to cancel this
Sublease by giving written notice to Landlord within ten (10) days after the
90-day period ends. If Tenant gives such notice, the Sublease shall be cancelled
and neither Landlord nor Tenant shall have any further obligations to the other.
If Tenant does not give such notice, Tenant's right to cancel the Sublease shall
expire and the Sublease Term shall commence upon the delivery of possession of
the Premises to Tenant. If delivery of possession of the Premises to Tenant is
delayed, Landlord and Tenant shall, upon such delivery, execute an amendment to
this Sublease setting forth the Commencement Date and expiration date of the
Sublease. For purposes of this Section 2.3, Landlord's delivery of possession of
the Premises shall mean the earlier of (i) the date Tenant occupies all or any
portion of the Premises, or (ii) the date upon which the Premises are
substantially complete in accordance with Exhibit A.
2.4 EARLY OCCUPANCY. If Tenant occupies the Premises prior to the Commencement
Date, Tenant's occupancy of the Premises shall be subject to all of the
provisions of this Sublease. Early occupancy of the Premises shall not advance
the expiration date of this Sublease. Tenant shall pay Base Rent and all other
charges specified in this Sublease for the early occupancy period.
2.5 HOLDING OVER. Tenant shall vacate the Premises upon the expiration or
earlier termination of this Sublease. Tenant shall reimburse Landlord for and
indemnify Landlord against all damages incurred by Landlord from any delay by
Tenant in vacating the Premises. If Tenant remains in possession of all or any
part of the Premises after the expiration of the term hereof, with or without
the express or implied consent of Landlord, such tenancy shall be from
month-to-month only and not a renewal hereof or an extension for any further
term, and in such case, Base Rent then in effect shall be increased by
twenty-five percent (25%) and other monetary sums due hereunder shall be payable
in the amount and at the time specified in this Sublease; and such
month-to-month tenancy shall be subject to every other term, covenant and
agreement contained herein, except that the month-to-month tenancy will be
terminable on thirty (30) days notice given at any time by either party.
2.6 SURRENDER OF PREMISES. Upon the termination of the Sublease, Tenant shall
surrender the Premises to Landlord in the condition specified in and according
to Section 6.7.
Article III
BASE RENT
3.1 TIME AND MANNER OF PAYMENT. Upon execution of this Sublease, Tenant shall
pay Landlord the Base Rent in the amount stated in Subsection 1.9.1 above for
the first month of the Sublease Term. On the first day of the second month of
the Sublease Term and each month thereafter, Tenant shall pay Landlord the Base
Rent in United States currency, in advance, without offset, deduction or prior
demand. The Base Rent shall be payable at Landlord's address or at such other
place as Landlord may designate in writing.
3.2 INCREASE. The Base Rent shall be increased at the times specified in
Subsection 1.9.1 above. Tenant shall be obligated to pay the new Base Rent from
its effective date until the next periodic increase without any prior notice
from Landlord.
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<PAGE>
3.3 SECURITY DEPOSIT INCREASES.
3.3.1 DEPOSIT. Upon the execution of this Sublease, Tenant shall deposit with
Landlord a cash Security Deposit in the amount set forth in Section 1.8
above. Landlord may apply all or part of the Security Deposit to any
unpaid rent or other charges due from Tenant or to cure any other defaults
of Tenant. If Landlord uses any part of the Security Deposit, Tenant shall
restore the Security Deposit to its full amount within ten (10) days after
Landlord's written request. Tenant's failure to do so shall be a material
default under this Sublease. No interest shall be paid on the Security
Deposit. Landlord shall not be required to keep the Security Deposit
separate from its other accounts and no trust relationship is created with
respect to the Security Deposit.
3.4 TERMINATION; ADVANCE PAYMENTS. Upon termination of this Sublease under
Article Seven (Damage or Destruction), Article Eight (Condemnation), or any
other termination not resulting from Tenant's default, and after Tenant has
vacated the Premises in the manner required by this Sublease, an equitable
adjustment shall be made concerning advance rent, any other advance payments
made by Tenant to Landlord, and accrued real property taxes, and Landlord shall
refund the unused portion of the Security Deposit to Tenant or Tenant's
successor.
Article IV
OTHER CHARGES PAYABLE BY TENANT
4.1 ADDITIONAL RENT. All charges payable by Tenant other than Base Rent are
called "Additional Rent." Unless this Sublease provides otherwise, all
Additional Rent shall be paid with the next monthly installment of Base Rent and
shall be in United States currency. The term "rent" shall mean Base Rent and
Additional Rent.
4.2 REAL PROPERTY TAXES.
4.2.1 PAYMENT OF TAXES. Tenant shall pay its proportionate share of all
real property taxes and general and special assessments, levied and assessed
against the Project of which the Premises are a part. Tenant's proportionate
share of real property taxes shall be the ratio that the total number of square
feet in the Premises bears to the total number of sub-leasable square feet in
the Project. Each year Landlord shall notify Tenant of Landlord's calculation of
Tenant's proportionate share of the real property taxes and together with such
notice shall furnish Tenant with a copy of the tax bill. If any supplemental tax
bills are delivered with respect to the Project, Landlord may notify Tenant of
Landlord's new calculation of Tenant's proportionate share of real property
taxes as soon as such supplemental tax bill is received. Subject to Section 4.8
below, Tenant shall reimburse Landlord for Tenant's proportionate share of the
Real Property Taxes semiannually no later than fifteen (15) days before the
taxing authority's delinquency date.
4.2.2 DEFINITION OF "REAL PROPERTY TAX." "Real Property Tax" means: (i)
any fee, license fee, license tax, commercial rental tax, levy, charge,
assessment, penalty or tax (other than inheritance or estate taxes) imposed by
any authority having the direct or indirect power to tax, including any City,
County, State or Federal government, or any school, agriculture, lighting,
drainage or other improvement district thereof, as against any legal or
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<PAGE>
equitable interest of Landlord in the Premises; (ii) any tax on the Landlord's
right to receive, or the receipt of, rent or income from the Premises or against
Landlord's business of leasing the Premises; (iii) any tax or charge for fire
protection, streets, sidewalks, road maintenance, refuse or other services
provided to the Premises by any governmental agency; (iv) any tax imposed upon
this transaction or based upon a reassessment of the Premises due to a change in
ownership or transfer of all or part of Landlord's interest in the Premises; and
(v) any charge or fee replacing any tax previously included within the
definition of Real Property Tax. "Real Property Tax" does not, however, include
Landlord's Federal or State income, franchise, inheritance or estate taxes.
4.2.3 JOINT ASSESSMENT. If the Premises is not separately assessed,
Tenant's share of the Real Property Tax payable by Tenant under Subsection 4.2.1
shall be determined from reasonably available information. Landlord shall make a
reasonable determination of Tenant's proportionate share of such real property
tax and Tenant shall pay such share to Landlord within fifteen (15) days after
receipt of Landlord's written statement.
4.2.4 PERSONAL PROPERTY TAXES.
(a) Tenant shall pay prior to delinquency all taxes charged against
trade fixtures, furnishings, equipment or any other personal property belonging
to Tenant. Tenant shall attempt to have such personal property taxed separately
from the Premises.
(b) If any such taxes on Tenant's personal property are levied
against Landlord or Landlord's Premises, or if the assessed value of the
Premises is increased by the inclusion therein of a value placed upon such
personal property or trade fixtures of Tenant, then Landlord, after written
notice to Tenant, shall have the right to pay the taxes based upon such
increased assessments, regardless of the validity thereof, but only under proper
protest if requested by Tenant in writing. If Landlord shall do so, then Tenant
shall, upon demand, repay to Landlord the taxes levied against Landlord, or the
proportion of such taxes resulting from such increase in the assessment. In any
such event, however, Tenant, at Tenant's sole cost and expense, shall have the
right, in the name of Landlord and with Landlord's full cooperation, to bring
suit in any court of competent jurisdiction to recover the amount of any such
taxes so paid under protest; any amount so recovered to belong to Tenant.
(c) If any of Tenant's personal property is taxed with the Premises,
Tenant shall pay Landlord the taxes for the personal property within fifteen
(15) days after Tenant receives a written statement from Landlord for such
personal property taxes.
4.2.5 TENANT'S RIGHT TO CONTEST TAXES. Tenant may attempt to have the
assessed valuation of the Premises reduced or may initiate proceedings to
contest the Real Property Tax. If required by law, Landlord shall join in the
proceedings brought by Tenant. However, Tenant shall pay all costs of the
proceedings, including any costs or fees incurred by Landlord. Upon the final
determination of any proceeding or contest, Tenant shall immediately pay the
excess Real Property Tax due, together with all costs, charges, interest and
penalties incidental to the proceedings. If Tenant does not pay the excess Real
Property Tax when due when due and contests such taxes, Tenant shall not be in
default under this Sublease for nonpayment of such taxes if Tenant deposits
funds with Landlord or opens an interest bearing
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account reasonably acceptable to Landlord in the joint names of Landlord and
Tenant. The amount of such deposit shall be sufficient to pay the excess Real
Property Tax plus a reasonable estimate of the interest, costs, charges and
penalties which may accrue if Tenant's action is unsuccessful, less any
applicable tax impounds previously paid by Tenant to Landlord. The deposit shall
be applied to the excess Real Property Tax due, as determined at such
proceedings. The excess Real Property Tax shall be paid under protest from such
deposit if such payment under protest is necessary to prevent the Premises from
being sold under a "tax sale" or similar enforcement proceeding.
4.3 UTILITIES. Tenant shall arrange for and pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer, telephone,
water and other utilities and services supplied to the Premises. Landlord will
cooperate in attempting to have each of the utilities supplied to the Premises
separately metered. However, if any such utilities or services are jointly
metered with other premises within the Project, Landlord shall make a reasonable
determination of Tenant's proportionate share of the cost of such utilities and
services, based on information reasonably available to Landlord, and Tenant
shall pay such share to Landlord within fifteen (15) days after receipt of
Landlord's written statement of such cost.
4.4 INSURANCE PREMIUMS.
4.4.1 LIABILITY INSURANCE. During the Sublease Term, Landlord shall
maintain a policy of comprehensive public liability insurance at Tenant's
expense, insuring Landlord against liability arising out of the ownership, use,
occupancy or maintenance of the Premises. The initial amount of such insurance
shall be at least $5,000,000.00, and shall be subject to periodic increase based
upon inflation, increased liability awards, recommendations of professional
insurance advisers, and other relevant factors. However, the amount of such
insurance shall not limit Tenant's liability nor relieve Tenant of any
obligation hereunder. The policy shall contain cross-liability endorsements, if
applicable, and shall insure Tenant's performance of the indemnity provisions of
Section 5.4. Tenant shall, at Tenant's expense, maintain such other liability
insurance as Tenant deems necessary to protect Tenant.
4.4.2 HAZARD AND RENTAL INCOME INSURANCE. During the Sublease Term,
Landlord shall, at Tenant's expense, maintain policies of insurance covering
loss of or damage to the Premises to the extent of at least one hundred percent
(100%) of its replacement value. Such policies shall provide protection against
all perils included within the classification of fire, extended coverage,
vandalism, malicious mischief, and any other perils which Landlord deems
necessary. Landlord may obtain insurance coverage for Tenant's fixtures,
equipment or building improvements installed by Tenant in or on the Premises.
Tenant shall, at Tenant's expense, maintain such primary or additional insurance
on its fixtures, equipment and building improvements as Tenant deems necessary
to protect its interest. During the Sublease Term, Landlord may also maintain a
rental income insurance policy at Tenant's expense, with loss payable to
Landlord in an amount equal to one year's Base Rent (as adjusted periodically),
estimated Real Property Taxes and insurance premiums. Tenant shall not do or
permit to be done anything which invalidates any such insurance policies.
4.4.3 PAYMENT OF PREMIUMS; INSURANCE POLICIES. Tenant shall pay its pro
rata share of the premiums for maintaining the insurance required by Subsections
4.4.1 and
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4.4.2. Tenant's pro rata share of all such premiums shall be based on
the same proportion as used for payment of taxes pursuant to Subsection 4.2.1
hereof. All such amounts will be due and payable upon ten (10) days written
notice.
4.4.4 INCREASE IN FIRE INSURANCE PREMIUM. Tenant agrees that it will not
keep, use, manufacture, assemble, sell or offer for sale in or upon the Premises
any article which may be prohibited by the standard form of fire insurance
policy. Tenant agrees to pay any increase in premiums for fire and extended
coverage insurance that may be charged during the term of this Sublease on the
amount of such insurance which may be carried by Landlord on said Premises or
the building of which it is a part, resulting from the acts or omissions of the
Tenant, its agents, servants or employees, or the use or occupancy of the
Premises by the Tenant or from the type of materials or products stored,
manufactured, assembled or sold by Tenant in the Premises, whether or not
Landlord has consented to the same. In determining whether increased premiums
are the result of Tenant's use of the Premises, a schedule, issued by the
organization making the insurance rate on the Premises, showing the various
components of such rate, shall be conclusive evidence of the several items and
charges which make up the fire insurance rate on the Premises.
4.4.5 WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive any and
all rights of recovery against the other or against the officers, employees,
agents and representatives of the other, on account of loss or damage occasioned
to such waiving party or its property or the property of others under its
control, to the extent that such loss or damage is insured against under any
fire and extended coverage insurance policy which either may have in force at
the time of such loss or damage. Tenant shall, upon the policies of insurance
required under this Sublease, give notice to the insurance carrier or carriers
that the foregoing mutual waiver of subrogation is contained in this Sublease.
4.5 COMMON AREAS.
4.5.1 DEFINITION; LOCATION. As used in this Sublease, "Common Areas" shall
mean all areas within the Project which are available for the common use of
tenants of the Project and which are not leased or held for the exclusive use of
tenants of the Project or which are not leased or held for the exclusive use of
Tenant or other tenants, including, but not limited to, parking areas,
driveways, sidewalks, loading areas, retaining walls, truck serviceways,
pedestrian malls, stairs, ramps, restrooms, access roads, corridors, landscaping
and planted areas. Landlord may from time to time change the size, location,
nature and use of the Common Areas, including converting Common Areas into
leasable areas, construction of additional parking facilities (including parking
structures) in the Common Areas, and increasing or decreasing Common Area land
and/or facilities. Tenant acknowledges that such activities may result in
occasional inconvenience to Tenant from time to time. Such activities and
changes shall be expressly permitted if they do not materially affect Tenant's
use of the Premises.
4.5.2 USE OF COMMON AREAS. Subject to other provisions of this Sublease,
Tenant shall have the nonexclusive right (in common with other tenants and all
others to whom Landlord has granted or may grant such rights) to use the Common
Areas for the purposes intended, subject to such reasonable rules and
regulations as Landlord may establish from time to time. Tenant shall abide by
such rules and regulations and shall use its best effort to cause others
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who use the Common Areas with Tenant's expressed or implied permission to abide
by Landlord's rules and regulations. At any time, Landlord may close any Common
Areas to perform any acts in and to the Common Areas as, in Landlord's judgment,
may be desirable to improve the Project. Tenant shall not, at any time,
intentionally interfere with the rights of Landlord, other tenants, or any other
person entitled to use the Common Areas.
4.5.3 VEHICLE PARKING. Tenant shall be entitled to use 3.8 vehicle parking
spaces in the Project for each 1,000 (One Thousand) square feet within the
Premises without paying any additional rent. Tenant's parking shall not be
reserved and shall be limited to vehicles no larger than standard size
automobiles or pickup utility vehicles. Tenant shall not cause large trucks or
other large vehicles to be parked within the Project or on the adjacent public
streets. Vehicles shall be parked only in striped parking spaces and not in
driveways, loading areas or other locations not specifically designated for
parking. If Tenant parks more vehicles in the parking area than the number
identified herein, such conduct shall be a material breach of the Sublease.
4.5.4 MAINTENANCE OF COMMON AREAS. Landlord shall maintain the Common
Areas in good order, condition and repair and shall operate the Project, in
Landlord's sole discretion, as a first class industrial/commercial real property
development. Tenant shall pay Tenant's pro rata share (as defined below) of all
costs incurred by Landlord for the operation and maintenance of the Common Area.
Common Area costs include, but are not limited to, costs and expenses for the
following: gardening and landscaping; pest extermination services; utilities,
water and sewage charges; maintenance of signs (other than Tenant's signs);
premiums for liability, property damage, fire and other types of casualty
insurance on the Common Areas and all Common Area improvements; all personal
properly taxes levied on or attributable to personal property used in connection
with the Common Areas; straight-line depreciation on personal property owned by
Landlord which is consumed in the operation or maintenance of the Common Areas;
rental or lease payments paid by Landlord for rented or leased personal property
used in the operation or maintenance of the Common Areas; the reasonable rental
value of any Common Area located within any building situated within the
Project; fees for management of the Project and Common Areas; fees for required
licenses and permits; repairing, resurfacing, repaving, maintaining , painting,
lighting, cleaning, refuse removal, security and similar items; reserves; and a
reasonable allowance to Landlord for Landlord's supervision of the Common Areas
(not to exceed five percent (5%) of the total of all other Common Area costs for
the calendar year). Landlord may cause any or all of such services to be
provided by third parties, or by entities associated with Landlord. Common Area
costs shall not include depreciation of real property which forms part of the
Common Areas. Landlord may, at Landlord's election, estimate in advance and
charge to Tenant monthly as Common Area costs, all real property taxes for which
Tenant is liable under the Sublease, all insurance premiums for which Tenant is
liable under the Sublease, and all maintenance and repair costs for which Tenant
is liable under the Sublease.
4.5.5 TENANT'S SHARE AND PAYMENT. Tenant shall pay Tenant's annual pro
rata share of all estimated Common Area costs, in advance, in monthly
installments on the first day of each month during the Sublease Term (prorated
for any fractional month). Tenant's pro rata share shall be calculated by
dividing the square foot area of the Premises, as set forth in Section 1.4 of
the Sublease, by the aggregate square foot area of the leaseable area within the
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Project, whether currently leased or not upon the date the computation is made.
Landlord may adjust such estimates at any time and from time to time based upon
Landlord's experience and reasonable anticipation of costs. Such adjustments
shall be effective as of the next rent payment date after notice to Tenant.
Within thirty (30) days after the end of each calendar year of the Sublease
Term, Landlord shall deliver to Tenant a statement prepared in accordance with
generally accepted accounting principles setting forth, in reasonable detail,
the actual Common Area costs paid or incurred by Landlord during the preceding
calendar year and Tenant's pro rata share. Upon receipt of such statement, there
shall be an adjustment between Landlord and Tenant with payment to or credit
given by Landlord (as the case may be) so that Landlord shall receive the entire
amount of Tenant's share of such costs and expenses for such period. Any changes
in the Common Area costs and/or the aggregate area leased or held for lease for
the exclusive use of all tenants of the Project during the Lease Term shall be
effective on the first day of the month after such change occurs.
4.5.5.1 ALTERNATIVE PAYMENT. Notwithstanding the foregoing, Landlord has
the right to notify Tenant on a monthly or other basis of the actual amount
Landlord has expended for all Common Area costs incurred during the previous
month or period. Such notice shall also set forth Tenant's pro rata share of
such actual costs. Upon receipt of such statement, Tenant shall pay with the
next monthly installment of rent Tenant's pro rata share of the actual Common
Area costs incurred during the previous month or period.
4.5.6 ADDITIONAL AREAS. In addition to the Common Areas and costs
associated therewith described in this Section 4.5, Landlord may, but is not
obligated to, provide certain additional spaces and areas within the Project
("Additional Areas") as (and included within the definition of) Common Areas.
The Additional Areas may include, but are not limited to, an office used by and
subject to the exclusive control of Landlord for leasing and/or managing the
Project, a conference room available on a reserved basis for use by tenants
within the Project during normal business hours, and a locker room facility for
use by tenants of the Project and their employees that are employed at the
Project. Common Area costs for which Tenant is liable for its pro rata share as
described in Section 4.5.4 shall include costs of operating and the reasonable
rental value of the space occupied by the Additional Areas.
4.6 LATE CHARGES. Tenant's failure to pay rent promptly may cause Landlord to
incur unanticipated costs. The exact amount of such costs is impractical or
extremely difficult to ascertain. Such costs may include, but are not limited
to, processing and accounting charges and late charges which may be imposed on
Landlord by any ground sublease, mortgage or trust deed encumbering the
Premises. Therefore, if Landlord does not receive any rent payment within five
(5) days after it becomes due, Tenant shall pay Landlord a late charge equal to
five percent (5%) of the overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of such late payment.
4.6.1 REPEATED LATE CHARGES. In the event that a late charge is payable
under this Sublease whether or not collected, for two installments of Base Rent
during any one calendar year of the Sublease Term, then the Base Rent shall
automatically become due and payable quarterly in advance, rather than monthly.
All monies paid to Landlord under this provision may be commingled with other
monies of Landlord and shall not bear interest.
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4.7 INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant to Landlord
which is not paid when due shall bear interest at the rate of ten percent (10%)
per annum or at the highest rate then permitted by law, whichever is less, from
the due date of such amount. However, interest shall not be payable on late
charges to be paid by Tenant under this Sublease. The payment of interest of
such amounts shall not excuse or cure any default by Tenant under this Sublease.
If the interest rate specified in this Sublease is higher than the rate
permitted by law, the interest rate is hereby decreased to the maximum legal
interest rate permitted by law.
4.8 IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. If requested by any
ground lessor or lender to whom Landlord has granted a security interest in the
Premises or the Project if Landlord deems it necessary in Landlord's sole and
absolute discretion, or if Tenant is more than ten (10) days late in the payment
of rent more than once in any consecutive twelve (12) month period, Tenant shall
pay Landlord a sum equal to one-twelfth (1/12) of the annual Real Property Tax
and/or insurance premiums payable by Tenant under this Sublease, together with
each payment of Base Rent. Such payment shall be paid to the ground lessor or
lender if required or held by Landlord in an impound account with no obligation
to pay the Tenant interest thereon. The amount of the Real Property Tax and
insurance premiums when unknown shall be reasonably estimated by Landlord. Funds
in the impound account shall be applied by Landlord to the payment of real
property taxes and insurance premiums when due. Any deficiency of funds in the
impound account shall be paid by Tenant to Landlord up on written request. If
Tenant defaults under this Sublease, Landlord may apply any funds in the impound
account to any obligation then due under this Sublease.
ARTICLE V
USE OF PREMISES
5.1 PERMITTED USES. Tenant may use the Premises only for the Permitted Uses set
forth in Section 1.6 above.
5.2 MANNER OF USE.
5.2.1 OBJECTIONABLE USES. Tenant shall not do or permit anything to be
done in or about the Premises which will in any way obstruct or interfere with
or infringe on the rights of other occupants of the building, or injure or annoy
them, or use or allow the Premises to be used for any improper, immoral, or
objectionable purposes; nor shall Tenant cause, maintain or permit any nuisance
in, on or about the Premises or commit or suffer to be committed any waste in,
on or about the Premises. Tenant shall not be liable to Landlord for any other
occupant's failure to so conduct itself.
5.2.2 NONPERMITTED USES. Tenant shall not do or permit to be done in or
about the Premises nor bring, keep or permit to be brought or kept therein,
anything which is prohibited by or 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, or which is prohibited by any standard form
of fire insurance policy or will in any way increase the existing rate of or
affect any fire or other insurance upon the building or any part thereof or any
of its contents, or cause a
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cancellation of any insurance policy covering the building or any part thereof
or any of its contents. Tenant shall comply with all governmental laws,
ordinances and regulations applicable to the Premises, and the requirements of
any Board of Fire Underwriters or other similar body now or hereafter
instituted, with any order, directive or certificate of occupancy issued
pursuant to any law, ordinance or regulation by any public officer insofar as
the same relates to or affects the condition, use or occupancy of the Premises,
including but not limited to, requirements of structural changes related to or
affected by Tenant's acts, occupancy or use of the Premises, all at Tenant's
sole expense. The judgment of any court of competent jurisdiction or the
admission of Tenant in any action against Landlord, whether or not Tenant is a
party to such action, shall be conclusive in establishing such violations
between Landlord and Tenant.
5.2.3 NOXIOUS ODORS. Tenant shall not use, keep or permit to be used or
kept any foul or noxious gas or substance in the Premises, or permit or suffer
the Premises to be occupied or used in a manner offensive or objectionable to
the Landlord or other occupants of the building by reason of noise, odors and/or
vibrations, or interfere in any way with other Tenants or those having business
therein, nor shall any animals or birds be brought in or kept in or about the
Premises or the building. Tenant shall not conduct any auction on the Premises.
No cooking shall be done or permitted by any Tenant on the Premises, nor shall
the Premises be used for the storage of merchandise, for washing clothes, for
lodging, or for any improper, objectionable or immoral purposes. Tenant shall
not use or keep in the Premises or the building any kerosene, gasoline or
inflammable or combustible fluid or material, or use any method of heating or
air conditioning other than supplied by Landlord.
5.2.4 PERMIT. Tenant shall obtain and pay for all permits required for
Tenant's occupancy of the Premises and shall promptly take all actions necessary
to comply with all applicable statutes, ordinances, rules, regulations, orders
and requirements regulating the use by Tenant of the Premises, including the
Occupational Health and Safety Act.
5.3 SIGNS AND AUCTIONS.
5.3.1 AUCTION. Tenant shall not conduct, or permit to be conducted, any
sale by auction on the Premises.
5.3.2 PROHIBITED SIGNS. Tenant shall not place, or suffer to be placed or
maintained, on any exterior door, wall or window of the Premises any sign,
awning or canopy, or advertising matter or other thing of any kind, and will not
place or maintain any decoration, lettering or advertising matter on the glass
of any window or door, or that can be seen through the glass, of the Premises
without Landlord's prior written approval. Tenant further agrees to maintain
such sign, awning, canopy, decoration, lettering, advertising matter or thing as
may be approved, in good condition and repair at all times.
5.3.3 SIGN CRITERIA. Landlord not required to install any sign for Tenant.
5.4 HAZARDOUS MATERIALS.
5.4.1 PROHIBITION OF STORAGE. Tenant shall not cause or permit any
Hazardous Material (as hereinafter defined) to be brought upon, kept or used in
or about the
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Premises or the Project by Tenant, its agents, employees, contractors or
invitees, other than those expressly permitted by Landlord and identified below.
If Tenant breaches the obligation stated in the preceding sentence, or if the
presence of Hazardous Materials on the Premises caused or permitted by Tenant
(including Hazardous Materials specifically permitted and identified below)
results in contamination of the Premises, or if contamination of the Premises by
Hazardous Material otherwise occurs for which Tenant is legally liable to
Landlord for damage resulting therefrom, then Tenant shall indemnify, defend and
hold Landlord, its agents and contractors harmless from any and all claims,
judgments, damages, penalties, fines, costs, liabilities, or losses (including
without limitation diminution in value of the Premises or any portion of the
Project, damages for the loss or restriction on use of rentable or usable space
or of any amenity of the Premises or Project, damages arising from any adverse
impact on marketing of space in the Premises or the Project, and sums paid in
settlement of claims, attorneys' fees, consultant fees and expert fees) which
arise during or after the Sublease Term as a result of such contamination. This
indemnification of Landlord by Tenant includes, without limitation, costs
incurred in connection with any investigation of site conditions or any cleanup,
remedial, removal, or restoration work required by any federal, state or local
governmental agency or political subdivision because of Hazardous Material
present in the soil or ground water on or under the Premises. Without limiting
the foregoing, if the presence of any Hazardous Material on the Premises caused
or permitted by Tenant results in any contamination of the Premises, Tenant
shall promptly take all actions at its sole expense as are necessary to return
the Premises to the condition existing prior to the introduction of any such
Hazardous Material to the Premises, provided that Landlord's approval of such
action shall first be obtained, which approval shall not be unreasonably
withheld so long as such actions would not potentially have any material adverse
long-term or short-term effect on the Premises or the Project.
5.4.2 TERMINATION OF LEASE. Notwithstanding the provisions of Paragraph
5.4.1 above, if (i) any anticipated use of the Premises by Tenant or any
proposed assignee or sublessee of Tenant involves generation, storage, use,
treatment or disposal of Hazardous Material, (ii) Tenant or the proposed
assignee or sublessee has been required by any prior landlord, lender or
governmental authority to take remedial action in connection with Hazardous
Material contaminating a property if the contamination resulted from such
party's action or use of the property in question, or (iii) Tenant or the
proposed assignee or sublessee is subject to an enforcement order issued by any
governmental authority in connection with the use, disposal or storage of a
Hazardous Material, Landlord shall have the right to terminate the Lease in
Landlord's sole and absolute discretion (with respect to any such matter
involving Tenant) and it shall not be unreasonable for Landlord to withhold its
consent to any proposed assignment or subletting (with respect to any such
matter involving a proposed assignee or sublessee).
5.4.3 TESTING. At any time prior to the expiration of the Sublease Term,
Landlord shall have the right to conduct appropriate tests of water and soil and
to deliver to Tenant the results of such tests to demonstrate that contamination
in excess of permissible levels has occurred as a result of Tenant's use of the
Premises. Tenant shall further be solely responsible for and shall defend,
indemnify and hold the Landlord, its agents and contractors harmless from and
against all claims, costs and liabilities including actual attorneys' fees and
costs, arising of or in connection with any removal, clean up, restoration and
materials required hereunder to return
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the Premises and any other property of whatever nature to their condition
existing prior to the appearance of the Hazardous Materials.
5.4.4 UNDERGROUND TANKS. If underground or other storage tanks storing
Hazardous Materials are located on the Premises or are hereafter placed on the
Premises by any party, Tenant shall monitor the storage tanks, maintain
appropriate records, implement reporting procedures, properly close any
underground storage tanks, and take or cause to be taken all other steps
necessary or required under the California Administrative Code, Title 23,
Chapter 3, Subchapter 16, "Underground Storage Tank Regulations," and Division
20, Chapter 6.7 of the California Health & Safety Code "Underground Storage of
Hazardous Substances," as they now exist or may hereafter be adopted or amended.
5.4.5 TENANT'S OBLIGATIONS. Tenant's obligations under this Paragraph 5.4
shall survive the termination of the Sublease. During any period of time
employed by Tenant after the Termination of this Sublease to complete the
removal from the Premises of any such Hazardous Materials, Lessee shall continue
to pay the full rental in accordance with this Sublease, which rental shall be
prorated daily.
5.4.6 DEFINITION OF "HAZARDOUS MATERIAL." As used herein, the term
"Hazardous Material" means any hazardous or toxic substance, material or waste
which is or becomes regulated by any local governmental authority, the State of
California or the United States Government. The term "Hazardous Material"
includes, without limitation, any material or substance which is (i) defined as
a "hazardous waste," "extremely hazardous waste" or "restricted hazardous waste"
under Sections 25115, 25117, 25122.7, or listed pursuant to Section 25140, of
the California Health and Safety Code, Division 20, Chapter 6.5 (Hazardous Waste
Control Law), (ii) defined as a "hazardous substance" under Section 25316 of the
California Health and Safety Code, Division 2, Chapter 6.8
(Carpenter-Presly-Tanner Hazardous Substance Account Act), (iii) defined as a
"hazardous material," "hazardous substance" or "hazardous waste" under Section
25501 of the California Health and Safety Code, Division 20, Chapter 6.95
(Hazardous Substances) (v) petroleum, (vi) asbestos, (vii) listed under Article
9 and defined as hazardous or extremely hazardous pursuant to Article 11 of
Title 22 of the California Administrative Code, Division 4, Chapter 20, (viii)
designated as a "hazardous substance" pursuant to Section 311 of the Federal
Water Pollution Control Act (33 U.S.C. Section 1317), (ix) defined as a
"hazardous waste'" pursuant to Section 1004 of the Federal Resource Conservation
and Recovery Act, 42 U.S.C. Section 6901 et. seq. (42 U.S.C. Section 6903), or
(x) defined as a "hazardous substance" pursuant to Section 101 of the
Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C.
Section 9601 et. seq. (42 U.S.C. Section 9601).
5.5 INDEMNIFICATION OF LANDLORD. Tenant shall indemnify Landlord and save it
harmless from and against any and all claims, actions, damages, liability and
expense in connection with loss of life , personal injury and/or damage to
property arising from or out of any occurrence in, upon or about the Premises,
or the occupancy or use by Tenant of the Premises or any part thereof, or
occasioned wholly or in part by any act of omission of Tenant, its agents,
contractors, employees, servants, tenants or concessionaires. Tenant shall
further indemnify and hold Landlord harmless from and against any and all claims
arising from any breach or default in performance of any obligation on Tenant's
part to be performed under the terms of this Sublease,
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or arising from any act, neglect, fault or omission of Tenant or its agents,
contractors, employees, servants, tenants or concessionaires, and from and
against all costs, attorneys' fees, expenses and liabilities incurred in
connection with such claim or any action or proceeding brought thereon. In case
any action or proceeding shall be brought against Landlord by reason of any such
claim, Tenant upon notice from Landlord shall defend the same at Tenant's
expense by counsel approved in writing by Landlord. Tenant, as a material part
of the consideration to Landlord hereby assumes all risk of damage to property
or injury to persons in, upon or about the Premises from any cause whatsoever
except (i) that which is caused by the failure of Landlord to observe any of the
terms and conditions of this Sublease where such failure has persisted for an
unreasonable period of time after written notice of such failure, and (ii)
Landlord's gross negligence or intentional misconduct. Tenant hereby waives all
its claims in respect thereof against Landlord.
5.6 LANDLORD'S ACCESS. Landlord or its agents may enter the Premises at all
reasonable times to show the Premises to potential buyers, investors or tenants
or other parties, or for any other purpose Landlord deems necessary. Landlord
shall give Tenant prior notice of such entry, except in the case of an
emergency. Landlord shall give Tenant prior notice of such entry, except in the
case of an emergency. Landlord may place customary "For Sale" or "For Sublease"
signs on the Premises.
5.7 QUIET POSSESSION. See "Quiet Possession and Nondisturbance" clause in the
Additional Provisions Sublease Rider.
5.8 WINDOW COVERING. Landlord shall select and install a standard window
covering for use throughout the Project, including all windows in the Premises.
ARTICLE VI
CONDITION OF PREMISES;
MAINTENANCE, REPAIRS AND ALTERATIONS
6.1 EXISTING CONDITIONS. Tenant accepts the Premises in its condition as of the
execution of the Sublease, subject to any other provisions of this Sublease and
to all recorded maters, laws, ordinances, and governmental regulations and
orders. Tenant acknowledge that neither Landlord nor any agent of Landlord has
made any representation as to the condition of the Premises or the suitability
of the Premises for Tenant's intended use.
6.2 EXEMPTION OF LANDLORD FROM LIABILITY; WAIVER. Landlord shall not be liable
for any damage or injury to the person, business (or any loss of income
therefrom), goods, wares, merchandise or other property of Tenant, Tenant's
employees, invitees, customers or any other person in or about the Premises,
whether such damage or injury is caused by or results from: (a) fire, steam,
electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other
defects of pipes, sprinklers, wires, appliances, plumbing, air condition or
lighting fixtures or any other cause; (c) conditions arising in or about the
Premises or upon other portions of any building of which the Premises is a part,
or from other sources or places; or (d) any act or omission of any other tenant
of any building of which the Premises is a part. Landlord shall not be liable
for any such damage or injury even though the cause of or the means of repairing
such
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damage or injury are not accessible to Tenant. Tenant, as a material part
of the consideration to be rendered to Landlord, hereby waives all claims
against Landlord for the foregoing damages from any cause arising at any time.
The provisions of this Section 6.2 shall not, however, exempt Landlord from
liability for Landlord's gross negligence or willful misconduct.
6.3 TENANT'S OBLIGATIONS.
6.3.1 MAINTENANCE AND REPAIR. Tenant shall keep the Premises (including
all nonstructural, interior and exterior areas, systems and equipment, all
glass, glazing, window moldings, partitions, doors, door hardware, interior
painting, fixtures and appurtenances thereof [including electrical, lighting,
plumbing and plumbing fixtures]) in good order, condition and repair during the
Sublease Term. Tenant shall promptly replace any portion of the Premises or
system or equipment in the Premises which cannot be fully repaired regardless of
whether the benefit of such replacement extends beyond the Sublease Term. Tenant
shall also maintain a preventive maintenance contract providing for the regular
inspection and maintenance of the heating and air conditioning system (including
leaks around ducts, pipes, vents, or other pa of the air conditioning) by a
licensed heating and air conditioning contractor. However, Landlord shall have
the right, upon written notice to Tenant, to undertake the responsibility for
preventive maintenance of the heating and air conditioning system, at Tenant's
expense.* It is the intention of the Landlord and Tenant that, at all times
during the Sublease Term, Tenant shall maintain the Premises in an attractive,
first class and fully operative condition. *in the event Landlord determines
that Tenant is maintaining the HVAC system in an unsatisfactory manner.
6.3.2 TENANT EXPENSE. All of Tenant's obligations to maintain and repair
shall be accomplished at Tenant's sole expense. If Tenant refuses or neglects to
repair properly as required hereunder and to the reasonable satisfaction of
Landlord, Landlord may, on ten (10) days' prior notice (except that notice shall
be required in case of emergency) enter the property and perform such repair and
maintenance on behalf of Tenant without liability to Tenant for any loss or
damage that may accrue to Tenant's merchandise, fixtures, or other property or
to Tenant's business by reason thereof, and upon completion thereof, Tenant
shall pay Landlord's costs for making such repairs plus five percent (5%) for
overhead upon presentation of bill therefor, as additional rent. Said bill shall
include interest at ten percent (10%) on said costs from the date of completion
of repairs by Landlord.
6.4 LANDLORD'S OBLIGATIONS. Landlord shall be responsible for the maintenance
and repair of structural portions of the Premises. As used herein, structural
portions of the Premises shall only refer to the foundation and slabs, exterior
walls, and exterior roof of the building in which the Premises is located. If
Landlord is required to make repairs to structural portions by reason of
Tenant's conduct or activities, Landlord may add the cost of such repairs to the
rent which shall thereafter become due. If Tenant refuses or neglects to repair
property as required hereunder, and to the reasonable satisfaction of Landlord
as soon as reasonably possible after written demand, Landlord may make such
repairs without liability to Tenant for any loss or damage that may accrue to
Tenant's merchandise, fixtures or other property or to Tenant's business by
reason thereof, and upon completion thereof, Tenant shall pay Landlord as
additional rent Landlord's cost for making such repairs, plus five percent (5%)
for overhead upon presentation of bill thereafter. Said bill shall include
interest at ten percent (10%) per year on said costs from the date of completion
of repairs by Landlord. The Tenant shall pay its pro rata
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share, computed in accordance with Subsection 4.2.1 hereof, of all repairs by
Landlord to the structural portions of the building where the Premises are
located. All such amounts shall be due and payable upon five (5) days' written
notice from Landlord.
6.5 ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
6.5.1 PROHIBITED ACTIONS. Tenant shall not make any alterations, additions
or improvements to the Premises without Landlord's prior written consent, except
for non-structural alterations which do not exceed Five Thousand Dollars
($5,000) in cost cumulatively over the Sublease Term and which are not visible
from the outside of any building of which the Premises is part. Landlord may
require Tenant to provide demolition and/or lien and completion bonds in form
and amount satisfactory to Landlord. Tenant shall promptly remove any
alterations, additions, or improvements constructed in violation of this
Subsection 6.5.1 upon Landlord's written request. All alterations, additions,
and improvements will be accomplished in good and workmanlike manner, in
conformity with all applicable laws and regulations, and by a contractor
approved by Landlord. Upon completion of any such work, Tenant shall provide
Landlord with "as built" plans, copies of all construction contracts, and proof
of payment for all labor and materials. Any additions to, or alterations of, the
Premises, except moveable furniture and trade fixtures, shall become at once a
part of the Premises and belong to Landlord. However, this shall not prevent the
Tenant from installing trade fixtures, machinery or other trade equipment in
conformance to all applicable ordinances of the above-specified city and county,
and the same may be removed upon the termination of this Sublease, provided the
Premises is not damaged by such removal, and Tenant shall not then be in default
under the terms and conditions of this Sublease.
6.5.2 PAYMENT BY TENANT. Tenant shall pay when due all claims for labor
and material furnished to the Premises. Tenant shall give Landlord at least
thirty (30) days' prior written notice of the commencement of any work on the
Premises. Landlord may elect to record and post notices of nonresponsibility on
the Premises.
6.5.3 FREEDOM FROM LIENS. Tenant shall keep the Premises, all other
property therein and the Building free from any liens arising out of any work
performed, material furnished or obligations incurred by Tenant, and shall
indemnify, hold harmless and defend Landlord from any liens and encumbrances
arising out of any work performed or materials furnished by or at the direction
of Tenant. In the event that Tenant shall not, within twenty (20) days following
the imposition of any such lien, cause such lien to be released of record by
payment or posting of a proper bond, Landlord shall have, in addition to all
other remedies provided herein and by law, the right, but no obligation, to
cause the same to be released by such means as it shall deem proper, including
payment of the claim giving rise to such lien. All such sums paid by Landlord
and all expenses incurred by it in connection therewith, including attorneys'
fees and costs, shall be payable to Landlord by Tenant on demand with interest
at the maximum rate allowed by law.
6.5.4 WRITTEN NOTIFICATION REQUIRED. Tenant will notify Landlord in
writing thirty (30) days prior to commencing any alterations or additions to
allow Landlord time to file notices of nonresponsibility. The Landlord reserves
the right to approve any contractor and method of payment, prior to said
contractor making any improvements to the Premises.
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6.5.5 COMMON AREA CONSTRUCTION. Tenant acknowledges that from time to time
Landlord may be required to construct, alter, or improve Common Areas within the
Project. Landlord will attempt to minimize any disruption to Tenant's business,
but Tenant hereby releases Landlord from any and all claims pertaining to such
construction, alteration, or improvement not caused by Landlord's gross
negligence or willful misconduct.
6.6 RULES AND REGULATIONS.
6.6.1 The Tenant agrees as follows:
(1) Landlord shall arrange for a trash collection service which will
provide and periodically empty trash containers placed in designated areas for
use by Tenant and other tenants in the Project. Tenant shall be responsible for
placing all of its garbage and trash in such trash containers.
(2) No aerial shall be erected on the roof or exterior walls of the
Premises, or on the grounds, without in each instance, the written consent of
the Landlord. Any aerial so installed without such written consent shall be
subject to removal without notice at any time.
(3) No loudspeakers televisions, phonographs, radios, or other
devices shall be used in a manner so as to be heard or seen outside of the
Premises without the prior written consent of the Landlord.
(4) The outside areas immediately adjoining the Premises shall be
kept clean and free from dirt and rubbish by the Tenant to the satisfaction of
the Landlord and Tenant shall not place or permit any obstruction or materials
in such areas. No exterior storage shall be allowed without permission in
writing from Landlord.
(5) The plumbing facilities shall not be used for any other purpose
than that for which they are constructed, and no foreign substance of any kind
shall be thrown therein, and the expense of any breakage, stoppage, or damage
resulting from a violation of this provision shall be borne by Tenant who shall,
or whose employees, agents or invitees shall have caused it.
(6) Tenant shall not burn any trash or garbage of any kind in or
about the Premises, or the Project.
(7) The sidewalks, halls, passages, exits, entrances, and stairways
in and about the Project shall not be obstructed by any of the tenants or used
by them for any purpose other than for ingress to and egress from their
respective Premises. The halls, passages, exits, entrances, stairways, balconies
and roof are not for the use of the general public and the Landlord shall in all
cases retain the right to control and prevent access thereto by all persons
whose presence in the judgment of the Landlord shall be prejudicial to the
safety, character, reputation and interests of the Project and their Tenants,
provided that nothing herein contained shall be constructed to prevent such
access to persons with whom the Tenant normally deals in the ordinary course of
Tenant's business unless such persons are engaged in illegal activities. No
Tenant and no employees or invitees of any Tenant shall go upon the roof of the
building , except to maintain RVAC system per Paragraph 6.3.1.
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(8) No additional locks or bolts of any kind shall be placed
upon doors or windows by Tenant, nor shall any changes be made in existing locks
or the mechanisms thereof. Tenant must, upon the termination of Tenant's
tenancy, restore to Landlord all keys of stores, offices and toilet rooms either
furnished to or otherwise procured by Tenant, and in the event of the loss of
any keys so furnished Tenant shall pay to Landlord the cost thereof.
(9) No Tenant shall lay linoleum or other similar floor
covering so that the same shall be affixed to the floor of the Premises in any
manner except by a paste, or other material, which may easily be removed with
water, the use of cement or other similar adhesive materials being expressly
prohibited. The method of affixing any such linoleum or other similar floor
covering to the floor, as well as the method of affixing carpets or rugs to the
Premises, shall be subject to approval by Landlord. The expense of repairing any
damage resulting from a violation of this rule shall be borne by Tenant by whom,
or by whose agents, clerks, employees, or visitors, the damage shall have been
caused.
(10) Tenant will not install blinds, shades, awnings, or other
form of inside or outside window covering, or window ventilators or similar
devices, without the prior written consent of Landlord.
Landlord reserves the right from time to time to amend or supplement the
foregoing rules and regulations, and to adopt and promulgate additional rules
and regulations applicable to the Premises. Notice of such rules and regulations
and amendments and supplements thereto, if any, shall be given to the Tenant and
Tenant agrees to comply with all such rules and regulations upon receipt of
notice to Tenant from Landlord. Landlord shall not be liable in any way to
Tenant for any damage or inconvenience caused by any other Tenant's
non-compliance with these rules and regulations.
6.7 CONDITION UPON TERMINATION. Upon the termination of the Sublease,
Tenant shall surrender the Premises to Landlord, broom-clean and in the same
condition as received except for ordinary wear and tear which Tenant was not
otherwise obligated to remedy under any provision of this Sublease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Damage or Destruction). In addition, Landlord may
require Tenant to remove any alterations, additions or improvements (whether or
not made with Landlord's consent) prior to the termination of the Sublease and
to restore the Premises to its prior condition, all at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the termination of the Sublease, except that Tenant may remove any of
Tenant's machinery or equipment which can be removed without material damage to
the Premises. Tenant shall repair, at Tenant's expense, any damage to the
Premises caused by the removal of any such machinery or equipment. In no event,
however, shall Tenant remove any of the following materials or equipment without
Landlord's prior written consent: any power wiring or power panels; lighting or
lighting fixtures; wall coverings; drapes, blinds or other window coverings;
carpets or other floor coverings; heaters, air conditioners or any other heating
or air conditioning equipment; fencing or security gates; or other similar
building operating equipment and decorations.
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6.8 MAINTENANCE OF COMMON AREAS. Landlord shall maintain the Common Areas as set
forth in Section 4.5 above.
ARTICLE VII
DAMAGE OR DESTRUCTION
7.1 PARTIAL DAMAGE TO PREMISES. Tenant shall notify Landlord in writing
immediately upon the occurrence of any damage to the Premises or the Building.
If the Premises or the Building is only partially damaged and if the proceeds
received by Landlord from the insurance policies described in Subsection 4.4.2
are sufficient to pay for the necessary repairs, this Sublease shall remain in
effect and Landlord shall repair the damage as soon as reasonably possible.
Landlord may elect to repair any damage to Tenant's fixtures, equipment, or
improvements. If the insurance proceeds received by Landlord are not sufficient
to pay the entire cost of repair, or if the cause of the damage is not covered
by the insurance policies which Landlord maintains under Subsection 4.4.2,
Landlord may elect either to (a) repair the damage as soon as reasonably
possible, in which case this Sublease shall remain in full force and effect or
(b) terminate this Sublease as of the date the damage occurred. Landlord shall
notify Tenant within thirty (30) days after receipt of notice of the occurrence
of the damage, whether Landlord elects to repair the damage or terminate the
Sublease. If Landlord elects to repair the damage, Tenant shall pay Landlord the
"deductible amount" (if any) under Landlord's insurance policies or the Tenant's
pro rata share thereof if the Premises is a multi-tenant building, and, if the
damage was due to an act or omission of Tenant, the difference between the
actual cost of repair and any insurance proceeds received by Landlord. If
Landlord elects to terminate this Sublease, Tenant may elect to continue this
Sublease in full force and effect, in which case Tenant shall repair any damage
to the Premises and any building in which the Premises is located. Tenant shall
pay the cost of such repairs, except that, upon satisfactory completion of such
repairs, Landlord shall deliver to Tenant any insurance proceeds received by
Landlord for the damage repaired by Tenant. Tenant shall give Landlord written
notice of such election within ten (10) days after receiving Landlord's
termination notice. If the damage to the Premises occurs during the last six (6)
months of the Sublease Term, Landlord may elect to terminate this Sublease as of
the date the damage occurred, regardless of the sufficiency of any insurance
proceeds and Landlord may retain all such proceeds. In such event, Landlord
shall not be obligated to repair or restore the Premises and Tenant shall have
no right to continue this Sublease. Landlord shall notify Tenant of its election
within thirty (30) days after receipt of notice of the occurrence of the damage.
7.2 TOTAL OR SUBSTANTIAL DESTRUCTION. If the Premises is totally or
substantially destroyed by any cause whatsoever, or if the Premises is in a
building which is substantially destroyed (even though the Premises is not
totally or substantially destroyed), this Sublease shall, at the election of the
Landlord, terminate as of the date the destruction occurred regardless of
whether Landlord receives any insurance proceeds. However, if the Premises can
be rebuilt within one (1) year after the date of destruction, Landlord may elect
to rebuild the Premises at Landlord's own expense (with all insurance proceeds
being made available to the Landlord to apply against such costs), in which
case, this Sublease shall remain in full force and effect. Landlord shall notify
Tenant of such election within thirty (30) days after the occurrence
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of total or substantial destruction. If the destruction was caused by an act or
omission of Tenant, Tenant shall pay Landlord the difference between the actual
cost of rebuilding and any insurance proceeds received by Landlord.
7.3 UNINSURED CASUALTY. In the event the Premises are destroyed to the extent of
fifteen percent (15%) or more of the replacement value thereof by any casualty
not covered under the fire and extended coverage insurance covered by Landlord
or Tenant, then Landlord may elect to terminate this Sublease. In the event of
such termination the rights and obligations of the parties hereunder shall
cease. If the Landlord does not elect to so terminate, then the Landlord shall
promptly commence repairing such damage at the Landlord's cost and expense.
7.4 LANDLORD'S OBLIGATIONS. Landlord shall not be required to repair any injury
or damage by fire or other cause, or to make any restoration or replacement of
any panelings, decorations, partitions, railings, floor coverings, office
fixtures or any other improvements or property installed in the Premises by
Tenant or at the direct or indirect expense of Tenant which are not part of the
original Tenant improvements paid for by Landlord. Tenant shall be required to
restore or replace same in the event of damage except for damage caused solely
by the Landlord's negligence or intentional misconduct. 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 the right to terminate
this Sublease as the result of any statutory provision now or hereafter in
effect pertaining to the damage and destruction of the Premises, except as
expressly provided herein.
7.5 TEMPORARY REDUCTION IN RENT. If the Premises are destroyed or damaged and
Landlord or Tenant repairs or restores the Premises pursuant to the provisions
of this Article Seven, any rent payable during the period of such damage, repair
and/or restoration shall be reduced by the amount payable under any rental
income insurance paid to Landlord. Except for such possible reduction in
payments required from the Tenant, Tenant shall not be entitled to any
compensation, reduction, or reimbursement from Landlord as a result of any
damage, destruction, repair, or restoration of or to the Premises.
7.6 WAIVER. Tenant waives the protection of any statute, code or judicial
decision which grants a tenant the right to terminate a sublease in the event of
damage or destruction of the premises. Tenant agrees that the provisions of this
Article Seven shall govern the rights and obligations of Landlord and Tenant in
the event of any damage or destruction of the Premises.
ARTICLE VIII
CONDEMNATION
8.1 CONDEMNATION. If all or any portion of the Premises is taken under the power
of eminent domain or sold under the threat of that power (all of which are
called "Condemnation"), this Sublease shall terminate as to the part taken or
sold on the date the condemning authority takes title or possession whichever
occurs first. If more than twenty percent (20%) of the floor area of the
Premises is taken, either Landlord or Tenant may terminate this Sublease as of
the date the condemning authority take title or possession, by delivering
written notice to the other within ten (10) days after receipt of written notice
of such taking (or in the absence of such
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notice, within ten (10) days after the condemning authority takes possession).
If more than twenty percent (20%) of all subleaseable space in the building in
which the Premises are located is taken the Landlord may elect to terminate this
Sublease by delivering such notice to Tenant. If neither Landlord nor Tenant
terminates this Sublease, this Sublease shall remain in effect as to the portion
of the Premises not taken, except that the Base Rent shall be reduced in
proportion to the reduction in the floor area of the Premises. Any Condemnation
award or payment shall be distributed in the following order: (a) first, to any
ground lessor, mortgagee or beneficiary under a deed of trust encumbering the
Premises, the amount of its interest in the Premises and the Tenant hereby
assigns any other rights which the Tenant may have now or in the future to any
other award to the Landlord; (b) second, to Tenant, only the amount of any award
specifically designated for loss of or damage to Tenant's trade fixtures or
removable personal property, and the Tenant hereby assigns any other rights
which the Tenant may have now or in the future to any other award to the
Landlord, and (c) third, to Landlord, the remainder of such award, whether as
compensation for reduction in the value of the subleasehold, the taking of the
fee, or otherwise. If this Sublease is not terminated, Landlord shall repair any
damage to the Premises caused by the Condemnation, except that Landlord shall
not be obligated to repair any damage for which Tenant has been reimbursed by
the condemning authority. If the severance damages received by Landlord are not
sufficient to pay for such repair, Landlord shall have the right to either
terminate this Sublease or make such repair at Landlord's expense.
ARTICLE IX
ASSIGNMENT AND SUBLETTING
9.1 LANDLORD'S CONSENT REQUIRED. No portion of the Premises or of Tenant's
interest in this Sublease may be acquired by any other person or entity, whether
by assignment, mortgage, sublease, transfer, operation of law, or act of Tenant,
without Landlord's prior written consent, except as provided in Section 9.2
below. Any attempted transfer without consent shall be void and shall constitute
a noncurable breach of this Sublease. If tenant is a partnership, (i) any
cumulative transfer or more than twenty percent (20%) of the partnership
interests, or (ii) the admission of a new general partner, or (iii) the transfer
of any interest of any general partner in the partnership shall require
Landlord's consent.
9.2 TENANT AFFILIATE. Tenant may assign this Sublease or sublease the Premises,
without Landlord's consent, to any corporation which controls, is controlled by
or is under common control with Tenant, or to any corporation resulting from the
merger of or consolidation with Tenant ("Tenant's Affiliate"). In such case, any
Tenant's Affiliate shall assume in writing all of Tenant's obligations under
this Sublease, but the Tenant shall remain primarily liable hereunder.
9.3 NO RELEASE OF TENANT. No transfer permitted by this Article Nine, whether
with or without Landlord's consent, shall release Tenant or change Tenant's
primary liability to pay the rent and to perform all other obligations of Tenant
under this Sublease. Landlord's acceptance of rent from any other person is not
a waiver of any provision of this Article Nine. Consent to one transfer is not a
consent to any subsequent transfer. If Tenant's transferee defaults under this
Sublease, Landlord may proceed directly against Tenant without pursuing remedies
against the transferee. Landlord may consent to subsequent assignments or
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modifications of this Sublease by Tenant's transferee, without notifying Tenant
or obtaining its consent. Such action shall not relieve Tenant's liability under
this Sublease.
9.4 LANDLORD'S ELECTION Tenant's request for consent to any transfer described
in Section 9.1 above shall be accompanied by a written statement setting forth
the details of the proposed transfer, including the name, business and financial
condition of the prospective transferee, financial details of the proposed
transfer (e.g., the term of and rent and security deposit payable under any
assignment or sublease), and any other information Landlord deems relevant.
Landlord shall have the right (a) to withhold consent, if reasonable; (b) to
grant consent; or (c) if the transfer is a sublease of the Premises or an
assignment of this Sublease, to terminate this Sublease as of the effective date
of such sublease or assignment, in which case Landlord may elect to enter into a
direct sublease with the proposed assignee or subtenant.
9.5 NO MERGER. No merger shall result from Tenant's sublease of the Premises
under this Article Nine, Tenant's surrender of this Sublease or the termination
of this Sublease in any other manner. In any such event, Landlord may terminate
any or all subtenancies or succeed to the interest of Tenant as sublandlord
thereunder.
ARTICLE X
DEFAULTS; REMEDIES
10.1 COVENANTS AND CONDITIONS. Tenant's performance of each of Tenant's
obligations under this Sublease is a condition as well as a covenant. Tenant's
right to continue in possession of the Premises is conditioned upon such
performance. Time is of the essence in the performance of all covenants and
conditions
10.2 DEFAULTS. Tenant shall be in material default under this Sublease:
10.2.1 VACATION OR ABANDONMENT. If Tenant abandons or vacates the Premises
or if such abandonment or vacation of the Premises results in the cancellation
of any insurance described in Section 4.4; or
10.2.2 FAILURE TO PAY. If Tenant fails to pay rent or any other charge
required to be paid to Tenant, as and when due; or
10.2.3 FAILURE TO PERFORM. If Tenant fails to perform any of Tenant's
nonmonetary obligations under this Sublease for a period of fifteen (15) days
after written notice from Landlord; provided that if more time is required to
complete such performance, Tenant shall not be in default if Tenant commence
such performance within the fifteen (15) day period and thereafter diligently
pursues its completion. However, Landlord shall not be required to give such
notice if Tenant's failure to perform constitute a non-curable breach of this
Sublease. The notice required by this Subsection is intended to satisfy any and
all notice requirements imposed by law on Landlord and is not in addition to any
such requirement.
10.2.4 OTHER DEFAULTS. (i) If Tenant makes a general assignment or general
arrangement for the benefit of creditors; (ii) If a petition for adjudication of
bankruptcy or for
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reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Sublease and possession is not restored
to Tenant within thirty (30) days; or (iv) if substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Sublease is
subjected to attachment, execution or other judicial seizure which is not
discharged within thirty (30) days. If a court of competent jurisdiction
determines that any of the acts described in this Subsection 10.2.4 is not
default under this Sublease, and a trustee is appointed to take possession (or
if Tenant remains a debtor in possession) and such trustee or Tenant transfers
Tenant's interest hereunder, then Landlord shall receive as Additional Rent, the
difference between the rent (or any other consideration) paid in connection with
such assignment or sublease and the rent payable by Tenant hereunder.
10.3 REMEDIES. On the occurrence of any material default by Tenant, Landlord
may, at any time thereafter, with or without notice or demand and without
limiting Landlord in the exercise of any right or remedy which Landlord may
have:
10.3.1 TERMINATION OF POSSESSION. Terminate Tenant's right to possession
of the Premise by any lawful means, in which case this Sublease shall terminate
and Tenant shall immediately surrender possession of the Premises to Landlord.
In such event Landlord shall have the immediate right to re-enter and remove all
persons and property and such property may be removed and stored in a public
warehouse or elsewhere at the cost of, and for the account of Tenant, all
without service of notice of resort to legal process and without being deemed
guilty of trespass, or becoming liable for any loss or damage which may be
occasioned thereby; and Landlord shall be entitled to recover from Tenant all
damages incurred by Landlord by reason of Tenant's default, including (i) the
worth at the time of the award of all Base Rent, Additional Rent and other
charges which were earned or were payable at the time of the termination; (ii)
the worth at the time of the award of the amount by which the unpaid Base Rent,
Additional Rent and other charges which would have been earned or were payable
after termination until the time of the award exceeds the amount of such rental
loss that Tenant proves could have been reasonably avoided, (iii) the worth at
the time of the award of the amount by which the unpaid Base Rent, Additional
Rent and other charges which would have been payable for the balance of the term
after the time of award exceeds the amount of such rental loss that Tenant
proves could have been reasonably avoided; and (iv) any other amount necessary
to compensate Landlord for all the detriment proximately caused by Tenant's
failure to perform its obligations under the Sublease or which in the ordinary
course of things would be likely to result therefrom, including, but not limited
to, any cost or expenses incurred by Landlord in maintaining or preserving the
Premises after such default, the cost of recovering possession of the Premises,
expenses of reletting, including necessary renovation or alteration of the
Premises, Landlord's reasonable attorneys fees incurred in connection therewith,
and any real estate commissions or other such fees paid or payable. As used in
subparts (i) and (ii) above, the "worth at the time of the award" is computed by
allowing interest on unpaid amounts at the rate of fifteen percent (15%) per
annum, or such lesser amount as may then be the maximum lawful rate. As used in
subpart (iii) above, the "worth at the time of the award" is 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%). If Tenant shall have
abandoned the Premises, Landlord shall have the option of (i)
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retaking possession of the Premises and recovering from Tenant the amount
specified in this Subsection 10.3.1 or (ii) proceeding under Subsection 10.3.2.
10.3.2 MAINTENANCE OF POSSESSION. Maintain Tenant's right to possession,
in which case this Sublease shall continue in effect whether or not Tenant shall
have abandoned the Premises. In such event, Landlord shall be entitled to
enforce all of Landlord's rights and remedies under this Sublease including the
right to recover the rent as it becomes due hereunder.
10.3.3 OTHER REMEDIES. Pursue any other remedy now or thereafter available
to Landlord under the laws or judicial decisions of the state in which the
Premises is located.
10.4 THE RIGHT TO RELET THE PREMISES. Should Landlord elect to re-enter, as
herein provided, or should it take possession pursuant to legal proceedings or
pursuant to any notice provided for by law, it may either terminate this
Sublease or it may from time to time without terminating this Sublease, make
such alterations and repairs as may be necessary in order to relet the property,
and relet said property or any part thereof for such term or terms (which may be
for a term extending beyond the term of this Sublease) and at such rental or
rentals and upon such other terms and conditions as Landlord in its sole
discretion may deem advisable upon each such reletting all rentals received by
the Landlord from such reletting shall be applied, first to the repayment of any
indebtedness other than rent due hereunder from Tenant to Landlord; second, to
the payment of any costs and expenses of such reletting, including brokerage
fees and attorneys' fees and of costs of such alterations and repairs; third, to
the payment of rent due and unpaid hereunder, and the residue, if any, shall be
held by Landlord and applied in payment of future rent as the same may become
due and payable hereunder. If such rentals received from such reletting during
any month are less than that to be paid during that month by Tenant hereunder,
Tenant shall pay any such deficiency to Landlord. Such deficiency shall be
calculated and paid monthly. No such re-entry or taking possession of said
property by Landlord shall be construed as an election on its part to terminate
this Sublease unless a written notice of such intention be given to Tenant or
unless the termination thereof be decree by a court of competent jurisdiction.
10.5 WAIVER OF RIGHTS OF REDEMPTION. Tenant hereby expressly waives any and all
rights of redemption granted by or under any present or future laws in the event
of Tenant being evicted or dispossessed for any cause, or in the event of
Landlord obtaining possession of the Premises, by reason of the violation by
Tenant of any of the covenants or conditions of this Sublease, or otherwise.
10.6 CUMULATIVE REMEDIES. Landlord's exercise of any right or remedy shall not
prevent it from exercising any other right or remedy.
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ARTICLE XI
PROTECTION OF CREDITORS
11.1 SUBORDINATION
11.1.1 LANDLORD'S ELECTION. This Sublease is and shall remain subordinate
to the Master Lease. In addition, Landlord shall have the right to require
Tenant to subordinate this Sublease to any other ground lease, deed of trust or
mortgage encumbering the Premises, any advances made on the security thereof and
any renewals, modifications, consolidations, replacements or extensions thereof
whenever made or recorded. However, Tenant's right to quiet possession of the
Premises during the Sublease Term shall not be disturbed if Tenant pays the rent
and performs all of Tenant's obligations under this Sublease and is not
otherwise in default. If any ground lessor, beneficiary or mortgagee elects to
have this Sublease prior to the lien of its ground sublease, deed of trust or
mortgage and gives written notice thereof to Tenant, this Sublease shall be
deemed prior to such ground sublease, deed of trust or mortgage whether this
Sublease is dated prior or subsequent to the date of said ground sublease, deed
of trust or mortgage or the date of recording thereof.
11.1.2 ADDITIONAL DOCUMENTS. Tenant agrees to execute any documents
required to effectuate such subordination or to make this sublease prior to the
lien of any ground sublease, mortgage or deed of trust, as the case may be, and
failing to do so within ten (10) days after written demand does hereby make,
constitute and irrevocably appoint Landlord as Tenant's attorney-in-fact and in
Tenant's name, place and stead, to do so.
11.2 ATTORNMENT. If Landlord's interest in the Premises is acquired by any
ground lessor, beneficiary, under a deed of trust, mortgagee, or purchaser at a
foreclosure sale, Tenant shall attorn to the transferee of or successor to
Landlord's interest in the Premises and recognize such transferee or successor
as Landlord under this Sublease. Tenant waives the protection of any statute or
rule of law which gives or purports to give Tenant any right to terminate this
Sublease or surrender possession of the Premises upon the transfer of Landlord's
interest.
11.3 SIGNING OF DOCUMENTS. Tenant shall sign and deliver any instrument or
documents necessary or appropriate to evidence any such attornment or
subordination or agreement to do so. If Tenant fails to do so within (10) days
after written request, Tenant hereby makes, constitutes and irrevocably appoints
Landlord, or any transferee or successor of Landlord, the attorney-in-fact of
Tenant to execute and deliver any such instrument or document.
11.4 ESTOPPEL CERTIFICATES.
11.4.1 LANDLORD'S REQUEST. Upon Landlord's written request, Tenant shall
execute. acknowledge and deliver to Landlord a written statement certifying: (1)
that none of the terms or provisions; of this Sublease have been changed (or if
they have been changed, stating how they have been changed); (ii) that this
Sublease has not been cancelled or terminated; (iii) the last date of payment of
the Base Rent and other charges and the time period covered by such payment; and
(iv) that Landlord is not in default under this sublease (or, if the Landlord is
claimed to be in default, stating why). Tenant shall deliver such statement to
Landlord within ten (10) days after Landlord's request. Any such statement by
Tenant may be given by Landlord to
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any prospective purchaser or encumbrancer of the Premises. Such purchaser or
encumbrancer may rely conclusively upon such statement as true and correct.
11.4.2 FAILURE TO DELIVER. If Tenant does not deliver such statement to
Landlord within such ten (10) day period, Landlord, and any prospective
purchaser or encumbrancer, may conclusively presume and rely upon the following
facts except as otherwise represented: (i) that the terms and provisions of this
Sublease have not been changed resented by Landlord; (ii) that this Sublease has
not been cancelled or terminated except as otherwise represented by Landlord;
(iii) that not more than one month's Base Rent or other charges have been paid
in advance; and (iv) that Landlord is not in default under the Sublease. In such
event, Tenant shall be estopped from denying the truth of such facts.
11.5 TENANT'S FINANCIAL CONDITION. Within ten (10) days after written request
from Landlord, Tenant shall deliver to Landlord such financial statements as are
reasonably required by Landlord to verify the net worth of Tenant, or any
assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall deliver
to any lender or proposed purchaser of the Premises designated by Landlord any
financial statements required by such lender to facilitate the sale, financing
or refinancing of the Premises. Tenant represents and warrants to Landlord that
(a) each such financial statement is a true and accurate statement as of the
date of such statement and (b) at all times after the date of any such statement
during the Sublease Term or any extension thereof, Tenant's net worth, as stated
therein, shall not be reduced. All financial statements shall be confidential
and shall be used only for the purposes set forth herein.
ARTICLE XII
LEGAL COSTS
12.1 LEGAL PROCEEDINGS. Tenant or Landlord shall reimburse the other party, upon
demand, for any costs or expense incurred by the other party in connection with
any breach or default of Tenant or Landlord under this Sublease, whether or not
suit is commenced or judgment entered. Such costs shall include legal fees and
costs incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the provisions
of this Sublease is commenced, the court in such action shall award to the party
in whose favor a judgment is entered a reasonable sum as attorneys' fees and
costs. Such attorneys' fees and costs shall be paid by the losing party in such
action. Tenant shall also indemnify Landlord against and hold Landlord harmless
from all costs, expenses, demands and liability incurred by Landlord if Landlord
becomes or is made a party to any claim or action (a) instituted by Tenant or by
any third party against Tenant, or by or against any person holding any interest
or using the Premises by license of or agreement with Tenant; (b) for
foreclosure of any lien for labor or material furnished to or for Tenant or such
other person; (c) otherwise arising out of or resulting from any act or
transaction of Tenant or such other person; or (d) necessary to protect
Landlord's interest under this Sublease in a bankruptcy proceeding, or other
proceeding under Title 11 of the United States Code, as amended. Tenant shall
defend Landlord against any such claim or action at Tenant's expense with
counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant
shall reimburse Landlord for any legal fee or costs incurred by Landlord in any
such claim or action.
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<PAGE>
12.2 LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable attorneys' fees
incurred in connection with Tenant's request for Landlord's consent under
Article Nine (Assignment and Subletting) or in connection with any other act
which Tenant proposes to do and which requires Landlord's consent, provided,
however, such attorney's fees shall not exceed $2,500.
ARTICLE XIII
MISCELLANEOUS PROVISIONS
13.2 LANDLORD'S LIABILITY; CERTAIN DUTIES.
13.2.1 LANDLORD. As used in this Sublease, the term "Landlord" means only
the current owner or owners of the leasehold estate under the Master Lease at
the time in question. Each Landlord has obligated to perform the obligations of
Landlord under this Sublease only during the time such Landlord owns such
interest or title. Any Landlord who transfers its title or interest is relieved
of all liability with respect to the obligations of Landlord under this Sublease
to be performed on or after the date of transfer. However, each Landlord shall
deliver to its transferee all funds previously paid by Tenant, if such funds
have not yet been applied under the terms of this Sublease.
13.2.2 WRITTEN NOTICE. Tenant shall give written notice of any failure by
Landlord to perform any of its obligations under this Sublease to Landlord and
to the District, any ground lessor, mortgagee or beneficiary under any deed of
trust encumbering the Premises whose name and address have been furnished to
Tenant in writing. Landlord shall not be in default under this Sublease unless
Landlord (or the District, or such ground lessor, mortgagee or beneficiary)
fails to cure such non-performance within thirty (30) days after receipt of
Tenant's notice. However, if such non-performance reasonably requires more than
thirty (30) days to cure, Landlord shall not be in default if such cure is
commenced within such thirty (30) day period and thereafter diligently pursued
to completion.
13.3 SEVERABILITY. A determination by a court of competent jurisdiction that any
provision of this Sublease or any part thereof is illegal or unenforceable shall
not cancel or invalidate the remainder of such provision or this Sublease, which
shall remain in full force and effect.
13.4 INTERPRETATION. The captions of the Articles or Sections of this Sublease
are to assist the parties in reading this Sublease and are not a part of the
terms or provisions of this Sublease. Whenever required by the context of this
Sublease, the singular shall include the plural and the plural shall include the
singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Premises with Tenant's expressed or
implied permission.
13.5 INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This Sublease is the only
agreement between the parties pertaining to the sublease of the Premises and
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<PAGE>
no other agreements are effective. All amendments to this Sublease shall be in
writing and signed by all parities. Any other attempt at amendment shall be
void.
13.6 NOTICES. All notices required or permitted under this Sublease shall be in
writing and shall be personally delivered or sent by certified mail, return
receipt requested, postage prepaid. Notices to Tenant shall be delivered to the
address specified in Section 1.3 above, except that upon Tenant's taking
possession of the Premises, the Premises shall be Tenant's address for notice
purposes. Notice to Landlord shall be delivered to the address specified in
Section 1.2 above. All notices shall be effective upon personal delivery or
three (3) days after deposit in the U.S. Mail. Either party may change its
notice address upon written notice to the other party.
13.7 WAIVERS. All waivers must be in writing and signed by the waiving party.
Landlord's failure to enforce any provision of this Sublease or its acceptance
of rent shall not be a waiver and shall not prevent Landlord from enforcing that
provision or any other provision of this Sublease in the future. No statement on
a payment check from Tenant or in a letter accompanying a payment check shall be
binding on Landlord. Landlord may with or without notice to Tenant, negotiate
such check without being bound to the conditions of such statement.
13.8 NO RECORDATION. Tenant shall not record this Sublease without prior written
consent from Landlord. However, Landlord may require that a "Short Form"
memorandum of this Sublease be executed by both parties and recorded.
13.9 BINDING EFFECT; CHOICE OF LAW. This Sublease binds any party who legally
acquires any rights or interest in this Sublease from Landlord or Tenant.
However, Landlord shall have no obligation to Tenant's successor unless the
rights or interests of Tenant's successor are acquired in accordance with the
terms of this Sublease. The laws of the state in which the Premises are located
shall govern this Sublease.
13.10 CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a corporation
each person signing this Sublease on behalf of Tenant represents and warrants
that he has full authority to do so and that this Sublease binds the
corporation. Within five (5) days after this Sublease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Sublease or other evidence of such
authority reasonably acceptable to Landlord. Tenant is a partnership, each
person signing this Sublease for Tenant represents and warrants that he is a
general partner of the partnership, that he has full authority to sign for the
partnership and that this Sublease binds the partnership and all general
partners of the partnership. Tenant shall give written notice to Landlord of any
general partner's withdrawal or addition. Within five (5) days after this
Sublease is signed, Tenant shall deliver to Landlord a copy of Tenant's recorded
statement of partnership or certificate of limited partnership.
13.11 JOINT AND SEVERAL LIABILITY. All parties signing this Sublease as Tenant
shall be jointly and severally liable for all obligations of Tenant.
13.12 FORCE MAJEURE. If Landlord cannot perform any of its obligations due to
events beyond Landlord's control, the time provided for performing such
obligations shall be extended
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<PAGE>
by a period of time equal to the duration of such events. Events beyond
Landlord's control include, but are not limited to, acts of God, war, civil
commotion, labor disputes, strikes, fire, flood or other casualty, shortage of
labor or material, government regulation or restriction and weather conditions.
13.13 NO OPTION. The submission of this Sublease for examination does not
constitute a reservation of or option to sublease the Premises and this Sublease
becomes effective only upon execution and delivery thereof by Landlord and
Tenant.
LANDLORD:
GAP PORTFOLIO PARTNERS,
a New York general partnership
By: Colony Advisors, Inc.
its authorized agent
By: /s/ Thomas F. Harrison
Name: Thomas F. Harrison
-------------------
Signed on April 26, 1993 Title: Senior Vice President
---------------------
at San Diego, California
TENANT:
Camino Laboratories, a Delaware corporation
By: /s/ Hazel Marie Allen /s/ Jack Rinds
Its: Vice President Controller
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<PAGE>
ADDITIONAL PROVISIONS
SUBLEASE RIDER
This Additional Provisions Sublease Ride ("Rider") is attached to and made a
part of that certain Industrial Real Estate Triple Net Sublease dated April 1,
1993, between GAP Portfolio Partners, a New York General Partnership, as
Landlord, and Camino Laboratories, a Delaware corporation as Tenant, covering
the Premises commonly known as 5955 Pacific Center Boulevard, Sand Diego,
California (the "Sublease"). The terms used in this Rider shall have the same
definitions as set forth in the Sublease and the other riders attached to and a
part of the Sublease. The provisions of this Rider shall supersede any
inconsistent or conflicting provisions of the Sublease, including the other
riders attached to and a part of the Sublease.
1. The Additional Rent charges per Paragraph 1.9.2 shall not exceed the
dollar amounts delineated below:
Calendar Year Amounts per square foot per month
------------- ---------------------------------
1993 $.181
1994 .186
1995 .192
1996 .198
1997 .204
1998 .210
1999 .216
2000 .222
2001 .229
2002 .236
2003 .243
2. Quiet Possession and Nondisturbance: If Tenant pays the rent and complies
with all other terms of this Sublease, Tenant may occupy and enjoy the
Premises for the full Sublease term. In the event of a foreclosure sale or
conveyance in lieu of such foreclosure, so long as there shall not then
exist any breach or default on the part of the Tenant under this Sublease,
or any event or condition which, with the giving of notice and/or the
passage of time, could become such a breach or default, or any other event
that would permit the Tenant's leasehold interest under this Sublease to
be terminated, and subject to compliance by the Tenant with the terms
hereof, (a) the Tenant's right to possession of the leased Premises and
leasehold interest under this Sublease shall not be disturbed and shall
continue in effect, and (b) the purchaser or transferee shall recognize
and accept the Tenant as tenant under the terms, requirements and
provisions of this Sublease.
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<PAGE>
TENANT IMPROVEMENT
SUBLEASE RIDER
This Tenant Improvement Sublease Rider ("Rider") is attached to and made a part
of that certain Industrial Real Estate Triple Net Sublease dated April 1, 1993,
between GAP Portfolio Partners, a New York General Partnership, as Landlord, and
Camino Laboratories, a Delaware corporation as Tenant, covering the Premises
commonly known as 5955 Pacific Center Boulevard, San Diego, CA 92121 (the
"Sublease"). The terms used in this Rider shall have the same definitions as set
forth in the Sublease. The provisions of this Rider shall supersede any
inconsistent or conflicting provisions of the Sublease.
1. LANDLORD'S OBLIGATION.
1.1 Landlord shall be responsible for painting interior office walls;
cleaning or replacing all carpeting at direction of Tenant; trimming trees in
front of building to make "Camino Labs" sign visible; adding wall in old
instrument area; and, installing new sinks in RI and QA labs.
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<PAGE>
OPTION TO EXTEND TERM
SUBLEASE RIDER
This Option to Extend Term Sublease Rider ("Rider") is attached to and made a
part of that certain Industrial Real Estate Triple Net Sublease dated April 1,
1993, between GAP Portfolio Partners, a New York General Partnership, as
Landlord, and Camino Laboratories, a Delaware corporation, as Tenant, covering
the Premises commonly known as 5955 Pacific Center Boulevard, San Diego, CA
92121 (the "Sublease"). The terms used in this Rider shall have the same
definitions as set forth in the Sublease. The provisions of this Rider shall
supersede any inconsistent or conflicting provisions of the Sublease.
1. OPTION(S) TO EXTEND TERM.
1.1 GRANT OF OPTION. Landlord hereby grants to Tenant (3) option (s) (the
"Option(s)") to extend the Sublease Term for additional term(s) of (2) years
each (the "Extension(s)"), on the same terms and conditions as set forth in the
Sublease, but at an increased rent as set forth below.
1.1.1 Each Option shall be exercised only by written notice
delivered to Landlord at least one hundred eighty (180) days before the
expiration of the Sublease Term or the preceding Extension of Sublease Term,
respectively. If Tenant fails to deliver Landlord written notice of the exercise
of an Option within the prescribed time period, such Option and any succeeding
Options shall lapse, and there shall be no further right to extend the Sublease
Term.
1.1.2 Each Option shall be exercisable by Tenant on the express
conditions that (i) at the time of the exercise, and at all times prior to the
commencement of such Extension, Tenant shall not be in default under any of the
provisions of the Sublease, and (ii) Tenant has not been ten (10) or more days
late on the payment of rent more than a total of three (3) times during the
Sublease Term and all preceding Extensions.
1.2 PERSONAL OPTIONS. The Option(s) are personal to the Tenant named in
Section 1.3 of the Sublease or any Tenant's Affiliate described in Section 9.2
of the Sublease and cannot be transferred.
1.2.1 If Tenant subleases any portion of the Premises or assigns or
otherwise transfers an interest under the Sublease to an entity other than a
Tenant Affiliate prior to the exercise of an Option (whether with or without
Landlord's consent), such Option and any succeeding Options shall lapse.
1.2.2 If Tenant subleases any portion of the Premises or assigns or
otherwise transfers an interest of Tenant under the Sublease to an entity other
than a Tenant Affiliate after the exercise of an Option but prior to the
commencement of the respective Extension (whether with or without Landlord's
consent), such Option and any succeeding Options shall lapse and the Sublease
Term shall expire if such Option were not exercised.
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<PAGE>
1.2.3 If Tenant subleases any portion of the Premises or assigns or
otherwise transfers an interest of Tenant under the Sublease in accordance with
Article 9 of the Sublease after the exercise of an Option and after the
commencement of the Extension related to such Option, then the term of the
Sublease shall expire upon the expiration of the Extension during which such
sublease or transfer occurred and only the succeeding Options shall lapse.
2. CALCULATION OF RENT
The Base Rent during the first year of the first extension only, shall b
ninety percent (90%) of the preceding year rent. Thereafter, the Base Rent
during any subsequent extensions shall continue to increase on each annual
anniversary of the Commencement Date as described in Section 1.9.1 of the
Sublease.
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<PAGE>
[Floorplan of Building 6]
BUILDING # 6
CAMINO LABS
EXHIBIT A
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<PAGE>
[Layout of Richardson Pacific Commerce Center]
EXHIBIT B
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<PAGE>
EXHIBIT C
[Original Concept Design]
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SORRENTOVIEW
INDUSTRIAL REAL ESTATE TRIPLE NET SUBLEASE
January 15, 1997
LANDLORD: Sorrento Montana, L.P.,
a California Limited Partnership
TENANT: Camino NeuroCare, Inc., A Delaware Corporation
<PAGE>
SORRENTOVIEW
INDUSTRIAL REAL ESTATE TRIPLE NET SUBLEASE
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
Article I BASIC TERMS......................................................1
1.1 Date Of Sublease.................................................1
1.2 Landlord.........................................................1
1.3 Tenant...........................................................1
1.4 Premises.........................................................1
1.5 Sublease Term....................................................1
1.6 Permitted Uses...................................................2
1.7 Tenant's Guarantor...............................................2
1.8 Initial Security Deposit.........................................2
1.9 Rent and Other Charges Payable by Tenant.........................2
1.10 Riders...........................................................2
1.11 Brokers..........................................................2
Article II SUBLEASE TERM....................................................2
2.1 Master Lease.....................................................2
2.2 Sublease of Premises For Sublease Term...........................2
2.3 Delay In Commencement............................................3
2.4 Early Occupancy..................................................3
2.5 Holding Over.....................................................3
2.6 Surrender Of Premises............................................3
Article III BASE RENT........................................................3
3.1 Time and Manner of Payment.......................................3
3.2 Increase.........................................................3
3.3 Security Deposit Increases.......................................3
3.4 Termination; Advance Payments....................................4
Article IV OTHER CHARGES PAYABLE BY TENANT..................................4
4.1 Additional Rent..................................................4
4.2 Real Property Taxes..............................................4
4.3 Utilities........................................................5
4.4 Insurance........................................................6
4.5 Common Areas.....................................................8
4.6 Late Charges....................................................10
4.7 Interest on Past Due Obligations................................10
4.8 Impounds For Insurance Premiums and Real Property Taxes.........10
Article V USE OF PREMISES.................................................11
5.1 Permitted Uses..................................................11
5.2 Manner of Use...................................................11
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
5.3 Signs and Auctions..............................................12
5.4 Hazardous Materials.............................................12
5.5 Indemnification.................................................14
5.6 Landlord's Access...............................................14
5.7 Quiet Possession................................................15
5.8 Window Covering.................................................15
Article VI CONDITION OF PREMISES; MAINTENANCE, REPAIRS, AND ALTERATIONS....15
6.1 Existing Conditions.............................................15
6.2 Exemption of Landlord From Liability; Waiver....................15
6.3 Tenant's Obligations............................................15
6.4 Landlord's Obligations..........................................16
6.5 Alterations, Additions, and Improvements........................16
6.6 Rules and Regulations...........................................18
6.7 Condition Upon Termination......................................19
6.8 Maintenance of Common Areas.....................................20
Article VII DAMAGE OR DESTRUCTION...........................................20
7.1 Partial Damage to Premises......................................20
7.2 Total or Substantial Destruction................................20
7.3 Landlord's Obligations..........................................21
7.4 Temporary Reduction of Rent.....................................21
7.5 Waiver..........................................................21
Article VIII CONDEMNATION...................................................21
8.1 Condemnation....................................................21
8.2 Waiver..........................................................22
Article IX ASSIGNMENT AND SUBLETTING.......................................22
9.1 Landlord's Consent Required.....................................22
9.2 Tenant Affiliate................................................22
9.3 No Release of Tenant............................................23
9.4 Landlord's Election.............................................23
9.5 No Merger.......................................................23
9.6 Excess Rentals..................................................23
Article X DEFAULTS; REMEDIES..............................................24
10.1 Covenants and Conditions........................................24
10.2 Defaults........................................................24
10.3 Remedies........................................................25
10.4 The Right to Relet the Premises.................................26
10.5 Waiver of Rights of Redemption..................................26
10.6 Cumulative Remedies.............................................26
10.7 Right to Cure...................................................26
Article XI PROTECTION OF CREDITORS.........................................27
11.1 Subordination...................................................27
11.2 Attornment......................................................27
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<PAGE>
11.3 Signing Of Documents............................................27
11.4 Estoppel Certificates...........................................27
11.5 Tenant's Financial Condition....................................28
Article XII LEGAL COSTS.....................................................28
12.1 Attorneys' Fees.................................................28
12.2 Landlord's Consent..............................................28
Article XIII MISCELLANEOUS PROVISIONS.......................................28
13.1 Substituted Premises............................................28
13.2 Landlord's Liability; Certain Duties............................28
13.3 Severability....................................................29
13.4 Interpretation..................................................29
13.5 Incorporation of Prior Agreements; Modifications................29
13.6 Notices.........................................................29
13.7 Waivers.........................................................30
13.8 No Recordation..................................................30
13.9 Binding Effect; Choice of Law...................................30
13.10 Corporate Authority; Partnership Authority......................30
13.11 Joint and Several Liability.....................................30
13.12 Force Majeure...................................................30
13.13 No Option.......................................................31
13.14 Brokers.........................................................31
13.15 Hazardous Substance Conditions..................................31
EXHIBIT "A" - Description of Premises........................................3
EXHIBIT "B" - Depiction of Project...........................................4
EXHIBIT "C" - Sign Criteria..................................................5
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<PAGE>
INDEX OF MAJOR DEFINED TERMS
LOCATION
OF DEFINATION
INDUSTRIAL SUBLEASE
DEFINED TERMS
Additional Area ........................................................... 7
Additional Rent ........................................................... 3
Base Rent ................................................................. 1
Broker .................................................................... 22
Building .................................................................. 1
Common Area Costs ......................................................... 7
Common Areas .............................................................. 6
Condemnation .............................................................. 15
District .................................................................. 2
Hazardous Material ........................................................ 10
Hazardous Substance Condition ............................................. 23
Impound Payments .......................................................... 8
Interest Rate ............................................................. 8
Landlord .................................................................. 21
Landlord Entities ......................................................... 5
Master Lease .............................................................. 2
Premises .................................................................. 1
Project ................................................................... 1
Real Property Taxes ....................................................... 4
Rent ...................................................................... 3
Security Deposit .......................................................... 2
Sublease Term ............................................................. 1
Tenant .................................................................... 21
Tenant's Affiliate ........................................................ 16
Work ...................................................................... 6
<PAGE>
SORRENTOVIEW
INDUSTRIAL REAL ESTATE TRIPLE NET SUBLEASE
ARTICLE 1
BASIC TERMS
This Article One contains the Basic Terms of this Sublease between the Landlord
and Tenant named below. This Sublease is subject to the Master Lease identified
in Section 2.1 below. Other Articles, Sections, and Subsections of this Sublease
referred to in this Article One explain and define the Basic Terms and are to be
read in conjunction with the Basic Terms.
1.1 DATE OF SUBLEASE. January 15, 1997
1.2 LANDLORD. Sorrento Montana, L.P., a California Limited
Partnership
Address of Landlord: c/o CDS Properties Services, Inc.,
d/b/a Sorrento Management Company
10211 Pacific Mesa Boulevard, Suite 406
San Diego, California 92121
1.3 TENANT. Camino NeuroCare, Inc., a Delaware Corporation
----------------------------------------------
Address of Tenant: 5955 Pacific Center Boulevard
-----------------------------
San Diego, California 92121
-----------------------------
-----------------------------
1.4 PREMISES. In consideration of the rents, covenants, and agreement on the
part of the Tenant to be paid and performed, Landlord subleases to Tenant, and
Tenant subleases from Landlord, those certain premises identified on Exhibit "A"
attached hereto and by this reference incorporated herein (the "Premises"). The
Premises contain approximately Eight Thousand Two Hundred (8,200) square feet of
space, and are situated within that certain building ("Building") known as
Building Seven (7) and located at 5965 Pacific Center Boulevard, Suites #709
through #713, San Diego, California 92121.
1 The Building is situated within that certain project ("Project") known
as SORRENTOVIEW, located at the east side of Pacific Mesa Boulevard, between
Pacific Mesa Court and Pacific Center Boulevard, San Diego, California, more
particularly identified on Exhibit "B" attached hereto and by this reference
incorporated herein.
1.5 SUBLEASE TERM. Thirty Six (36) months, beginning on the earlier of (a) the
date Premises are delivered to Tenant by Landlord, or (b) January 15, 1997 or
such other date as is specified in this Sublease (the "Sublease Term") (See
Article 2).
<PAGE>
1.6 PERMITTED USES. The Premises shall be used and occupied only for Medical
Device Manufacturing, Warehousing, Distribution, and Directly Related
Administrative Uses (See Section 5.1).
1.7 TENANT'S GUARANTOR. (IF NONE, SO STATE) None.
1.8 INITIAL SECURITY DEPOSIT. (See Section 3.3) Five Thousand Three Hundred
Thirty and 00/100 Dollars ($5,330.00).
1.9 RENT AND OTHER CHARGES PAYABLE BY TENANT.
1.9.1 BASE RENT. The base rent ("Base Rent") shall be Five Thousand Three
Hundred Thirty and 00/100 Dollars ($5,330.00) per month for the first Twelve
(12) months, as provided in Section 3.1, then Base Rent shall be increased on
each annual anniversary of the Commencement Date, beginning on the first
anniversary of the Commencement Date, by three percent (3%) of the Base Rent in
effect during the immediately preceding one year period. If the Commencement
Date does not occur on the first day of the month, then the foregoing
adjustments to Base Rent shall occur on the first day of the month in which the
Commencement Date occurs.
1.9.2 OTHER PERIODIC PAYMENTS; ADDITIONAL RENT. (i) Real Property Taxes;
(ii) utilities; (iii) insurance premiums; (iv) Common Area Costs; (v) impounds
for insurance premiums and Real Property Taxes; (vi) maintenance, repairs, and
alterations (See Articles Four and Six).
1.10 RIDERS. The following Riders are attached to and made a part of this
Sublease: (If none, so state) Tenant Improvement Sublease Rider, Additional
Provisions Sublease
1.11 BROKERS. (See Section 13.14). Tenant is represented by Gilbert Enciso/GE
Commercial Real Estate. No other brokers are involved with this transaction.
ARTICLE II
SUBLEASE TERM
2.1 MASTER LEASE. Landlord is the ground lessee of the real property improved
with and identified as the Project under that certain Lease dated August 25,
1987, by and between the San Diego Unified School District ("District") as
lessor and Landlord as lessee (the "Master Lease"). The Master Lease provided
that Landlord may construct improvements and sublease portions thereof to
tenants. Accordingly, and subject to the Master Lease, Landlord is entering into
this sublease with Tenant.
2.2 SUBLEASE OF PREMISES FOR SUBLEASE TERM. Landlord subleases the Premises to
Tenant and Tenant subleases the Premises from Landlord for the Sublease Term.
The Sublease Term is for the period stated in Section 1.5 above and shall begin
and end on the
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<PAGE>
dates specified in Section 1.5 above, unless the beginning or end of the
Sublease Term is changed under any provision of this Sublease. The "Commencement
Date" shall be the date specified in Section 1.5 above for the beginning of the
Sublease Term, unless advanced or delayed under any provision of this Sublease.
2.3 DELAY IN COMMENCEMENT. Deleted.
2.4 EARLY OCCUPANCY. If Tenant occupies the Premises prior to the Commencement
Date, Tenant's occupancy of the Premises shall be subject to all of the
provisions of this Sublease, except for payment of Rent. Early occupancy of the
Premises shall not advance the expiration date of this Sublease.
2.5 HOLDING OVER. Tenant shall vacate the Premises upon the expiration or
earlier termination of this Sublease. Tenant shall reimburse Landlord for and
indemnify Landlord against all damages, loss or liability (including reasonable
attorneys' fees and costs) incurred by Landlord from any delay by Tenant in
vacating the Premises. If Tenant remains in possession of all or any part of the
Premises after the expiration of the term hereof without the express consent of
Landlord, such tenancy shall be from month-to-month only and not a renewal
hereof or an extension for any further term, and in such case, Base Rent then in
effect shall be increased by fifty percent (50%) and other monetary sums due
hereunder shall be payable in the amount and at the time specified in this
Sublease; and such month-to-month tenancy shall be subject to every other term,
covenant and agreement contained herein, except that the month-to-month tenancy
will be terminable on thirty (30) days notice given at any time by either party.
2.6 SURRENDER OF PREMISES. Upon the termination of the Sublease, Tenant shall
surrender the Premises to Landlord in the condition specified in and according
to Section 6.7.
ARTICLE III
BASE RENT
3.1 TIME AND MANNER OF PAYMENT. Upon execution of this Sublease, Tenant shall
pay Landlord the Base Rent in the amount stated in Subsection 1.9.1 above for
the first month of the Sublease Term. On the first day of the second month of
the Sublease Term and each month thereafter, Tenant shall pay Landlord the Base
Rent in United States currency, in advance, without offset, deduction or prior
demand. The Base Rent shall be payable at Landlord's address or at such other
place as Landlord may designate in writing.
3.2 INCREASE. The Base Rent shall be increased at the times specified in
Subsection 1.9.1 above. Tenant shall be obligated to pay the new Base Rent from
its effective date until the next periodic increase without any prior notice
from Landlord.
3.3 SECURITY DEPOSIT INCREASES.
3.3.1 DEPOSIT. Upon the execution of this Sublease, Tenant shall deposit
with Landlord a cash security deposit in the amount set forth in Section 1.8
above (the "Security
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Deposit"). Landlord may apply all or part of the Security Deposit to any unpaid
rent or other charges due from Tenant or to cure any other defaults of Tenant.
Tenant hereby waives the provisions of Section 1950.7 of the California Civil
Code, and all other provisions of law, now or hereafter in force, which provide
that Landlord may claim from a security deposit only those sums reasonably
necessary to remedy defaults in the payment of rent, to repair damage caused by
Tenant or to clean the Premises, it being agreed that Landlord may, in addition,
claim those sums reasonably necessary to compensate Landlord for any other loss
or damage, foreseeable or unforeseeable, caused by the act or omission of Tenant
or any officer, employee, agent or invitee of Tenant. If Landlord uses any part
of the Security Deposit, Tenant shall restore the Security Deposit to its full
amount within ten (10) days after Landlord's written request. Tenant's failure
to do so shall be a material default under this Sublease. No interest shall be
paid on the Security Deposit. Landlord shall not be required to keep the
Security Deposit separate from its other accounts and no trust relationship is
created with respect to the Security Deposit.
3.3.2 INCREASE IN DEPOSIT. Deleted.
3.4 TERMINATION; ADVANCE PAYMENTS. Upon termination of this Sublease under
Article Seven (Damage or Destruction), Article Eight (Condemnation), or any
other termination not resulting from Tenant's default, and after Tenant has
vacated the Premises in the manner required by this Sublease, an equitable
adjustment shall be made concerning advance Rent, any other advance payments
made by Tenant to Landlord, and accrued Real Property Taxes, and Landlord shall
refund the unused portion of the Security Deposit to Tenant or Tenant's
successor.
ARTICLE IV
OTHER CHARGES PAYABLE BY TENANT
4.1 ADDITIONAL RENT. All charges payable by Tenant other than Base Rent are
called "Additional Rent." Unless this Sublease provides otherwise, all
Additional Rent shall be paid with the next monthly installment of Base Rent and
shall be in United States currency. The term "Rent" shall mean Base Rent and
Additional Rent.
4.2 REAL PROPERTY TAXES.
4.2.1 PAYMENT OF TAXES. Tenant shall pay its proportionate share of all
Real Property Taxes levied and assessed against the Project. Tenant's
proportionate share of Real Property Taxes shall be the ratio that the total
number of square feet in the Premises bears to the total number of leasable
square feet in the Project existing upon the date the computation is made. Each
year Landlord shall notify Tenant of Landlord's calculation of Tenant's
proportionate share of the Real Property Taxes and together with such notice
shall furnish Tenant with a copy of the tax bill. If any supplemental tax bills
are delivered with respect to the Project, Landlord may notify Tenant of
Landlord's new calculation of Tenant's proportionate share of Real Property
Taxes as soon as such supplemental tax bill is received. Subject to Section 4.8
below, Tenant shall reimburse Landlord for Tenant's proportionate share of Real
Property Taxes semiannually no later than fifteen (15) days before the taxing
authority's delinquency date.
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4.2.2 DEFINITION OF "REAL PROPERTY TAXES". "Real Property Taxes" means (i)
any fee, license fee, license tax, commercial rental tax, levy, charge,
assessment, penalty or tax (other than inheritance or estate taxes) imposed by
any authority having the direct or indirect power to tax, including any City,
County, State or Federal government, or any school, agriculture, lighting,
drainage or other improvement district thereof, as against any legal or
equitable interest of Landlord in the Premises; (ii) any tax on the Landlord's
right to receive, or the receipt of, rent or income from the Premises or against
Landlord's business of leasing the Premises; (iii) any tax or charge for fire
protection, streets, sidewalks, road maintenance, refuse or other services
provided to the Premises by any governmental agency; (iv) any tax imposed upon
this transaction or based upon a reassessment of the Premises due to a change in
ownership or transfer of all or part of Landlord's interest in the Premises; and
(v) any charge or fee replacing any tax previously included within the
definition of Real Property Taxes. "Real Property Taxes" does not, however,
include Landlord's Federal or State income, franchise, inheritance or estate
taxes.
4.2.3 PERSONAL PROPERTY TAXES.
(a) Tenant shall pay prior to delinquency all taxes charged against
trade fixtures, furnishings, equipment or any other personal property belonging
to Tenant. Tenant shall attempt to have such personal property taxed separately
from the Premises.
(b) If any such taxes on Tenant's personal property are levied
against Landlord or Landlord's property, or if the assessed value of the
Premises is increased by the inclusion therein of a value placed upon such
personal property or trade fixtures of Tenant, then Landlord, after written
notice to Tenant, shall have the right to pay the taxes based upon such
increased assessments, regardless of the validity thereof, but only under proper
protest if requested by Tenant in writing. If Landlord shall do so, then Tenant
shall, upon demand, repay to Landlord the taxes levied against Landlord, or the
proportion of such taxes resulting from such increase in the assessment. In any
such event, however, Tenant, at Tenant's sole cost and expense, shall have the
right, in the name of Landlord and with Landlord's cooperation, to bring suit in
any court of competent jurisdiction to recover the amount of any such taxes so
paid under protest; any amount so recovered to belong to the Tenant.
(c) If any of Tenant's personal property is taxed with the Premises,
Tenant shall pay Landlord the taxes for the personal property within fifteen
(15) days after Tenant receives a written statement from Landlord for such
personal property taxes.
4.3 UTILITIES. Tenant shall arrange for and pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer, telephone,
water and other utilities and services supplied to the Premises. Landlord will
cooperate in attempting to have each of the utilities supplied to the Premises
separately metered. However, if any such utilities or services are jointly
metered with other premises within the Project, Landlord shall make a reasonable
determination of Tenant's proportionate share of the cost for such utilities and
services, based on information reasonably available to Landlord, and Tenant
shall pay such share to Landlord within fifteen (15) days after receipt of
Landlord's written statement of such cost.
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4.4 INSURANCE.
4.4.1 LANDLORD'S LIABILITY INSURANCE. During the Sublease Term, Landlord
shall maintain a policy of commercial general liability insurance at Tenant's
expense, insuring Landlord against liability arising out of the ownership, use,
occupancy or maintenance of the Premises. The initial amount of such insurance
shall be at least $2,000,000.00 and shall be subject to periodic increase based
upon inflation, increased liability awards, recommendations of professional
insurance advisers, and other relevant factors. However, the amount of such
insurance shall not limit Tenant's liability nor relieve Tenant or any
obligation hereunder. Tenant shall, at Tenant's expense, maintain such other
liability insurance as required pursuant to Subsections 4.4.6 and 4.4.7 hereof.
4.4.2 LANDLORD'S HAZARD AND RENTAL INCOME INSURANCE. During the Sublease
Term, Landlord shall, at Tenant's expenses, maintain policies of insurance
covering loss of or damage to the Premises to the extent of at least one hundred
percent (100%) of its replacement value. Such policies shall provide protection
against all perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, and any other perils which Landlord
reasonably deems necessary. Landlord may obtain insurance coverage for Tenant's
fixtures, equipment or building improvements installed by Tenant in or on the
Premises. Tenant shall, at Tenant's expense, maintain such primary or additional
insurance on its fixtures, equipment and building improvements as is required
pursuant to Subsections 4.4.6 and 4.4.7 hereof. During the Sublease Term,
Landlord may also maintain a rental income insurance policy at Tenant's expense,
with loss payable to Landlord in an amount equal to one year's Rent. Tenant
shall not do or permit to be done anything which invalidates any such insurance
policies.
4.4.3 PAYMENT OF PREMIUMS; INSURANCE POLICIES. Tenant shall pay its pro
rata share of the premiums for maintaining the insurance required by Subsections
4.4.1 and 4.4.2. Tenant's pro rata share of all such premiums shall be based on
the same proportion as used for payment of taxes pursuant to Subsection 4.2.1
hereof. All such amounts will be due and payable upon ten (10) days written
notice.
4.4.4 INCREASE IN FIRE INSURANCE PREMIUM. Tenant agrees that it will not
keep, use, manufacture, assemble, sell or offer for sale in or upon the Premises
any article which may be prohibited by the standard form of fire insurance
policy. Tenant agrees to pay any increase in premiums for fire and extended
coverage insurance that may be charged during the term of this Sublease on the
amount of such insurance which may be carried by Landlord on said Premises or
the Building, resulting from the acts or omissions of Tenant, its agents,
servants or employees, or the use or occupancy of the Premises by Tenant or from
the type of materials or products stored, manufactured, assembled or sold by
Tenant in the Premises, whether or not Landlord has consented to the same. In
determining whether increased premiums are the result of Tenant's use of the
Premises, a schedule, issued by the organization making the insurance rate on
the Premises, showing the various components of such rate, shall be conclusive
evidence of the several items and charges which make up the fire insurance rate
on the Premises.
4.4.5 WAIVER OF SUBROGATION. Landlord and Tenant each hereby release and
relieve the other, and waive their entire right to recover damages (whether in
contract or in tort)
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against the other, for loss or damage arising out of or incident to the perils
required to be insured against under Section 4.4. The effect of such releases
and waivers of the right to recover damages shall not be limited by the amount
of insurance carried or required, or by any deductibles applicable thereto.
Landlord and Tenant agree to have their respective insurance companies issuing
property damage insurance waive any right to subrogation that such companies may
have against Lessor or Lessee, as the case may be, so long as the insurance is
not invalidated thereby.
4.4.6 TENANT'S REQUIRED INSURANCE. Tenant shall keep in force throughout
the Sublease Term: (a) a commercial general liability insurance policy or
policies to protect the Landlord Entities against any liability to the public or
to any invitee of Tenant or a Landlord Entity incidental to the use of or
resulting from any accident occurring in or upon the Premises with a limit of
not less than $1,000,000.00 per occurrence and not less than $2,000,000.00 in
the annual aggregate, or such larger amount as Landlord may prudently require
from time to time, covering bodily injury, personal injury, property damage and
contractual liability and $1,000,000 products/completed operations aggregate;
(b) Business Auto Liability covering owned, non-owned and hired vehicles with a
limit of not less than $1,000,000 per accident; (c) insurance protecting against
liability under Worker's Compensation Laws with limits at least as required by
statute; (d) Employer's Liability with limits of $500,000 each accident,
$500,000 disease policy limit, $500,000 disease - each employee; (e) All Risk or
Special Form coverage protecting Tenant against loss or damage to Tenant's
alterations, additions, improvements, carpeting, floor coverings, paneling,
decorations, fixtures, inventory, and other personal property situated in or
about the Premises to the full replacement value of the property so insured; and
(f) such other reasonable types of insurance and in such reasonable amounts
covering the Premises and operations therein as Landlord may reasonably require
from time to time. The term "Landlord Entities" shall mean Landlord and any
other person or entity that Landlord may designate from time to time.
4.4.7 REQUIRED INSURANCE POLICIES. Each of the policies required under
Section 4.4.6 shall (a) be provided at Tenant's expense; (b) name the Landlord
Entities as additional insureds; (c) be issued by an insurance company with a
minimum Best's rating of "A:VII" during the Sublease Term; (d) provide that said
insurance shall not be canceled unless thirty (30) days prior written notice
(ten days for non-payment of premium) shall have been given to Landlord; and (e)
be primary to and not contributory with any similar insurance carried by
Landlord. Said policy or policies or certificates thereof shall be delivered to
Landlord by Tenant upon the Commencement Date and at least thirty (30) days
prior to each renewal of said insurance.
4.4.8 ADDITIONAL LIABILITY; UNDER CONSTRUCTION. Whenever Tenant shall
undertake any alterations, additions or improvements in, to or about the
Premises ("Work") the aforesaid insurance protection must extend to and include
injuries to persons and damage to property arising in connection with such Work,
together with such other insurance as Landlord shall require; and the policies
of or certificates evidencing such insurance must be delivered to Landlord prior
to the commencement of any such Work.
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4.5 COMMON AREAS.
4.5.1 DEFINITION; LOCATION. As used in this Sublease, "Common Areas" shall
mean all areas within the Project which are available for the common use of
tenants of the Project and which are not leased or held for the exclusive use of
tenants of the Project or which are not leased or held for the exclusive use of
Tenant or other tenants, including, but not limited to, parking areas,
driveways, sidewalks, loading areas, retaining walls, truck service ways,
pedestrian malls, stairs, ramps, restrooms, access roads, corridors,
landscaping, planted areas and trash enclosures. Landlord may from time to time
change the size, location, nature and use of the Common Areas, including
converting Common Areas into leasable areas, construction of additional parking
facilities (including parking structures) in the Common Areas, and increasing or
decreasing Common Area land and/or facilities. Tenant acknowledges that such
activities may result in occasional inconvenience to Tenant from time to time.
Landlord will exercise good faith efforts to minimize any disruption to Tenant's
business caused by such activities, but Tenant hereby releases Landlord from any
and all claims pertaining to such activities.
4.5.2 USE OF COMMON AREAS. Subject to other provisions of this Sublease,
Tenant shall have the nonexclusive right (in common with other tenants and all
others to whom Landlord has granted or may grant such rights) to use the Common
Areas for the purposes intended, subject to such reasonable rules and
regulations as Landlord may establish from time to time. Tenant shall abide by
such rules and regulations and shall use its best effort to cause others who use
the Common Areas with Tenant's expressed or implied permission to abide by
Landlord's rules and regulations. At any time, Landlord may close any Common
Areas to perform any acts in and to the Common Areas as, in Landlord's judgment,
may be desirable to improve the Project. Tenant shall not, at any time,
intentionally interfere with the rights of Landlord, other tenants, or any other
person entitled to use the Common Areas.
4.5.3 VEHICLE PARKING. Tenant shall be entitled to use 3.8 vehicle parking
spaces in the Project for each 1,000 (One Thousand) square feet (a total of
thirty-one (31) spaces) within the Premises without paying any additional rent.
Tenant's parking shall not be reserved and shall be limited to vehicles no
larger than standard size automobiles or pickup or utility vehicles. Tenant
shall not cause large trucks or other large vehicles to be parked within the
Project. Vehicles shall be parked only in striped parking spaces and not in
driveways, loading areas or other locations not specifically designated for
parking. If Tenant parks more vehicles in the parking area than the number
identified herein, such conduct shall be a material breach of this Sublease. No
vehicle may be parked at the Project for more than seventy-two (72) consecutive
hours without Landlord's prior written consent.
4.5.4 MAINTENANCE OF COMMON AREAS. Landlord shall maintain the Common
Areas in good order, condition and repair and shall operate the Project, in
Landlord's reasonable discretion, as a first class industrial/commercial real
property development. Tenant shall pay Tenant's pro rata share (as defined
below) of all costs incurred by Landlord in connection with the ownership,
operation and maintenance of the Common Area ("Common Area Costs"). Common Area
Costs include, but are not limited to, costs and expenses for the following:
gardening and landscaping; pest control and extermination services; utilities,
water and sewage charges; maintenance of signs (other than Tenant's signs);
premiums for liability,
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property damage, fire and other types of casualty insurance on the Common Areas
and all Common Area improvements; all personal property taxes levied on or
attributable to personal property used in connection with the Common Areas;
straight-line depreciation on personal property owned by Landlord which is
consumed in the operation or maintenance of the Common Areas; fees for required
licenses and permits; repairing, resurfacing, repaving, maintaining, painting,
lighting, cleaning, refuse removal, security and similar items; reserves; and a
reasonable allowance to Landlord for Landlord's supervision of the Common Areas
(not to exceed five percent (5%) of the total of all other Common Area Costs for
the calendar year). Landlord may cause any or all of such services to be
provided by third parties, or by entities associated with Landlord. Common Area
Costs shall not include depreciation of real property which forms part of the
Common Area, all Real Property Taxes for which Tenant is liable under this
Sublease, all insurance premiums for which Tenant is liable under this Sublease,
and all maintenance and repair costs for which Tenant is liable under this
Sublease.
4.5.5 TENANT'S SHARE AND PAYMENT. Tenant shall pay Tenant's annual pro
rata share of all estimated Common Area Costs, in advance, in monthly
installments on the first day of each month during the Sublease Term (prorated
for any fractional month). Tenant's pro rata share shall be calculated by
dividing the square foot area of the Premises, as set forth in Section 1.4 of
this Sublease, by the aggregate square foot area of the leasable area within the
Project whether currently leased or not upon the date the computation is made.
Landlord may adjust such estimates at any time and from time to time based upon
Landlord's experience and reasonable anticipation of costs. Such adjustments
shall be effective as of the next Rent payment date after notice to Tenant.
Within thirty (30) days after the end of each calendar year of the Sublease
Term, Landlord shall deliver to Tenant a statement prepared in accordance with
generally accepted accounting principles setting forth, in reasonable detail,
the actual Common Area Costs paid or incurred by Landlord during the preceding
calendar year and Tenant's pro rata share. Upon receipt of such statement, there
shall be an adjustment between Landlord and Tenant with payment to or credit
given by Landlord (as the case may be) so that Landlord shall receive the entire
amount of Tenant's share of such costs and expenses for such period. Any delay
or failure of Landlord to deliver such statement within said thirty (30) day
period will not constitute a waiver of Landlord's right to subsequently deliver
such statement and require Tenant to pay any deficiency in Tenant's pro rata
share as may be disclosed by such statement. Tenant shall have the right to
audit the Common Area Costs billed to Tenant by Landlord. The cost of the audit
shall be the responsibility of and paid by Tenant, unless the Common Area Costs
billed to Tenant by Landlord exceed actual costs as verified by the audit by
more than five (5) percent, in which case the cost of the audit shall be paid by
Landlord.
4.5.5.1 ALTERNATIVE PAYMENT. Notwithstanding the foregoing, Landlord
has the right to notify Tenant on a monthly or other basis of the actual amount
Landlord has expended for all Common Area Costs incurred during the previous
month or period. Such notice shall also set forth Tenant's pro rata share of
such actual costs. Upon receipt of such statement, Tenant shall pay with the
next monthly installment of Rent Tenant's pro rata share of the actual Common
Area Costs incurred during the previous month or period.
4.5.6 ADDITIONAL AREAS. In addition to the Common Areas and costs
associated therewith described in this Section 4.5, Landlord may, but is not
obligated to, provide certain
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additional spaces and areas within or in close proximity to the Project
("Additional Areas") as (and included within the definition of) Common Areas.
The Additional Areas may include, but are not limited to, an office used by and
subject to the exclusive control of Landlord for leasing and/or managing the
Project, a conference room available on a reserved basis for use by tenants
within the Project during normal business hours, maintenance facilities for the
storage of equipment and supplies, and a locker room facility for use by tenants
of the Project and their employees that are employed at the Project. Common Area
Costs for which Tenant is liable for its pro rata share as described in Section
4.5.4 shall include costs of operating and the reasonable rental value of the
space occupied by the Additional Areas. Notwithstanding anything to the contrary
herein, Landlord agrees to make the conference Room Locker/shower facilities
available to Tenant throughout the initial term of the sublease.
4.6 LATE CHARGES. Tenant's failure to pay Rent promptly may cause Landlord to
incur unanticipated costs. The exact amount of such costs is impractical or
extremely difficult to ascertain. Such costs may include, but are not limited
to, processing and accounting charges and late charges which may be imposed on
Landlord by any ground lease, mortgage or trust deed encumbering the Premises.
Therefore, if Landlord does not receive any Rent payment within five (5)
business days after it becomes due, Tenant shall pay Landlord a late charge
equal to five percent (5%) of the overdue amount. The parties agree that such
late charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of such late payment.
4.6.1 REPEATED LATE CHARGES. In the event that a late charge is payable
under this Sublease, whether or not collected, for four (4) installments of Base
Rent during any one calendar year of the Sublease Term, then the Base Rent shall
automatically become due and payable quarterly in advance, rather than monthly.
All moneys paid to Landlord under this provision may be commingled with other
moneys of Landlord and shall not bear interest.
4.7 INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant to Landlord
which is not paid when due shall bear interest at (i) the prime or reference
rate, or succeeding similar index, announced by Bank of America (or its
successor) from time to time plus four (4) percentage points or (ii) the highest
rate then permitted by law, whichever is less, from the due date of such amount
(the "Interest Rate"). However, interest shall not be payable on late chares to
be paid by Tenant under this Sublease.
4.8 IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. If requested by any
ground lessor or lender to whom Landlord has granted a security interest in the
Premises or the Project, or if Landlord deems it necessary in Landlord's sole
and absolute discretion, of if Tenant is more than ten (10) business days late
in the payment of Rent more than once in any consecutive twelve (12) month
period, Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the
annual Real Property Taxes and/or insurance premiums payable by Tenant under
this Sublease (the "Impound Payments"), together with each payment of Base Rent.
The Impound Payments shall be paid to the ground lessor or lender if required or
held by Landlord with no obligation to pay Tenant interest thereon or keep the
Impound Payments in a separate account. The amount of the Real Property Taxes
and insurance premiums when unknown shall be reasonably estimated by Landlord.
The Impound Payments shall be applied by Landlord to the payment of Real
Property Taxes and insurance premiums when due. Any
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deficiency of Impound Payments shall be paid by Tenant to Landlord upon
written request. If Tenant defaults under this Sublease, Landlord may apply the
Impound Payments to any obligation then due under this Sublease.
ARTICLE V
USEOF PREMISES
5.1 PERMITTED USES. Tenant may use the Premises only for the Permitted Uses set
forth in Section 1.6 above.
5.2 MANNER OF USE.
5.2.1 OBJECTIONABLE USES. Tenant shall not do or permit anything to be
done in or about the Premises which will in any way obstruct or interfere with
or infringe on the rights of other occupants of the Project, or injure or annoy
them, or use or allow the Premises to be used for any improper, immoral, or
objectionable purposes; nor shall Tenant cause, maintain or permit any nuisance
in, on or about the Premises or commit or suffer to be committed any waste in,
on or about the Premises.
5.2.2 NONPERMITTED USES; COMPLIANCE WITH LAW. Tenant shall not do or
permit to be done in or about the Premises, nor bring, keep or permit to be
brought or kept therein, anything which is prohibited by or 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, or which is
prohibited by any standard form of fire insurance policy or will in any way
increase the existing rate of or affect any fire or other insurance policy
covering the Project or any part thereof or any of its contents. Tenant shall,
at its sole expense, comply with all governmental laws, ordinances and
regulations, with the requirements of any Board of Fire Underwriters or other
similar body now or hereafter instituted, and with any order, directive or
certificate of occupancy issued pursuant to any law, ordinance or regulation by
any public officer, insofar as the same relates to or affects the condition, use
or occupancy of the Premises; provided, however, Tenant will not be required to
make any structural changes to the Premises unless such structural change is
required due to Tenant's acts or particular occupancy or use of the Premises.
The judgment of any court of competent jurisdiction or the admission of Tenant
in any action against Landlord, whether or not Tenant is a party to such action,
shall be conclusive in establishing such violations between Landlord and Tenant.
5.2.3 NOXIOUS ODORS. Tenant shall not use, keep or permit to be used or
kept any foul or noxious gas or substance in the Premises, or permit or suffer
the Premises to be occupied or used in a manner offensive or objectionable to
Landlord or other occupants of the Project by reason of noise, odors and/or
vibrations, or interfere in any way with other tenants or those having business
therein, nor shall any animals or birds be brought in or kept in or about the
Premises or the Project. Tenant shall not conduct any auction on the Premises.
No cooking (with the exception of coffee, tea, cocoa, instant soups and
microwavable foods) shall be done or permitted by Tenant on the Premises, nor
shall the Premises be used for washing clothes, for lodging, or for any
improper, objectionable or immoral purposes. Tenant shall not use or keep in
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the Premises or the Project any kerosene, gasoline or inflammable or combustible
fluid or material (except for small amounts of normal cleaning supplies used in
day-to-day operations) or use any method of heating or air conditioning other
than that supplied by Landlord.
5.2.4 PERMIT. Tenant shall obtain, pay for and keep current all permits
required for Tenant's occupancy of the Premises and shall promptly take all
actions necessary to comply with all applicable, statutes, ordinances, rules,
regulations, orders and requirements regulating the use by Tenant of the
Premises, including, without limitation, the Occupational Health and Safety Act
and the Americans With Disabilities Act.
5.3 SIGNS AND AUCTIONS.
5.3.1 AUCTION. Tenant shall not conduct, or permit to be conducted, any
sale by auction on the Premises.
5.3.2 PROHIBITED SIGNS. Tenant shall not place, or suffer to be placed or
maintained, on any exterior door, wall or window of the Premises any sign,
awning or canopy, or advertising matter or other thing of any kind, and will not
place or maintain any decoration, lettering or advertising matter on the glass
of any window or door, or that can be seen through the glass, of the Premises
without Landlord's prior written approval. Tenant further agrees to maintain
such sign, awning, canopy, decoration, lettering, advertising matter or things
as may be approved, in good condition and repair at all times.
5.3.3 SIGN CRITERIA. Unless Tenant and Landlord agree otherwise, Landlord
will install, at Tenant's expense, a sign for Tenant in the Project in
accordance with the criteria described on Exhibit "C" attached hereto and by
this reference incorporated herein.
5.4 HAZARDOUS MATERIALS.
5.4.1 PROHIBITION OF STORAGE; INDEMNITY. Tenant shall not cause or permit
any Hazardous Material (as hereinafter defined) to be brought upon, kept or used
in or about the Premises or the Project in violation of this sublease or any
applicable laws by Tenant, its agents, employees, contractors or invitees, other
than those expressly permitted by Landlord in writing. If Tenant breaches the
obligation stated in the preceding sentence, or if the presence of Hazardous
Materials on the Premises caused or permitted by Tenant (including Hazardous
Materials specifically permitted by Landlord) results in contamination of the
Premises or the Project, or if contamination of the Premises or the Project by
Hazardous Material otherwise occurs for which Tenant is legally liable to
Landlord for damage resulting therefrom, Tenant shall indemnify, defend and hold
the Landlord Entities harmless from and against any and all claims, judgments,
damages, penalties, fines, costs, liabilities, or losses (including without
limitation diminution in value of the Premises or any portion of the Project,
damages for the loss or restriction on use of rentable or usable space or of any
amenity of the Premises of the Project, damages arising from any adverse impact
on marketing of space in the Premises or the Project due to Tenant's breach of
its obligations under the first sentence herein, and sums paid in settlement of
claims, attorneys' fees, consultant fees and expert fees) which arise during or
after the Sublease Term as a result of such contamination. This indemnification
of the Landlord
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Entities by Tenant includes, without limitation, costs incurred in connection
with any investigation of site conditions or any cleanup, remedial, removal, or
restoration work required by any federal, state or local governmental agency or
political subdivision because of Hazardous Material present in the soil or
ground water on or under the Premises. Without limiting the foregoing, if the
presence of any Hazardous Material on the Premises caused or permitted by Tenant
results in any contamination of the Premises or the Project, Tenant shall
promptly take all actions at its sole expense as are necessary to return the
Premises or the Project, as applicable, to the condition existing prior to the
introduction of any such Hazardous Material to the Premises or the Project, as
applicable, provided that Landlord's approval of such action shall first be
obtained, which approval shall not be unreasonably withheld so long as such
actions would not potentially have any material adverse long-term or short-term
effect on the Premises or the Project.
5.4.2 TERMINATION OF LEASE. Deleted.
5.4.3 TESTING. At any time prior to the expiration of the Sublease Term,
Landlord shall have the right, upon at least twenty-four (24) hours' advance
notification, to conduct at Landlord's expense (subject to reimbursement as
provided below) appropriate tests of water and soil and to deliver to Tenant the
results of such tests to demonstrate that contamination has occurred as a result
of Tenant's use of the Premises, provided, however, that Landlord shall not
unreasonably interfere with Tenant's business operations. If the results of such
tests demonstrate that contamination has occurred as a result of Tenant's use of
the Premises, Tenant shall reimburse Landlord for the cost of such tests within
ten (10) days following written demand therefor.
5.4.4 UNDERGROUND TANKS. If underground or other storage tanks storing
Hazardous Materials are located on the Premises or are hereafter placed on the
Premises by any party, Tenant shall monitor the storage tanks, maintain
appropriate records, implement reporting procedures, properly close any
underground storage tanks, and take or cause to be taken all other steps
necessary or required under the California Administrative Code, Title 23,
Chapter 3, Subchapter 16, "Underground Storage Tank Regulations," and Division
20, Chapter 6.7 of the California Health & Safety Code, "Underground Storage of
Substances," as they now exist or may hereafter be adopted or amended.
5.4.5 TENANT'S OBLIGATIONS. Tenant's obligations under this Section 5.4
shall survive the termination of this Sublease. During any period of time
employed by Tenant after the termination of this Sublease to complete the
removal from the Premises of any such Hazardous Materials, the provisions of
Section 2.5 shall apply. To the best of Landlord's knowledge, the Premises and
the Project contain no Hazardous Materials as of the commencement date of this
sublease.
5.4.6 DEFINITION OF "HAZARDOUS MATERIAL". As used herein, the term
"Hazardous Material" means any hazardous or toxic substance, material or waste
which is or becomes regulated by any local governmental authority, the State of
California, the United States Government or any agency thereof. The term
"Hazardous Material" includes, without limitation, any material or substance
which is (i) defined as a "hazardous waste," "extremely hazardous waste" or
"restricted hazardous waste" under Section 25115, 25117 or 25122.7, or listed
pursuant
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to Section 25140, of the California Health and Safety Code, Division
20, Chapter 6.5 (Hazardous Waste Control Law), (ii) defined as a "hazardous
substance" or under Section 25316 of the California Health and Safety Code,
Division 2, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous Substance Account
Act), (iii) defined as a "hazardous material," "hazardous substance" or
"hazardous waste" under Section 25501 of the California Health and Safety Code,
Division 20, Chapter 6.95 (Hazardous Substances), (v) petroleum, (vi) asbestos,
(vii) listed under Article 9 and defined as hazardous or extremely hazardous
pursuant to Article 11 of Title 22 of the California Administrative Code,
Division 4, Chapter 20, (viii) designated as a "hazardous substance" pursuant to
Section 311 of the Federal Water Pollution Control Act (33 U.S.C. Section 1317),
(ix) defined as a "hazardous waste" pursuant to Section 1004 of the Federal
Resource Conservation and Recovery Act, 42 U.S.C. Section 6091 et seq. (42
U.S.C. Section 6903), or (x) defined as a "hazardous substance" pursuant to
Section 101 of the Comprehensive Environmental Response Compensation and
Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601).
5.5 INDEMNIFICATION. None of the Landlord Entities shall be liable and Tenant
hereby waives all claims against them for any damage to any property or any
injury to any person in or about the Premises or the Project by or from any
cause whatsoever (including without limiting the foregoing, rain or water
leakage of any character from the roof, windows, walls, basement, pipes,
plumbing works or appliances, the Project, or any portion thereof, not being in
good condition or repair, gas, fire, oil, electricity, theft or the presence of
Hazardous Material), except to the extent caused by or arising from the
negligence or willful misconduct of Landlord or its agents, employees or
contractors, or failure of Landlord to make repairs after receipt of notice of
defects from Tenant, and then only to the extent such damage or injury is of a
type not insured against, or required to be insured against hereunder, by
Tenant. Tenant shall protect, indemnify, and hold the Landlord Entities harmless
from and against any and all loss, claims, liability or costs (including court
costs and attorney's fees) incurred by reason of (a) any damage to any property
(including but not limited to property of any Landlord Entity) or any injury
(including but not limited to death) to any person occurring in, on or about the
Premises or the Project to the extent that such injury or damage shall be caused
by or arise from any actual or alleged act, neglect or fault by Tenant, its
agents, servants, employees, invitees or visitors, or from any omission by or of
Tenant, its agents, servants, employees, invitees or visitors to meet any
standards imposed by any duty with respect to the injury or damage; (b) the
conduct or management of any work or thing whatsoever done by the Tenant in or
about the Premises or from transactions of the Tenant concerning the Premises;
(c) Tenant's failure to comply with any and all governmental laws, ordinances,
and regulations applicable to the condition or use of the Premises or its
occupancy; or (d) any breach or default on the part of Tenant in the performance
of any covenant or agreement on the part of the Tenant to be performed pursuant
to this Sublease. The provisions of this Section shall survive the termination
of this Sublease with respect to any claims or liability accruing prior to such
termination.
5.6 LANDLORD'S ACCESS. Landlord or its agents may enter the Premises during
normal business hours to show the Premises to potential buyers, investors or
tenants or other parties, or for any other purpose, Landlord reasonably deems
necessary. Landlord shall give Tenant reasonable prior notice of such entry,
except in the case of an emergency. Notwithstanding the
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foregoing, Landlord shall not unreasonably interfere with Tenant's business
operations, Landlord may place customary "For Sale" or "For Lease" signs on the
Premises.
5.7 QUIET POSSESSION. If Tenant pays the rent and complies with all other terms
of this Sublease, Tenant may occupy and enjoy the Premises for the full Sublease
Term, subject to the provisions of this Sublease, free from hindrance by anyone
claiming by, through or under Landlord.
5.8 WINDOW COVERING. Tenant shall not change the window coverings in the
Premises without Landlord's prior written consent.
ARTICLE VI
CONDITION OF PREMISES;
MAINTENANCE, REPAIRS, AND ALTERATIONS
6.1 EXISTING CONDITIONS. Tenant accepts the Premises in its condition as of the
execution of this Sublease, subject to any other provisions of this Sublease and
to all recorded matters, laws, ordinances, and governmental regulations and
orders. Tenant acknowledges that neither Landlord nor any agent of Landlord has
made any representation as to the condition of the Premises or the suitability
of the Premises for Tenant's intended use.
6.2 EXEMPTION OF LANDLORD FROM LIABILITY; WAIVER. Landlord shall not be liable
for any damage or injury to the person, business (or any loss of income
therefrom), goods, wares, merchandise or other property of Tenant, Tenant's
employees, invitees, customers or any other persons in or about the Premises,
whether such damage or injury is caused by or results from: (a) fire, steam,
electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other
defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or
lighting fixtures or any other cause; (c) conditions (including the presence of
Hazardous Material) arising in or about the Premises or upon other portions of
the Project, or from other sources or places; or (d) any act or omission of any
other tenant of the Project. Landlord shall not be liable for any such damage or
injury even though the cause of or the means of repairing such damage or injury
are not accessible to Tenant. Tenant, as a material part of the consideration to
be rendered to Landlord, hereby waives all claims against Landlord for the
foregoing damages from any cause arising at any time. The provisions of this
Section 6.2 shall not, however, except Landlord from liability for Landlord's
negligence or willful misconduct, or for Landlord's failure to observe any of
the terms and conditions of this Sublease.
6.3 TENANT'S OBLIGATIONS.
6.3.1 MAINTENANCE AND REPAIR. Tenant shall keep the Premises (including
all nonstructural, interior and exterior areas, systems and equipment, all
glass, glazing, window moldings, partitions, doors, door hardware, interior
painting, fixtures, and appurtenances thereof (including electrical, lighting,
plumbing, and plumbing fixtures) in good order, condition, and repair during the
Sublease Term. Tenant shall promptly replace any portion of the Premises or
system or equipment in the Premises which cannot be fully repaired, regardless
of whether the
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benefit of such replacement extends beyond the Sublease Term. Tenant shall also
maintain a preventive maintenance contract providing for the regular inspection
and maintenance of the heating and air conditioning system (including leaks
around ducts, pipes, vents, or other parts of the air conditioning) by a
licensed heating and air conditioning contractor. However, Landlord shall have
the right, upon written notice to Tenant, to undertake the responsibility for
preventive maintenance of the heating and air conditioning system, at Tenant's
expense. It is the intention of the Landlord and Tenant that, at all times
during the Sublease Term, Tenant shall maintain the Premises in an attractive,
first-class fully operative condition. Further, Tenant shall keep the exterior
areas surrounding the Premises free from litter and debris. Tenant waives and
releases its rights under California Civil Code Section 1942.
6.3.2 TENANT EXPENSE. All of Tenant's obligations under Section 6.3.1
shall be accomplished at Tenant's sole expense. If Tenant refuses or neglects to
properly perform its obligations as required under Section 6.3.1 and to the
reasonable satisfaction of Landlord, Landlord may, on ten (10) days' prior
written notice (except that no notice shall be required in case of emergency)
enter the Premises and perform such obligation on behalf of Tenant without
liability to Tenant for any loss or damage that may accrue to Tenant's
merchandise, fixtures, or other property or to Tenant's business by reason
thereof, and upon completion thereof, Tenant shall pay Landlord's costs for
making such repairs plus fifteen percent (15%) for overhead, upon presentation
of bill therefor, as Additional Rent. Said bill shall include interest at the
Interest Rate on said costs from the date of completion of repairs by Landlord.
6.4 LANDLORD'S OBLIGATIONS. Landlord shall be responsible only for the
maintenance and repair of structural portions of the Premises. As used herein,
structural portions of the Premises shall only refer to the foundation and
slabs, exterior walls, and exterior roof of the Building in which the Premises
are located. If Landlord is required to make repairs to structural portions by
reason of Tenant's conduct or activities, Landlord may add the cost of such
repairs to the Rent which shall thereafter become due. Except for the cost of
repairs subject to reimbursement pursuant to the preceding sentence, Tenant
shall pay its pro rata share, computed in accordance with Subsection 4.2.1
hereof, of all repairs, alterations and improvements made by Landlord to the
structural portions of the Building where the Premises are located. All such
amounts shall be due and payable upon five (5) business days written notice from
Landlord.
6.5 ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
6.5.1 PROHIBITED ACTIONS. Tenant shall not make any alterations, additions
or improvements to the Premises without Landlord's prior written consent, except
for nonstructural alterations which do not exceed Five Thousand Dollars ($5,000)
in cost per alteration, and which are not visible from the outside of the
Premises. In no event may Tenant install any antennas, satellite dishes or other
devices on the roof of the Premises without Landlord's prior written consent,
which consent Landlord may withhold in its sole and absolute discretion,
Landlord may require Tenant to provide demolition and/or lien and completion
bonds in form and amount satisfactory to Landlord. Tenant shall promptly remove
any alterations, additions, or improvements constructed in violation of this
Subsection 6.5.1 upon Landlord's written request. All alterations, additions,
and improvements will be accomplished in good and workmanlike manner, in
conformity with all applicable laws and regulations, and by a contractor
approved by
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Landlord. Upon completion of any such work, Tenant shall provide Landlord with
"as built" plans (or dimensioned drawings of sufficient detail to reflect the
alterations made by Tenant), copies of all construction contracts, and proof of
payment for all labor and materials. Any additions to, or alterations of, the
Premises, except moveable furniture and trade fixtures, shall become at once a
part of the Premises and belong to Landlord; provided, however, (i) Landlord
shall not be obligated to insure or restore such additions or alterations
pursuant to Subsections 4.4.2 and 7.3, respectively, and (ii) to the extent an
alteration or addition requires Landlord's consent hereunder and Tenant has
failed to obtain such consent, Landlord may require Tenant to remove any such
additions to, or alterations of, the Premises by giving Tenant written notice
thereof prior to the termination of this Sublease in which event Tenant shall
remove the same and repair any damage to the Premises caused by such removal.
Nothing in this Section 6.5.1 shall prevent Tenant from installing trade
fixtures, machinery or other trade equipment in conformance to all applicable
laws and regulations, and the same may be removed upon the termination of this
Sublease, provided the Premises are not damaged by such removal, and provided
further that Tenant shall not then be in default under the terms and conditions
of this Sublease.
6.5.2 PAYMENT BY TENANT. Tenant shall pay when due all claims for labor
and material furnished to the Premises.
6.5.3 FREEDOM FROM LIENS. Tenant shall keep the Premises, all other
property therein and the Project free from any liens arising out of any work
performed, material furnished or obligations incurred by Tenant, and shall
indemnify, hold harmless and defend the Landlord Entities from and against any
liens and encumbrances arising out of any work performed or materials furnished
by or at the direction of Tenant. In the event that Tenant shall not, within
twenty (20) days following the imposition of any such lien, cause such lien to
be released of record by payment or posting of a proper bond, Landlord shall
have, in addition to all other remedies provided herein and by law, the right,
but no obligation, to cause the same to be released by such means as it shall
deem proper, including payment of the claim giving rise to such lien. All such
sums paid by Landlord and all expenses incurred by it in connection therewith,
including attorneys' fees and costs, shall be payable to Landlord by Tenant on
demand with interest at the Interest Rate.
6.5.4 WRITTEN NOTIFICATION REQUIRED. Tenant will notify Landlord in writing ten
(10) days prior to commencing any alterations or additions to allow Landlord
time to file and post notices of nonresponsibility. Landlord reserves the right
to approve any contractor and method of Payment, prior to said contractor making
any improvements to the Premises.
6.6 RULES AND REGULATIONS.
Tenant agrees as follows:
(1) Landlord shall arrange for a trash collection service which will
provide and periodically empty trash containers placed in designated areas for
use by Tenant and other tenants in the Project. Tenant shall be responsible for
placing all of its garbage and trash in such trash containers, and Tenant shall
not permit any of its garbage or trash to accumulate outside of such trash
containers.
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(2) No aerial shall be erected on the roof or exterior walls of the
Premises, or on the grounds, without in each instance, the written consent of
the Landlord. Any aerial so installed without such written consent shall be
subject to removal without notice at any time.
(3) No loudspeakers, televisions, phonographs, radios, or other
devices shall be used in a manner so as to be heard or seen outside of the
Premises without the prior written consent of Landlord.
(4) The outside areas immediately adjoining the Premises shall be
kept clean and free from dirt and rubbish by Tenant to the satisfaction of
Landlord, and Tenant shall not place or permit any obstruction or materials in
such areas. No exterior storage shall be allowed without permission in writing
from Landlord.
(5) The plumbing facilities shall not be used for any other purpose
than that for which they are constructed, and no foreign substance of any kind
shall be thrown therein, and the expense of any breakage, stoppage, or damage
resulting from a violation of this provision shall be borne by Tenant.
(6) Tenant shall not burn any trash or garbage of any kind in or
about the Premises, or the Project.
(7) The sidewalks, halls, passages, exits, entrances, and stairways
in and about the Project shall not be obstructed by Tenant or used for any
purpose other than for ingress to and egress from the Premises. The halls,
passages, exits, entrances, stairways, balconies and roof are not for the use of
the general public and Landlord shall in all cases retain the right to control
and prevent access thereto by all persons whose presence in the judgment of the
Landlord shall be prejudicial to the safety, character, reputation and interests
of the Project, provided that nothing herein contained shall be constructed to
prevent such access to persons with whom Tenant normally deals in the ordinary
course of Tenant's business unless such persons are engaged in illegal
activities. Tenant and its employees and invitees shall not go upon the roof of
the Building.
(8) No additional locks or bolts of any kind shall be placed upon
any of the doors or windows by Tenant, nor shall any changes be made in existing
locks or the mechanisms thereof. Tenant must, upon the termination of Tenant's
tenancy, return to Landlord all keys of stores, offices and toilet rooms either
furnished to or otherwise procured by Tenant, and in the event of the loss of
any keys so furnished Tenant shall pay to Landlord the cost thereof.
(9) Tenant shall not lay linoleum or other similar floor covering so
that the same shall be affixed to the floor of the Premises in any manner except
by a paste, or other material, which may easily be removed with water, the use
of cement or other similar adhesive materials being expressly prohibited. The
method of affixing any such linoleum or other similar floor covering to the
floor, as well as the method of affixing carpets or rugs to the Premises, shall
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be subject to approval by Landlord. The expense of repairing any damage
resulting from a violation of this rule shall be borne by Tenant.
(10) Tenant will not install blinds, shades, awnings, or other form
of inside or outside window covering, or window ventilators or similar devices,
without the prior written consent of Landlord.
Landlord reserves the right from time to time to reasonably amend or supplement
the foregoing rules and regulations, and to adopt and promulgate additional
reasonable rules and regulations applicable to the Premises. Notice of such
rules and regulations and amendments and supplements thereto, if any, shall be
given to the Tenant and Tenant agrees to comply with all such rules and
regulations upon receipt of notice to Tenant from Landlord. Landlord shall not
be liable in any way to Tenant for any damage or inconvenience caused by any
other tenant's noncompliance with these rules and regulations; Landlord shall,
however, use its best commercially reasonable efforts to cause such compliance.
6.7 CONDITION UPON TERMINATION. Upon the termination of the Sublease, Tenant
shall surrender the Premises to Landlord, broom-clean and in the same condition
as received except for ordinary wear and tear which Tenant was not otherwise
obligated to remedy under any provision of this Sublease. However, Tenant shall
not be obligated to repair any damage which Landlord is required to repair under
Article Seven (Damage or Destruction). In addition, and in accordance with
Section 6.5.1, Landlord may require Tenant to remove any alterations, additions
or improvements (where Landlord's consent is required but not obtained, or if at
the time approval is granted Landlord advises Tenant in writing that removal of
the alterations, additions or improvements may be required) prior to the
termination of this Sublease. Any alterations, additions or improvements which
Landlord has not required Tenant to remove shall become Landlord's property and
shall be surrendered to Landlord upon the termination of the Sublease, except
that Tenant may remove any of Tenant's machinery or equipment which can be
removed without material damage to the Premises. Tenant shall repair, at
Tenant's expense, any damage to the Premises caused by the removal of any such
machinery or equipment. In no event, however, shall Tenant remove any of the
following materials or equipment without Landlord's prior written consent: any
power wiring or power panels; lighting or lighting fixtures; wall coverings;
drapes, blinds or other window coverings; carpets or other floor coverings;
heaters, air conditioners or any other heating or air conditioning equipment;
fencing or security gates; or other similar building operating equipment and
decorations.
6.8 MAINTENANCE OF COMMON AREAS. Landlord shall maintain the Common Areas as set
forth in Section 4.5 above.
ARTICLE VII
DAMAGE OR DESTRUCTION
7.1 PARTIAL DAMAGE TO PREMISES. Tenant shall notify Landlord in writing
immediately upon the occurrence of any damage to the Premises. If the Premises
are only partially damaged and if the proceeds received by Landlord from the
insurance policies described
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in Subsection 4.4.2 are sufficient to pay for the necessary repairs, this
Sublease shall remain in effect and Landlord shall repair the damage as soon as
reasonably possible; provided, however, that if Landlord either (i) fails to
commence such repairs within thirty (30) days, or (ii) fails to complete such
repairs within 270 days, and further provided that such damage materially
interferes with Tenant's business operations, Tenant may elect to terminate this
sublease. Landlord may elect, with Tenant's consent, to repair any damage to
Tenant's equipment, fixtures or improvements installed in the Premises at
Tenant's sole cost and expense. If the insurance proceeds received by Landlord
are not sufficient to pay the entire cost of repair, or if the cause of the
damage is not covered by the insurance policies which Landlord maintains under
Subsection 4.4.2, Landlord may elect either to (a) repair the damage as soon as
reasonably possible, in which case this Sublease shall remain in full force and
effect, or (b) terminate this Sublease as of the date the damage occurred.
Landlord shall notify Tenant within thirty (30) days after receipt of notice of
the occurrence of the damage whether Landlord elects to repair the damage or
terminate this Sublease. Tenant shall pay to Landlord within thirty (30) days
after request therefor by Landlord the "deductible amount" (if any) under
Landlord's insurance policies if the damage was due to an act or omission of
Tenant. If the damage to the Premises occurs during the last twelve (12) months
of the Sublease Term, Landlord or Tenant may elect to terminate this Sublease as
of the date the damage occurred, regardless of the sufficiency of any insurance
proceeds, and Landlord may retain all such proceeds. In such event, Landlord
shall not be obligated to repair or restore the Premises, and the other party
shall have no right to continue this sublease. The notifying party shall notify
the other party of its election within thirty (30) business days after receipt
of notice of the occurrence of the damage.
7.2 TOTAL OR SUBSTANTIAL DESTRUCTION. If the Premises are totally or
substantially destroyed (meaning the cost to repair would exceed twenty-five
percent (25%) of replacement value) by any cause whatsoever, or if the Premises
are in a building which is substantially destroyed (even though the Premises are
not totally or substantially destroyed), or if the Project is substantially
destroyed (even though the Premises are not totally or substantially destroyed),
this Sublease shall, at the election of either Landlord or Tenant, terminate as
of the date the destruction occurred regardless of whether Landlord receives any
insurance proceeds. The notifying party shall notify the other party of such
election within thirty (30) business days after the occurrence of total or
substantial destruction. If the destruction was caused by an act or omission of
Tenant, Tenant shall pay Landlord the difference between the actual cost of
rebuilding and any insurance proceeds received by Landlord.
7.3 LANDLORD'S OBLIGATIONS. Landlord shall promptly commence and diligently
pursue to completion any repairs which it is obligated to effect under Section
7.1. Landlord shall not be required to repair any injury or damage by fire or
other cause to (or to make any restoration or replacement of) any paneling,
decorations, partitions, railings, floor coverings, office fixtures or any other
improvements of property installed in the Premises by Tenant or at the direct or
indirect expense of Tenant which are not part of the original Tenant
improvements paid for by Landlord. Tenant shall be required to restore or
replace same in the event of damage except for damage caused solely by the
Landlord's gross negligence or intentional misconduct that is not covered by the
insurance carried, or required to be carried hereunder, by Tenant. Tenant shall
have no claim against Landlord for any damage suffered by reason of any such
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damage, destruction, repair or restoration, except to the extent caused by
Landlord's negligence or willful misconduct.
7.4 TEMPORARY REDUCTION OF RENT. If the Premises are destroyed or damaged and
Landlord or Tenant repairs or restores the Premises pursuant to the provisions
of this Article Seven, any Base Rent payable during the period of such damage,
repair and/or restoration shall be reduced in proportion to the rentable space
which is unusable by Tenant in the conduct of its business, but only to the
extent that Landlord has obtained rental income insurance to cover such
abatement of Base Rent. Except for such possible reduction in payments required
from Tenant, Tenant shall not be entitled to any compensation, reduction, or
reimbursement from Landlord as a result of any damage, destruction, repair or
restoration of or to the Premises.
7.5 WAIVER. Tenant waives the provisions of any statute, code or judicial
decision which grants a tenant the right to terminate a lease in the event of
damage or destruction of its premises, including Sections 1932(2) and 1933(4) of
the California Civil Code, due to the fact that Tenant agrees that the
provisions of this Article Seven shall govern the rights and obligations of
Landlord and Tenant in the event of any damage or destruction of the Premises.
ARTICLE VIII
CONDEMNATION
8.1 CONDEMNATION. If all or any portion of the Premises is taken under the power
of eminent domain or sold under the threat of that power (all of which are
called "Condemnation"), this Sublease shall terminate as to the part taken or
sold on the date the condemning authority takes title or possession, whichever
occurs first. If more than twenty percent (20%) of the floor area of the
Premises or more than twenty percent (20%) of the parking spaces available to
Tenant under Section 4.5.3 are taken and Landlord is unable to provide
reasonable substitute parking, either Landlord or Tenant may terminate this
Sublease as of the date the condemning authority takes title or possession,
whichever occurs first, by delivering written notice to the other within ten
(10) days after receipt of written notice of such taking (or in the absence of
such notice, within ten (10) days after the condemning authority takes
possession). If more than twenty percent (20%) of all subleasable space in the
Building in which the Premises are located or more than fifty percent (50%) of
all subleasable space within the Project is taken Landlord may elect to
terminate this Sublease by delivering such notice to Tenant. If neither Landlord
nor Tenant terminates this Sublease, this Sublease shall remain in effect as to
the portion of the Premises not taken, except that the Base Rent shall be
reduced in proportion to the reduction in the floor area of the Premises. Any
Condemnation award or payment shall be distributed in the following order: (a)
first, to any ground lessor, mortgagee or beneficiary under a deed of trust
encumbering the Premises, the amount of its interest in the Premises and Tenant
hereby assigns any other rights which Tenant may have now or in the future to
any other award to Landlord; (b) second, to Tenant, only the amount of any award
specifically designated for loss of or damage to Tenant's trade fixtures or
removable personal property, and Tenant hereby assigns any other rights which
Tenant may have now or in the future to any other award to the Landlord, and (c)
third, to Landlord; the remainder of such award, whether as compensation for
reduction in the value of the subleasehold, the taking of the fee, or otherwise.
If this Sublease is not terminated, Landlord
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shall repair any damage to the Premises caused by the Condemnation, except that
Landlord shall not be obligated to repair any damage for which Tenant has been
reimbursed by the condemning authority. If the severance damages received by
Landlord are not sufficient to pay for such repair, Landlord shall have the
right to either terminate this Sublease or make such repair at Landlord's
expense.
8.2 WAIVER. Tenant waives the provisions of any statute, code or judicial
decision which grants a tenant the right to terminate a lease in the event of a
taking of its premises, including California Code of Civil Procedure Section
1265.130, due to the fact that Tenant agrees that the provisions of this Article
Eight shall govern the rights and obligations of Landlord and Tenant in the
event of a taking of the Premises.
ARTICLE IX
ASSIGNMENT AND SUBLETTING
9.1 LANDLORD'S CONSENT REQUIRED. No portion of the Premises or of Tenant's
interest in this Sublease may be acquired by any other person or entity, whether
by assignment, mortgage, sublease, transfer, operation of law, or act of Tenant,
without Landlord's prior written consent, except as provided in Section 9.2
below. Any attempted transfer without consent shall, at Landlord's option, be
void and shall constitute a noncurable breach of this Sublease. Except as
otherwise provided in Section 9.2, if Tenant is a partnership, limited liability
company or corporation, any cumulative transfer of more than fifty percent (50%)
of the ownership interest in Tenant shall be deemed an assignment of this
Sublease requiring Landlord's consent. If Tenant effects a transfer or requests
the consent of Landlord to any transfer (whether or not such transfer is
consummated), then, upon demand, and as a condition precedent to Landlord's
consideration of the proposed transfer, Tenant agrees to pay Landlord a
non-refundable administrative fee of Two Hundred Dollars ($200.00), plus
Landlord's reasonable attorneys' fees and costs and other costs incurred by
Landlord in reviewing such proposed transfer.
9.2 TENANT AFFILIATE. Tenant may assign this Sublease or sublease the Premises,
without Landlord's consent, to any entity which controls, is controlled by or is
under common control with Tenant, or to any entity resulting from the merger of
or consolidation with Tenant ("Tenant's Affiliate"). In such case, any Tenant's
Affiliate shall assume in writing all of Tenant's obligations under this
Sublease, but Tenant shall remain primarily liable hereunder.
9.3 NO RELEASE OF TENANT. No transfer permitted by this Article Nine, whether
with or without Landlord's consent, shall release Tenant or change Tenant's
primary liability to pay the Rent and to perform all other obligations of Tenant
under this Sublease. Landlord's acceptance of Rent from any other person is not
a waiver of any provision of this Article Nine. Consent to one transfer is not a
consent to any subsequent transfer. If Tenant's transferee defaults under this
Sublease, Landlord may proceed directly against Tenant without pursuing remedies
against the transferee. Landlord may consent to subsequent assignments or
modifications of this Sublease by Tenant's transferee, without notifying Tenant
or obtaining its consent. Such action shall not relieve Tenant's liability under
this Sublease.
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9.4 LANDLORD'S ELECTION. Tenant's request for consent to any transfer described
in Section 9.1 above shall be accompanied by a written statement setting forth
the details of the proposed transfer, including the name, business and financial
condition of the prospective transferee, financial details of the proposed
transfer (e.g., the term of any rent and security deposit payable under any
assignment or sublease), and any other information Landlord reasonably deems
relevant. Landlord shall have the right (a) to withhold consent in Landlord's
reasonable discretion; (b) to grant consent; or (c) if the transfer is a
sublease of the Premises or an assignment of this Sublease, to terminate this
Sublease as of the effective date of such sublease or assignment, in which case
Landlord may elect to enter into a direct sublease with the proposed assignee or
subtenant. By way of example and without limitation, the parties agree it shall
be reasonable for Landlord to withhold its consent to a proposed transfer if any
of the following situations exist or may exist: (i) the transferee's
contemplated use of the Premises following the proposed transfer is different
than the Permitted Uses set forth in Section 1.6 and is not an appropriate use
for the Project, or in Landlord's opinion is not a use compatible with
contemplated or existing uses within the Project; (ii) in Landlord's reasonable
business judgment, the transferee lacks sufficient business reputation or
experience to operate a successful business of the type and quality permitted
under this Lease; (iii) in Landlord's reasonable business judgment, the present
net worth of the transferee indicates a reasonable likelihood that such
transferee will be unable to perform Tenant's obligations under this Sublease;
or (iv) the proposed transfer would breach any covenant of Landlord respecting
radius, location, use or exclusivity in any other lease, financing agreement, or
other agreement to which Landlord is bound.
9.5 NO MERGER. No merger shall result from Tenant's sublease of the Premises
under this Article Nine. Tenant's surrender of this Sublease or the termination
of this Sublease in any other manner. In any such event, Landlord may terminate
any or all subtenancies or succeed to the interest of Tenant as sublandlord
thereunder.
9.6 EXCESS RENTALS. Tenant agrees to pay to Landlord, as additional rent, all
sums and other consideration payable to and for the benefit of Tenant by the
assignee or sublessee in excess of the rent payable under this Lease for the
same period and portion of the Premises. In calculating excess rent or other
consideration which may be payable to Landlord under this Section 9.6, Tenant
will be entitled to deduct commercially reasonable third party brokerage
commissions and attorneys' fees and other amounts reasonably and actually
expended by Tenant in connection with such assignment or subletting if
acceptable written evidence of such expenditures is provided to Landlord.
ARTICLE X
DEFAULTS; REMEDIES
10.1 COVENANTS AND CONDITIONS. Tenant's performance of each of Tenant's
obligations under this Sublease is a condition as well as a covenant. Tenant's
right to continue in possession of the Premises is conditioned upon such
performance. Time is of the essence in the performance of all covenants and
conditions.
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10.2 DEFAULTS. Tenant shall be in material default under this Sublease:
10.2.1 VACATION OR ABANDONMENT. If Tenant abandons or vacates the Premises
or if such abandonment or vacation of the Premises results in the cancellation
of any insurance described in Section 4.4; or
10.2.2 FAILURE TO PAY. If Tenant fails to pay rent or any other charge
required to be paid by Tenant, as and within five (5) business days of the date
when due. The notice required by this Subsection is intended to satisfy any and
all notice requirements imposed by California Code of Civil Procedure Section
1161, et seq. or any other applicable law and is not in addition to any such
requirements; or
10.2.3 FAILURE TO PERFORM. If Tenant fails to perform any of Tenant's
nonmonetary obligations under this Sublease for a period of thirty (30) days
after written notice from Landlord; provided that if more time is required to
complete such performance, Tenant shall not be in default if Tenant commences
such performance within the thirty (30) day period and thereafter diligently
pursues its completion. However, Landlord shall not be required to give such
notice if Tenant's failure to perform constitutes a non-curable breach of this
Sublease. The notice required by this Subsection is intended to satisfy any and
all notice requirements imposed by California Code of Civil Procedure Section
1161, et seq. or any other applicable law and is not in addition to any such
requirements. Notwithstanding the foregoing, Tenant shall be obligated to
commence performance to cure matters related to the storage or use of hazardous
materials within fifteen days of receipt of notice from Landlord.
10.2.4 OTHER DEFAULTS. (i) If Tenant makes a general assignment or general
arrangement for the benefit of creditors; (ii) if a petition for adjudication of
bankruptcy or for reorganization or rearrangement is filed by or against Tenant
and is not dismissed within thirty (30) days; (iii) if a trustee or receiver is
appointed to take possession of substantially all of Tenant's assets located at
the Premises or of Tenant's interest in this Sublease and possession is not
restored to Tenant within thirty (30) days; or (iv) if substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this Sublease
is subjected to attachment, execution or other judicial seizure which is not
discharged within thirty (30) days; or (iv) if substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Sublease is
subjected to attachment, execution or other judicial seizure which is not
discharged within thirty (30) days. If a court of competent jurisdiction
determines that any of the acts described in this Subsection 10.2.4 is not a
default under this Sublease, and a trustee is appointed to take possession (or
if Tenant remains a debtor in possession) and such trustee or Tenant transfers
Tenant's interest hereunder, then Landlord shall receive, as Additional Rent,
the difference between the Rent (or any other consideration) paid in connection
with such assignment or sublease and the Rent payable by Tenant hereunder.
10.3 REMEDIES. On the occurrence of any material default by Tenant, Landlord
may, at any time thereafter, with or without notice or demand and without
limiting Landlord in the exercise of any right or remedy which Landlord may
have:
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10.3.1 TERMINATION OF POSSESSION. Terminate Tenant's right to possession
of the Premises by any lawful means, in which case this Sublease shall terminate
and Tenant shall immediately surrender possession of the Premises to Landlord.
In such event Landlord shall have the immediate right to re-enter and remove all
persons and property and such property may be removed and stored in a public
warehouse or elsewhere at the cost of, and for the account of Tenant, all
without service of notice or resort to legal process and without being deemed
guilty of trespass, or becoming liable for any loss or damage which may be
occasioned thereby, and Landlord shall be entitled to recover from Tenant all
damages incurred by Landlord by reason of Tenant's default, including (i) the
worth at the time of the award of all Base Rent, Additional Rent and other
charges which were earned or were payable at the time of the termination; (ii)
the worth at the time of the award of the amount by which the unpaid Base Rent,
Additional Rent and other charges which would have been earned or were payable
after termination until the time of the award exceeds the amount of such Rental
loss that Tenant proves could have been reasonably avoided; (iii) the worth at
the time of the award of the amount by which the unpaid Base Rent, Additional
Rent and other charges which would have been payable for the balance of the
Sublease Term after the time of award exceeds the amount of such Rental loss
that Tenant proves could have been reasonably avoided; and (iv) any other amount
necessary to compensate Landlord for all the detriment proximately caused by
Tenant's failure to perform its obligations under this Sublease or which in the
ordinary course of things would be likely to result therefrom, including, but
not limited to, any costs or expenses incurred by Landlord in maintaining or
preserving the Premises after such default, the cost of recovering possession of
the Premises, expenses of reletting, including necessary renovation or
alteration of the Premises, Landlord's reasonable attorneys' fees incurred in
connection therewith, and any real estate commissions or other such fees paid or
payable.
As used in subparts (i) and (ii) above, the "worth at the time of the
award" is computed by allowing interest on unpaid amounts at the Interest Rate.
As used in subpart (iii) above, the "worth at the time of the award" is 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%). If Tenant shall
have abandoned the Premises, Landlord shall have the option of (i) retaking
possession of the Premises and recovering from Tenant the amount specified in
this Subsection 10.3.1, or (ii) proceeding under Subsection 10.3.2.
10.3.2 MAINTENANCE OF POSSESSION. Maintain Tenant's right to possession,
in which case this Sublease shall continue in effect whether or not Tenant shall
have abandoned the Premises. In such event, Landlord shall be entitled to
enforce all of Landlord's rights and remedies under this Sublease, including the
right to recover the Rent as it becomes due hereunder as permitted by California
Civil Code Section 1951.4 or any successor statute.
10.3.3 OTHER REMEDIES. Pursue any other remedy now or hereafter available
to Landlord under the laws or judicial decisions of the State of California.
10.4 THE RIGHT TO RELET THE PREMISES. Should Landlord elect to re-enter, as
herein provided, or should it take possession pursuant to legal proceedings or
pursuant to any notice provided for by law, it may either terminate this
Sublease or it may from time to time without terminating this Sublease, make
such alterations and repairs as may be necessary in order
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to relet the Premises, and relet the Premises or any part thereof for such term
or terms (which may be for a term extending beyond the term of this Sublease)
and at such rental or rentals and upon such other terms and conditions as
Landlord in its sole discretion may deem advisable; upon each such reletting all
rentals received by Landlord from such reletting shall be applied, first, to the
repayment of any indebtedness other than Rent due hereunder from Tenant to
Landlord; second, to the payment of any costs and expenses of such reletting,
including brokerage fees and attorneys' fees and of costs of such alterations
and repairs; third, to the payment of Rent due and unpaid hereunder, and the
residue, if any, shall be held by Landlord and applied in payment of future Rent
as the same may become due and payable hereunder. If such Rentals received from
such reletting during any month are less than that to be paid during that month
by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such
deficiency shall be calculated and paid monthly. No such re-entry or taking
possession of the Premises by Landlord shall be construed as an election on its
part to terminate this Sublease unless a written notice of such intention be
given to Tenant or unless the termination thereof be decreed by a court of
competent jurisdiction.
10.5 WAIVER OF RIGHTS OF REDEMPTION. Tenant hereby expressly waives any and all
rights of redemption granted by or under any present or future laws in the event
of Tenant being evicted or dispossessed for any cause, or in the event of
Landlord obtaining possession of the Premises, by reason of the violation by
Tenant of any of the covenants or conditions of this Sublease, or otherwise.
10.6 CUMULATIVE REMEDIES. Landlord's exercise of any right or remedy shall not
prevent it from exercising any other right or remedy.
10.7 RIGHT TO CURE. If Tenant fails, refuses or neglects to perform any
obligation under this Sublease in the time and manner required herein, Landlord
shall have the right, but not the obligation, after ten (10) days prior written
notice to Tenant, to do the same, but at the expense and for the account of
Tenant. The amount of money so expended or obligations so incurred by Landlord,
together with interest thereon at the Interest Rate, shall be repaid to Landlord
as Additional Rent within five (5) days of Tenant's receipt of written notice
thereof. Landlord's performance of such obligations shall not waive any default
by Tenant hereunder.
ARTICLE XI
PROTECTION OF CREDITORS
11.1 SUBORDINATION. This Sublease is and shall remain subordinate to the Master
Lease, and to any other ground lease, deed of trust or mortgage encumbering the
Premises, any advances made on the security thereof and any renewals,
modifications, consolidations, replacements or extensions thereof, whenever made
or recorded. However, Landlord shall, within thirty (30) days after the
Commencement Date with respect to any existing encumbrance (including the Master
Lease), and prior to the effective date of any subordination to any future
encumbrance, deliver to Tenant a non-disturbance agreement, in a commercially
reasonable form, in which such ground lessor or the beneficiary or holder of
such encumbrance shall agree to honor all of Tenant's rights and remedies under
this Sublease. If any ground lessor, beneficiary or mortgagee
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elects to have this Sublease prior to the lien of its ground lease, deed of
trust or mortgage and gives written notice thereof to Tenant, this Sublease
shall be deemed prior to such ground lease, deed of trust or mortgage whether
this Sublease is dated prior or subsequent to the date of said ground lease,
dead of trust or mortgage of the date of recording thereof.
11.2 ATTORNMENT. If Landlord's interest in the Premises is acquired by any
ground lessor, beneficiary under a deed of trust, mortgagee, or purchaser at a
foreclosure sale, Tenant shall attorn, to the transferee of or successor to
Landlord's interest in the Premises and recognize such transferee or successor
as Landlord under this Sublease, Tenant waives the protection of any statute or
rule of law which gives or purports to give Tenant any right to terminate this
Sublease or surrender possession of the Premises upon the transfer of Landlord's
interest.
11.3 SIGNING OF DOCUMENTS. Tenant shall sign and deliver any commercially
reasonable documents necessary or appropriate to evidence any such
non-disturbance, attornment or subordination or agreement to do.
11.4 ESTOPPEL CERTIFICATES.
11.4.1 LANDLORD'S REQUEST. Upon Landlord's written request, Tenant shall
execute, acknowledge and deliver to Landlord a written statement certifying: (i)
that none of the terms or provisions of this Sublease have been changed (or if
they have been changed, stating how they have been changed); (ii) that this
Sublease has not been canceled or terminated; (iii) the last date of payment of
the Base Rent and other charges and the time period covered by such payment;
(iv) that Landlord is not in default under this Sublease (or, if the Landlord is
claimed to be in default, stating why); and (v) as to such other matters as may
be reasonably requested of Tenant. Tenant shall deliver such statement to
Landlord within ten (10) days after Landlord's request. Any such statement by
Tenant may be given by Landlord to any prospective purchaser or encumbrancer of
the Premises, Such purchaser or encumbrancer may rely conclusively upon such
statement as true and correct.
11.4.2 FAILURE TO DELIVER. If Tenant does not deliver such statement to
Landlord within such ten (10) day period, Tenant shall be in material default
under this Sublease and, in addition, Landlord, and any prospective purchaser or
encumbrancer, may conclusively presume and rely upon the facts set forth in such
Statement. In such event, Tenant shall be estopped from denying the truth of
such facts.
11.5 TENANT'S FINANCIAL CONDITION. Tenant shall, upon ten (10) days prior
written notice, provide Landlord with a financial statement for the prior year
and, if available, the current year, to the extent such statements are then in
existence, prepared in accordance with generally accepted accounting principles
and, if such is Tenant's normal practice, audited by an independent certified
public accountant.
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ARTICLE XII
LEGAL COSTS
12.1 ATTORNEYS' FEES. If either party commences litigation against the other for
the specific performance of this Sublease, for damages for the breach hereof or
otherwise for enforcement of any remedy hereunder, in the event of any such
commencement of litigation, the prevailing party shall be entitled to recover
from the other party such costs and reasonable attorneys' fees as may have been
incurred.
Further, if for any reason Landlord consults legal counsel or otherwise incurs
any costs or expenses as a result of its rightful attempt to enforce the
provisions of this Sublease after Tenant's grace or notice period has expired,
after written notice to Tenant from Landlord that Landlord is seeking the advice
of counsel, even though no litigation is commenced, or if commenced is not
pursued to final judgment, Tenant shall be obligated to pay to Landlord, in
addition to all other amounts for which Tenant is obligated hereunder, all of
Landlord's costs, expenses and reasonable attorneys' fees incurred in connection
with obtaining such advice.
12.2 LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable attorneys' fees
(not to exceed $500 per occurrence) incurred in connection with Tenant's request
for Landlord's consent under Article Nine (Assignment and Subletting), or in
connection with any other act which Tenant proposes to do and which requires
Landlord's consent.
ARTICLE XIII
MISCELLANEOUS PROVISIONS
13.1 SUBSTITUTED PREMISES. Deleted.
13.2 LANDLORD'S LIABILITY; CERTAIN DUTIES.
13.2.1 LANDLORD. As used in this Sublease, the term "Landlord" means only
the current owner or owners of the leasehold estate under the Master Lease at
the time in question. Each Landlord is obligated to perform the obligations of
Landlord under this Sublease only during the time such Landlord owns such
interest or title. Any Landlord who transfers its title or interest is relieved
of all liability with respect to the obligations of Landlord under this Sublease
to be performed on or after the date of transfer. However, each Landlord shall
deliver to its transferee all funds previously paid by Tenant if such funds have
not yet been applied under the terms of this Sublease. Notwithstanding the
foregoing, for purposes of Tenant's indemnification obligations under this
Sublease, the term "Landlord" shall include the current owner(s) of the
leasehold estate under the Master Lease and all prior owner(s) thereof during
the Sublease Term.
13.2.2 WRITTEN NOTICE. Tenant shall give written notice of any failure by
Landlord to perform any of its obligations under this Sublease to Landlord and
to the District, any ground lessor, mortgagee or beneficiary under any deed of
trust encumbering the Premises whose name and address have been furnished to
Tenant in writing. Landlord shall not be in default under this Sublease unless
Landlord (or the District, or such ground lessor, mortgagee or
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beneficiary) fails to cure such non-performance within thirty (30) days after
receipt of Tenant's notice. However, if such non-performance reasonably requires
more than thirty (30) days to cure, Landlord shall not be in default if such
cure is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.
13.2.3 EXCULPATION. It is expressly understood and agreed that,
notwithstanding anything in this Sublease to the contrary, and notwithstanding
any applicable law to the contrary, the liability of Landlord hereunder and any
recourse by Tenant against Landlord shall be limited solely and exclusively to
the interest of Landlord in and to the Project, and neither Landlord, nor any of
its constituent partners or subpartners, shall have any personal liability
therefor, and Tenant, on behalf of itself and all persons claiming by, through
or under Tenant, hereby expressly waives and releases Landlord and such partners
and subpartners from any and all personal liability.
13.2.4 FAILURE TO GIVE CONSENT. Deleted.
13.3 SEVERABILITY. A determination by a court of competent jurisdiction that any
provision of this Sublease or any part thereof is illegal or unenforceable shall
not cancel or invalidate the remainder of such provision or this Sublease, which
shall remain in full force and effect.
13.4 INTERPRETATION. The captions of the Articles or Sections of this Sublease
are to assist parties in reading this Sublease and are not a part of the terms
of provisions of this Sublease. Whenever required by the context of this
Sublease, the singular shall include the plural and the plural shall include the
singular. The masculine, feminine, and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Premises with Tenant's expressed or
implied permission.
13.5 INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This Sublease is the only
agreement between the parties pertaining to the sublease of the Premises and no
other agreements are effective, All amendments to this Sublease shall be in
writing and signed by all parties. Any other attempted amendment shall be void.
13.6 NOTICES. All notices required or permitted under this Sublease shall be in
writing and shall be personally delivered or sent by certified mail, return
receipt requested, postage prepaid. Notices to Tenant shall be delivered to the
address specified in Section 13 above, except that upon Tenant's taking
possession of the Premises, the Premises shall be Tenant's address for notice
purposes. Notices to Landlord shall be delivered to the address specified in
Section 1.2 above. If personally delivered, notice shall be effective upon
personal delivery or refusal. If mailed as aforesaid, notice shall be effective
upon delivery or refusal as evidenced by the return receipt. Either party may
change its notice address upon written notice to the other party.
13.7 WAIVERS. All waivers must be in writing and signed by the waiving party.
Landlord's failure to enforce any provision of this Sublease or its acceptance
of rent shall not be a waiver and shall not prevent Landlord from enforcing that
provision or any other provision of this
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Sublease in the future. No statement on a payment check from Tenant or in a
letter accompanying a payment check shall be binding on Landlord. Landlord may,
with or without notice to Tenant, negotiate such check without being bound to
the conditions of such statement.
13.8 NO RECORDATION. Tenant shall not record this Sublease without prior written
consent from Landlord. However, Landlord may require that a "Short Form"
memorandum of this Sublease be executed by both parties and recorded.
13.9 BINDING EFFECT; CHOICE OF LAW. This Sublease binds any party who legally
acquires any rights or interest in this Sublease from Landlord or Tenant.
However, Landlord shall have no obligation to Tenant's successor unless the
rights or interests of Tenant's successor are acquired in accordance with the
terms of this Sublease. The laws of the State of California shall govern this
Sublease.
13.10 CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a corporation,
each person signing this Sublease on behalf of Tenant represents and warrants
that he has full authority to do so and that this Sublease binds the
corporation. As soon as is reasonably possible after this Sublease is signed,
Tenant shall deliver to Landlord a certified copy of a resolution of Tenant's
Board of Directors authorizing the execution of this Sublease or other evidence
of such authority reasonably acceptable to Landlord. If Tenant is a partnership,
each person signing this Sublease for Tenant represents and warrants that he is
a general partner of the partnership, that he has full authority to sign for the
partnership and that this Sublease binds the partnership and all general
partners of the partnership. Tenant shall give written notice to Landlord of any
general partner's withdrawal or addition. Within five (5) days after this
Sublease is signed, Tenant shall deliver to Landlord a copy of Tenant's recorded
statement of partnership or certificate of limited partnership.
13.11 JOINT AND SEVERAL LIABILITY. All parties signing this Sublease as Tenant
shall be jointly and severally liable for all obligations of Tenant.
13.12 FORCE MAJEURE. If Landlord cannot perform any of its obligations due to
events beyond Landlord's control, the time provided for performing such
obligations shall be extended by a period of time equal to the duration of such
events. Events beyond Landlord's control include, but are not limited to, acts
of God, war, civil commotion, labor disputes, strikes, fire, flood or other
casualty, shortages of labor or material, government regulation or restriction
and weather conditions.
13.13 NO OPTION. The submission of this Sublease for examination does not
constitute a reservation of or option to sublease the Premises and this Sublease
becomes effective only upon execution and delivery thereof by Landlord and
Tenant.
13.14 BROKERS. Landlord shall pay any commissions or fees that are payable to
the broker specified in Section 1.11 ("Broker") with respect to this Sublease in
accordance with the provisions of a separate commission contract. Landlord shall
have no further or separate obligation for payment of commissions or fees to any
other real estate broker,
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finder or intermediary. Tenant represents that it has not had any dealings with
any real estate broker, finder or intermediary with respect to this Lease, other
than Broker. Subject to the foregoing, each party hereto shall indemnify and
hold harmless the other party hereto from and against any and all losses,
damages, liabilities, losses, costs and expenses (including, but not limited to,
reasonable attorneys' fees and related costs) resulting from any claims that may
be asserted against such other party by any real estate broker, finder or any
intermediary arising from any acts of the indemnifying party in connection with
this Lease.
13.15 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs,
unless Tenant or its agents, employees, contractors or invitees are responsible
therefor in accordance with Section 5.4, Landlord may at Landlord's option
investigate and remediate such Hazardous Substance Condition, if required, as
soon as reasonably possible at Landlord's expense.
LANDLORD: TENANT:
SORRENTO MONTANA, L.P. Camino Neuro Care, Inc., A Delaware
a California Limited Partnership Corporation
By: CDS Property Services, Inc. By:____________________________
dba Sorrento Management Company, Name:__________________________
A California Corporation Title:_________________________
Date:__________________________
By:___________________________
Name:_________________________
Title: Agent/Broker
Date:_________________________
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ADDITIONAL PROVISIONS
SUBLEASE RIDER
This Additional Provisions Rider ("Rider") is attached to and made a part of
that certain industrial Real Estate Triple Net Sublease dated January 15, 1997,
by and between Sorrento Montana, L.P., a California Limited Partnership, as
Landlord and Camino NeuroCare Inc., a Delaware Corporation as Tenant, covering
the Premises commonly known as 5955 Pacific Center Boulevard, Suites #709
through #713, San Diego, California 92121 (the "Sublease"). The terms used in
this Rider shall have the same definitions as set forth in the Sublease and the
other riders attached to and a part of the Sublease. The provisions of this
Rider shall supersede any inconsistent or conflicting provisions of the
Sublease, including the other riders attached to and a part of the Sublease.
1. Extension Options: Landlord hereby grants to Tenant an option ("Option") to
extend the initial term of the Sublease for two (2) additional and consecutive
periods, the first of which shall be eighteen (18) months, and the second of
which shall be twenty-four (24) months commencing immediately upon the
expiration of the initial term of the Sublease ("Extended Terms"), Tenant may
exercise its Option to extend the term of the Sublease by given written notice
of exercise to Landlord not more than one hundred eighty (180) days and not less
than one hundred twenty (120) days prior to the expiration of the then term of
the Sublease. Tenant shall not be entitled to exercise its Option to renew the
Term of the Sublease pursuant hereto if: (a) Tenant is in default under the
Sublease at the time of exercise of the Option; (b) Tenant is in default under
the Sublease at the expiration of the Term hereof; or (c) Tenant has previously
been in material default as defined in Section 10.2 of the Sublease on three (3)
or more separate occasions during any twelve month period during the Sublease
Term.
If Tenant elects to exercise its initial eighteen (18) month Option pursuant to
the above provisions, and subsequent thereto, Tenant desires to elect to
exercise its twenty-four (24) month Option, the procedure for electing its
twenty-four (24) month Option shall be governed by the above procedures. In the
event Tenant exercises its Option for one or both of the Extended Terms, the
terms and conditions of the Sublease shall continue to govern during each
extended term, with the exception that the Base Rent payable by Tenant during
each Extended Term ("Option Rent") shall be equal to the Fair Market Rental
Value of the Premises as of the commencement date of each Extended Term, but in
no event shall the Option Rent be less than one hundred three percent (103%) of
the Base Rent payable by Tenant for the month immediately preceding the
commencement of such Extended Term. For the purpose of this paragraph, Fair
Market Rental Value shall be the rental rate at which tenants lease comparable
space within the Mira Mesa Distribution Center as of the commencement of the
applicable Extension Term. All references in the Sublease to the "Term" shall
include the initial term and one or both Extended Terms, as applicable. If
Tenant fails to exercise its Option (whether voluntarily or because Tenant is in
default as described above) with respect to the first Extended Term, Tenant
shall not be entitled to exercise its Option with respect to the second Extended
Term.
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2. Improvements To The Premises: Tenant is subleasing the Premises from Landlord
in an "as is" condition, with the following exceptions which shall be completed
at Landlord's cost:
Suite #709 - Remove existing vinyl tile and carpeting; replace carpeting
("Building Standard" 20-ounce commercial grade glue down) and vinyl tile
("Building Standard" 12" by 12" Vinyl Composition Tile of 1/8" thickness);
remove existing rest room walls and "cap off" existing plumbing fixtures;
repaint interior walls; provide "Building Standard" window coverings for
existing windows.
Suite #710 - Enclose and paint two existing fire wall penetrations; remove
existing floor coverings and replace with "Building Standard" glue-down carpet
and vinyl composition tile as hereinabove described; repaint interior walls;
provide "Building Standard" window coverings for existing windows.
Suites #711 - #713 - Patch and repaint existing interior walls (or the
square footage area equivalent thereof); provide and install "Building Standard"
floor coverings throughout; provide "Building Standard" window coverings for
existing windows.
All other costs associated with Tenant's desired improvements to the premises
shall be at Tenant's expense, including but not limited to demolition of
non-bearing interior walls and ceiling grid system installation of underground
telephone conduit between the Premises and the existing building at 5955 Pacific
Center Boulevard.
Except as specifically provided in this Additional Provisions Sublease Rider,
all of the terms, conditions and definitions set forth in the Sublease shall
remain unchanged and in full force and effect, In the event of any conflict
between this Additional Provisions Sublease Rider and the Sublease, the terms of
this Additional Provisions Sublease Rider shall prevail.
LANDLORD: TENANT:
SORRENTO MONTANA, L.P. CAMINO NEURO CARE, Inc.,
A California Limited Partnership A Delaware Corporation
By: Sorrento Management Company, By:____________________________
A California Corporation Title:_________________________
Date:__________________________
By:____________________________
Name:__________________________
Title:_________________________
Date:__________________________
-2-
<PAGE>
FIRST AMENDMENT TO SUBLEASE
THIS FIRST AMENDMENT TO SUBLEASE ("First Amendment") is made as of May 1, 1997
by and between SORRENTO MONTANA, L.P. a California Limited Partnership
("Landlord") and CAMINO NEUROCARE, INC., A Delaware Corporation ("Tenant"). with
reference to the following facts and circumstances:
A. Landlord and Tenant previously entered into a Sublease dated January 15, 1997
("Sublease") for approximately 1,728 square feet of premises commonly known as
5965 Pacific Center Boulevard, Suite #708, San Diego, California 92121
("Premises").
B. Landlord and Tenant desire to modify, amend and supplement the Sublease as
follows effective May 1, 1997:
1. Paragraph 1.4 ("PREMISES") is amended to add the approximately 1,728 square
foot Suite #708 to the Premises subleased by Tenant from Landlord.
2. Paragraph 1.9.1 ("BASE RENT") is amended to increase the Base Rent payable by
Tenant by One Thousand One Hundred Twenty Three and 20/100 Dollars ($1,123.20)
per month, or a combined Base Rent of Six Thousand Four Hundred Fifty Three and
20/100 Dollars ($6,453.20) for Suites #708 through #713.
3. Paragraph 2 ("IMPROVEMENTS TO THE PREMISES") of the Additional Provisions
Sublease Rider is hereby amended to provide that Tenant is subleasing Suite #708
in an "as is" condition. Notwithstanding the foregoing, Landlord shall provide
Tenant with an allowance of Ten Thousand and No/100 Dollars ($10,000.00) to
offset the cost of Tenant's desired improvements to the Premises.
4. Except as specifically provided in this First Amendment, all of the terms,
conditions and definitions set forth in the Sublease shall remain unchanged and
in full force and effect. In the event of any conflict between this First
Amendment and the Sublease, the terms of this First Amendment shall prevail.
-1-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment To
Sublease effective the day and year first written above.
LANDLORD: TENANT:
SORRENTO MONTANA, L.P. CAMINO NEUROCARE, Inc.,
A California Limited Partnership A Delaware Corporation
By: Sorrento Management Company, By:____________________________
A California Corporation Title:_________________________
Date:__________________________
By:____________________________
Name:__________________________
Title:_________________________
Date:__________________________
-2-
<PAGE>
SECOND AMENDMENT TO SUBLEASE
THIS SECOND AMENDMENT TO SUBLEASE ("Second Amendment") is made as of May 1, 1998
by and between SORRENTO MONTANA, L.P., a California Limited Partnership
("Landlord") and CAMINO NEUROCARE, INC., A Delaware Corporation ("Tenant"), with
reference to the following facts and circumstances:
A. Landlord and Tenant previously entered into a Sublease dated January 15, 1997
("Sublease") for approximately 8,200 square feet of premises commonly known as
5966 Pacific Center Boulevard, Suite #709 through #713, San Diego, California
92121 ("Premises").
B. Landlord and Tenant subsequently modified amended and supplemented the
Sublease through First Amendment To Sublease dated May 1, 1997 adding the
approximately 1,728 square foot Suite #708 to the Premises.
C. Landlord and Tenant desire to modify, amend and supplement the Sublease as
follows effective May 1, 1998:
1. Paragraph 1.4 ("PREMISES") is amended to (a) add the approximately 1,728
square foot Suite #706 to the Premises subleased by Tenant from Landlord
effective May 1. 1998, and (b) add the approximately 1,728 square foot Suite
#707 effective August 1, 1998.
2. Paragraph 1.9.1 ("BASE RENT") is amended to (a) increase the Base Rent
payable by Tenant by One Thousand One Hundred Fifty Seven and 76/100 Dollars
($1,157.76) per month for Suite #706 effective May 1, 1998, and (b) increase the
Base Rent payable by Tenant by an additional One Thousand One Hundred Fifty
Seven and 76/100 Dollars ($1,157.76) per month for Suite #707 effective August
1, 1998. Base Rent for all Premises included under the January 15, 1997 Sublease
as subsequently amended By First Amendment dated May 1, 1997 and Second
Amendment dated May 1, 1998 shall be increased three percent (3%) each January 1
throughout the remainder of the Sublease term.
3. Paragraph 2 ("IMPROVEMENTS TO THE PREMISES") of the Additional Provisions
Sublease Rider Is hereby amended to provide that Tenant is subleasing Suite #707
in an "as is" condition. Landlord shall provide Tenant with an allowance of
Three Thousand Five Hundred and No/100 Dollars ($3,500.00) to offset the cost of
Tenant's desired improvements to Suite #706.
4. Paragraph 14.0 ("RIGHT OF FIRST REFUSAL") is hereby added to provide Tenant
with a one-time Right Of First Refusal to sublease the approximately 4,956
square foot Suites #702 through #705, which are expected to be vacated by the
present occupant on or about June 15, 1998. Tenant shall have three days from
notification by Landlord of receipt of an acceptable offer from an outside third
party to sublease Suites #702 through #705 within which to commit in writing to
subleasing the space upon the same terms and conditions as offered by the
outside third party. Tenant's failure to respond in writing to Landlord's
notification shall be deemed a waiver of the on-time Right.
-1-
<PAGE>
5. Except as specifically provided in this Second Amendment, all of the terms,
conditions and definitions set forth in the Sublease shall remain unchanged and
in full force and effect. In the event of any conflict between this First
Amendment and the Sublease, the terms of this Second Amendment shall prevail.
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment To
Sublease effective the day and year first written above.
LANDLORD: TENANT:
SORRENTO MONTANA, L.P. CAMINO NEUROCARE, Inc.,
A California Limited Partnership A Delaware Corporation
By: Sorrento Management Company, By:____________________________
A California Corporation Title:_________________________
Date:__________________________
By:____________________________
Name:__________________________
Title:_________________________
Date:__________________________
-2-
<PAGE>
THIRD AMENDMENT TO SUBLEASE
THIS THIRD AMENDMENT TO SUBLEASE ("Third Amendment") is made as of February 1,
1999 by and between SORRENTO MONTANA, L.P., a California Limited Partnership
("Landlord") and CAMINO NEUROCARE, INC., a Delaware Corporation ("Tenant") with
reference to the following facts and circumstances:
A. Landlord and Tenant previously entered into a Sublease dated January 15, 997
("Sublease") for approximately 8,200 square feet of premises commonly known as
5965 Pacific Center Boulevard, Suite #709 through #713, San Diego, California
92121 ("Premises").
B. Landlord and Tenant subsequently modified, amended and supplemented the
Sublease through First Amendment To Sublease dated May 1, 1997 adding the
approximately 1,728 square foot Suite #708 to the Premises.
C. Landlord and Tenant further modified, amended and supplemented the Sublease
through Second Amendment To Sublease dated May 1, 1998, adding the approximately
1,728 square foot Suite #706 effective May 1, 1998, and the approximately 1,728
square foot Suite #707 effective August 1, 1998.
D. Landlord and Tenant desire to further modify, amend and supplement the
Sublease as follows effective February 1, 1999:
1. Paragraph 1.4 ("PREMISES") is amended to add the approximately 1,618 square
foot Suite #714 to the Premises subleased by Tenant from Landlord effective
February 1, 1999.
2. Paragraph 1.9.1 ("BASE RENT") is amended to increase the Base Rent payable by
Tenant by One Thousand One Hundred Sixteen and 47/100 Dollars ($1,116.47) per
month for Suite #714 effective February 1, 1999. Effective January 1, 2000, Base
Rent for all Premises included under the January 15, 1997 Sublease as
subsequently amended By First Amendment dated May 1, 1997, Second Amendment
dated May 1, 1998 and this Third Amendment dated February 1, 1999, shall be
increased to $0.725 NNN per square foot of Premise's per month, plus three
percent (3%) increases each January 1 thereafter throughout the term of the
Sublease and any extensions thereof.
3. Paragraph 1.5 ("SUBLEASE TERM") is amended to extend the term of the Sublease
an additional eighteen months through June 30, 2001. This extension of the
Sublease Term shall be considered the exercise of the first of Tenant's of two
extension options contained in the Additional Provisions Sublease Rider to
Tenant's Sublease dated January 15, 1997.
4. Paragraph 2 ("IMPROVEMENTS TO THE PREMISES") of the Additional Provisions
Sublease Rider is hereby amended to provide that Tenant is subleasing Suite #707
in an "as is" condition. Notwithstanding the foregoing, Landlord shall provide
Tenant with an allowance of Four Thousand and No/100 Dollars ($4,000.00) to
offset the cost of Tenant's desired modifications to Suite #714.
-1-
<PAGE>
5. Except as specifically provided in this Third Amendment, all of the terms,
conditions and definitions set forth in the Sublease shall remain unchanged and
in full force and effect. In the event of any conflict between this Third
Amendment and the Sublease, the terms of this Third Amendment shall prevail.
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment To
Sublease effective the day and year first written above.
LANDLORD: TENANT:
SORRENTO MONTANA, L.P. CAMINO NEUROCARE, Inc.,
A California Limited Partnership A Delaware Corporation
By: Sorrento Management Company, By:____________________________
A California Corporation Title:_________________________
Date:__________________________
By:____________________________
Name:__________________________
Title:_________________________
Date:__________________________
-2-
<PAGE>
[Floorplan of Building 7]
EXHIBIT "A"
<PAGE>
[Floorplan of Building 7 including description and map]
EXHIBIT "B"
<PAGE>
[Original Concept Design]
EXHIBIT "C"
Exhibit 21
Subsidiaries of Integra LifeSciences Holdings Corporation
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation or Organization
- ------------------ --------------------------------------
<S> <C>
1. Camino NeuroCare, Inc Delaware
2. Heyer-Schulte NeuroCare, Inc. Delaware
3. Integra LifeSciences Corporation Delaware
4. Integra NeuroCare LLC Delaware
5. LifeSciences Services Corporation Delaware
6. NeuroCare Holding Corporation Delaware
7. Redmond NeuroCare LLC Delaware
8. Rystan Company, Inc. New Jersey
9. Telios Pharmaceuticals, Inc. Delaware
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Integra LifeSciences Holdings Corporation and Subsidiaries on Form S-8 (File
Nos. 333-82233, 333-58235 and 333-06577) of our reports dated March 1, 2000
(except for Note 20, as to which the date is March 29, 2000), on our audits of
the consolidated financial statements and financial statement schedules of
Integra LifeSciences Holdings Corporation, as of December 31, 1999 and 1998, and
for each of the three years in the period ended December 31, 1999, which reports
are included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 19,301
<SECURITIES> 4,311
<RECEIVABLES> 9,309
<ALLOWANCES> 944
<INVENTORY> 10,111
<CURRENT-ASSETS> 42,806
<PP&E> 17,784
<DEPRECIATION> (8,018)
<TOTAL-ASSETS> 66,253
<CURRENT-LIABILITIES> 14,792
<BONDS> 0
0
6
<COMMON> 161
<OTHER-SE> 37,822
<TOTAL-LIABILITY-AND-EQUITY> 66,253
<SALES> 39,661
<TOTAL-REVENUES> 42,490
<CGS> 22,219
<TOTAL-COSTS> 22,219
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 712
<INCOME-PRETAX> (7,784)
<INCOME-TAX> 1,818
<INCOME-CONTINUING> (5,966)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,966)
<EPS-BASIC> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
