UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number: 0-26082
VIDAMED, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0314454
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(State of incorporation) (IRS Employer Identification No.)
46107 Landing Parkway
Fremont, CA 94538
(Address of principal executive offices)
(510) 492-4900
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, $.001 par value
Preferred Share Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 of 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. [ X ] Yes [ ] 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 the Form 10-K or any amendments to this
Form 10-K. [ ]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates as of March 25, 1997 was $49,579,699.
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, was 15,255,292 as of March 25, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this report by reference to
the Proxy Statement for the Registrant's 1998 annual meeting of stockholders to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this Form
10-K. Certain information is incorporated into Parts II and IV of this report by
reference to the Registrant's annual report to stockholders for the year ended
December 31, 1997.
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VIDAMED, INC.
INDEX
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Page
Number
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PART I
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 8
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation 8
Item 8. Financial Statements and Supplementary Data 8
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 9
PART III
Item 10. Directors and Executive Officers of the Registrant 9
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners and Management 10
Item 13. Certain Relationships and Related Transactions 10
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 11
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PART I
Item 1 - BUSINESS
VidaMed, Inc. (the "Company" or "VidaMed") designs, develops,
manufactures and markets technologically and clinically advanced, cost effective
systems for urological conditions. The Company's initial focus is upon the
treatment of benign prostatic hyperplasia (BPH). The Company's first product,
the patented TUNA System, is designed to offer a cost effective, minimally
invasive alternative therapy with compelling clinical advantages for BPH
treatment. The Company commenced manufacturing production and international
product sales in 1993. The Company received clearance from the Food and Drug
Administration (FDA) in October 1996 for the treatment of symptoms associated
with BPH. The Company sells its products primarily to urologists, surgery
centers and hospitals in the United States and internationally to distributors
who resell to physicians and hospitals.
VidaMed was founded as a California corporation in July 1992 and was
reincorporated in Delaware in June 1995. VidaMed's principal offices are located
at 46107 Landing Parkway, Fremont, California. The Company's telephone number is
(510) 492-4900.
Overview
This Report on Form 10-K contains certain forward-looking statements
regarding future events with respect to the Company. Actual events and future
results of operations may differ materially from those contemplated by such
forward-looking statements as a result of certain factors discussed herein under
"Marketing and Customers," "Clinical Status," "Manufacturing," "Research and
Development," and "Additional Risk Factors" or as discussed in the section
labeled "Management's Discussion and Analysis of Financial Condition and Results
of Operations, Factors Affecting Results of Operations" appearing on pages 3-8
of the Company's 1997 Annual Report to Stockholders under: "Limited Operating
History; History of Losses and Expectation of Future Losses; Fluctuations in
Operating Results," "Uncertainty of Market Acceptance," "Uncertainty Relating to
Third Party Reimbursement," "Competition and Technological Advances,"
"Government Regulation," "Limited Manufacturing Experience; Scale-Up Risk;
Product Recall Risk," "Uncertainty Regarding Patents and Protection of
Proprietary Technology," "Intellectual Property Litigation Risks," "Rights to
Founder's Inventions Limited to Urology," "Risks Related to RITA," and "Product
Liability Risk; Limited Insurance Coverage."
The prostate is a fibromuscular gland in that lies immediately below
the bladder in the male. The normal prostate is approximately the size of a
walnut. Usually in the fourth decade of life, the prostate begins to enlarge and
causes a condition called benign prostatic hyperplasia (BPH). Benign nodules
grow around the tube-like urethra that empties the bladder and passes through
the center of the prostate. This growth obstructs the flow of urine through the
urethra.
As a result of this obstruction, men begin to experience problems with
urination such as frequency, the need to urinate more often, especially at
night; urgency, the sudden sensation that you need to find a toilet; incomplete
emptying of the bladder; and burning or pain during urination. A delay in
treatment can have serious consequences, including complete obstruction (acute
retention of body waste or urine), loss of bladder functions, and in extreme
cases, kidney failure. The symptoms can be debilitating and can significantly
alter a sufferer's quality of life.
BPH or enlarged prostate is a very common condition among older men.
According to industry sources, the percentage of men suffering from symptoms of
BPH is approximately 50% for men in their fifties and increases to more than 75%
for men over eighty. It is estimated that approximately 23 million men worldwide
have urinary tract problems associated with BPH, including approximately 13
million men in the United States. Many patients experiencing BPH are regularly
monitored and given clinical tests by their physicians but, due in part to the
side effects and complications associated with current BPH therapies, elect not
to receive active intervention (a course of inaction known as watchful waiting).
If symptoms persist or worsen, drug therapy or surgical intervention is usually
recommended. The most common surgical procedure is Transurethral Resection of
the Prostate (known as TURP), an invasive procedure in which an electrosurgical
loop is used to cut away the prostatic urethra and the surrounding tissue in the
prostate thereby widening the urethral channel for urinary flow. Recently, less
invasive surgical procedures to treat the symptoms of BPH have been developed.
Total BPH related expenditures exceed $10 billion worldwide, of which
approximately $3.5 billion annually occurred in the United States. Industry
sources estimate that in excess of 1.5 million men currently receive
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medical treatment for BPH in the United States. Prior to the advent of drug
therapy in the mid-1990s TURP was the principal treatment modality for BPH.
Although the number of TURP procedures performed in the United States has been
declining progressively in recent years, TURP remains one of the most common
surgical procedures performed on men in the United States and represents a major
surgical expense reimbursed by Medicare. The Company believes that the numerous
complications associated with TURP such as, incontinence, impotence, retrograde
ejaculation, bleeding, longer hospital stays, and the potentially lethal TUR
syndrome, are a deterrent to many prospective patients, and coupled with the
acceptance of drug therapy, has lead to a decline in the number of TURP
procedures performed in the United States, from a total of 315,000 in 1992 to
235,000 in 1997. The Company feels that the development of less invasive
procedures for the treatment of BPH has developed from patients who fail drug
therapy or otherwise are looking for less radical alternatives than TURP or a
lifetime on drug therapy.
Total BPH related expenditures outside the United States are estimated
to be nearly $6.5 billion annually. Industry sources estimate that approximately
450,000 BPH patients outside the United States are currently receiving drug
therapy, and that approximately 550,000 TURP procedures are performed annually
outside the United States.
The BPH market is large and can be expected to continue to grow due to
the general aging of the world's population, as well as increasing life
expectancies. For example, the population of men 50 years of age and older in
the United States is growing approximately 25% annually and is expected to reach
approximately 39 million in 2005. Improved education on healthcare issues may
also encourage more men to seek treatment of their BPH symptoms.
Medicare, which covers approximately 80% of BPH patients in the U.S. is
under ever increasing budget pressures. The rising cost of healthcare in the
United States has also influenced public support for managed care in order to
control spending. Hospitals and doctors are now forced to compete for the
managed care dollars. VidaMed believes it is well positioned to provide both
payors and physicians a cost-effective alternative to drug therapy, invasive
surgery, and other less invasive surgical procedures and intends to capitalize
on this position with the goal of capturing market share.
The TUNA System and Procedure
VidaMed has developed the TUNA System to provide the therapy of choice
for BPH over watchful waiting, drug therapy and current surgical therapies.
VidaMed's TUNA Procedure is designed to restore and improve urinary flow while
resulting in fewer complications and adverse effects, shorter recovery time and
greater cost effectiveness than other therapies for treating BPH. The Company
believes that the cost of treatment with the TUNA Procedure will be less than
the cost of most other interventional BPH therapies because the procedure is
designed to be performed in an office or outpatient setting and to result in
fewer complications.
The VidaMed TUNA System (VTS) is designed to deliver low levels of
radio frequency energy directly into hyperplastic tissue to shrink the symptoms
associated with BPH. The principal components of the TUNA System are (i) VTS
Generator, a low power radio frequency (RF) energy generator, (ii) VTS Hand
Piece, a single-use hand piece that delivers RF energy to the prostate, and,
(iii) VTS Telescope, an optical device that allows direct viewing during the
procedure.
VTS Generator. The VTS Generator is designed specifically for use with
the VTS Hand Piece. This generator is the control center for the TUNA procedure.
It interprets and regulates the RF energy delivered into each prostatic lobe. In
the automatic mode, the VTS Generator provides simultaneous monitoring of
urethral, prostatic and rectal temperatures to prevent damage to the urethra,
charring of prostate tissue and damage to the rectum. The manual mode allows
physicians to customize the lesion for optimal results in atypical prostates.
The VTS RF Generator continuously and automatically calculates impedance and
energy output to reach the ideal treatment levels in each lobe. The VTS
Generator has an automatic shut-off activated by both temperature and impedance
measurements to ensure controlled tissue ablation. An integrated computer
records patient information for medical records and reimbursement.
VTS Hand Piece. The single use VTS Hand Piece measures 22 French
(approximately seven millimeters) in diameter and contains laterally deployed
needles that extend at an approximately 90 degree angle. The VTS Hand Piece has
insulated twin needles that deliver the energy into the prostate. Adjustable,
patented insulation shields, which cover the needles, contain thermocouples to
continually monitor interstitial temperature, ensuring optimal results. A
separate thermocouple located at the tip of the VTS Hand Piece sheath directly
monitors the urethral wall temperature to prevent damage to that structure. The
VTS Hand Piece has a clear tip that allows a physician to view the needles
advancing through the urethra into the prostate and the VTS Hand Piece has
capabilities for irrigation
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and aspiration. This feature enhances visualization for the physician and
enables bladder drainage without the irritation of removing and reinserting the
catheter.
VTS Telescope. The VTS Telescope allows precise positioning of the
catheter between the verumontanum and the bladder neck during the procedure
using direct vision control. The VTS Telescope is reusable after sterilization
and is equipped with a three-way exchange adapter, which allows the unit to be
used with most endoscopic light sources manufactured by other companies.
The VidaMed TUNA Procedure desiccates prostatic tissue, leading to
improved urinary flow, and can generally be performed in approximately 30 to 45
minutes with local anesthesia such as lidocaine jelly and an oral sedative. Some
physicians also prefer to use a prostate block. The VTS Hand Piece catheter is
inserted into the patient's urethra, and the two shielded needle electrodes are
then advanced into one of the two lateral lobes of the prostate. Controlled RF
energy delivered by the needle electrodes heats targeted portions of the
prostate lobe to temperatures of 90 to 100 degrees centigrade, creating a
localized area of desiccated tissue measuring approximately one to two
centimeters in diameter, while the shields protect the urethra from thermal
damage. Once a lesion of sufficient size has been created, the urologist
retracts the needles and places the catheter at the next site to be ablated and
repeats the process. Typically, two or more treatments in each lateral prostatic
lobe are performed depending upon the size of the prostate. If the patient is
unable to urinate due to temporary swelling or irritation of the urethra, a
catheter may be inserted into the patient's urethra. This catheter, if inserted,
is typically left in place for one to three days.
The Company believes that the VTS design offers significant advantages
over other BPH therapies. Because the components of the VidaMed TUNA System
shield the urethra and deliver controlled RF energy directly into the interior
of the prostate, the procedure protects the prostatic urethra and reduces the
risk of unintended thermal damage to surrounding structures. In other procedures
where this control does not exist, the urethra and other structures can be
damaged or destroyed, causing significant patient discomfort and complications.
Clinical trials of the TUNA procedure as reported by Claus Roehrborn, M.D. in
the peer-reviewed published study, titled "Transurethral Needle Ablation of
Benign Prostatic Hyperplasia: 12-Month Results of a Prospective, Multicenter
U.S. Study," indicate that TUNA results in fewer of the complications associated
with TURP, including sexual dysfunction and incontinence. This study, conducted
at several major university medical centers includes 130 patients who were
treated with TUNA under local anesthesia and no patients, (93 followed),
required retreatment at 1-year. Compared to clinical results published for other
less invasive procedures including TUMT and ILC, Roehrborn's study supports the
VidaMed TUNA Procedure as a minimally invasive therapy with the least
post-procedure complications of any treatment for BPH.
The Company believes that the cost of the TUNA procedure in the United
States, including physician charges, will be significantly less than the cost of
TURP. The capital cost for VidaMed's TUNA System is less than the cost for
general surgical lasers required to perform laser procedures, and the ultrasound
and microwave devices required for other minimally invasive surgical procedures.
In addition to providing procedural alternatives, the Company
believes the VidaMed TUNA Procedure also provides patients, physicians and
health care payors with a clinically and economically superior alternative to
ongoing drug therapy. To date, the symptomatic relief experienced by patients in
the Company's clinical trials suggest that the TUNA procedure provides greater
relief than the results reported for drug therapy or watchful waiting.
Additionally, the Company's available two-year U.S. clinical follow-up data and
three-year international follow-up data for TUNA patients do not suggest the
need for a significant number of re-treatments within these time frames.
However, there can be no assurance as to whether and how frequently TUNA
patients will require retreatment.
BPH Therapies
Watchful Waiting
The majority of BPH patients are initially managed through watchful
waiting, an approach entailing periodic visits to physicians and clinical
testing. The aim of watchful waiting is to monitor the patient's symptoms, treat
some of the attendant complications such as bladder infections, and determine
whether and when more active intervention is required. For many BPH sufferers,
watchful waiting represents only a temporary option due to generally worsening
symptoms that eventually require therapeutic intervention. The Company believes
that many
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health care payors have encouraged watchful waiting or drug therapy over
surgical intervention, due in large part to the higher costs of interventional
therapy, particularly TURP procedures.
Drug Therapy
Drug therapy for BPH has been available since the commercial
availability of three orally administered pharmaceutical products: Proscar (sold
by Merck) in 1992, Hytrin (sold by Abbott Laboratories) in 1993 and Cardura
(sold by Pfizer) in 1995. These remain the primary drug therapies currently
available although several other pharmaceutical products are currently available
or undergoing clinical trials for BPH symptom relief.
Proscar blocks hormones that stimulate growth of the prostate. Hytrin,
an alpha-blocker, disables alpha-receptors on smooth muscle cells in the area of
the prostate, causing muscle relaxation that alleviates some of the symptoms of
BPH. Cardura, also an alpha-blocker, acts in a manner similar to Hytrin. Side
effects of Proscar include impotence, decreased libido and other sexual
dysfunction. Side effects of alpha-blockers include dizziness, headache and
fatigue. Drug therapy generally must be administered daily for the duration of
the patient's life at an average annual cost estimated at $1,400 the first year,
$600-$800 annually thereafter.
Surgical Treatments for BPH
Transurethral Resection of the Prostate. TURP has been the primary
interventional treatment modality for BPH since the 1940s and remains the most
common BPH surgical procedure. TURP is an inpatient procedure requiring general
anesthesia or regional anesthesia administered into the spinal column. Patients
usually remain in the hospital for 2-5 days and experience a 6-week recovery
period. The TURP procedure is performed by a physician, who uses a visualization
scope (known as a cystoscope) inserted through the urethra to view the prostate
and an electrically powered metal loop to cut away the prostatic urethra and the
surrounding prostatic tissue. The procedure results in removal of a substantial
portion of the prostate. While TURP results in a dramatic improvement in urine
flow, it can also result in serious complications. A significant amount of
bleeding occurs during the procedure, and due to the trauma to the urethra,
patients may experience pain during urination and require a urinary catheter,
which is typically left in place for several days or longer. The initial cost to
the hospital of the equipment needed to perform TURP, including a power source,
cystoscope and electrosurgical loop, is approximately $20,000, and this
equipment is generally reusable.
A large number of TURP patients experience complications. Virtually all
patients experience a burning sensation upon urination that lasts for up to
three weeks following the procedure. Based on our randomized FDA audited trials,
other complications include impotence (13% of patients), retrograde ejaculation
(the reverse flow of semen, which often results in sterility) (37%), urinary
tract infection symptoms/urethral stricture resulting in a complete inability to
urinate (20%),incontinence (4%). According to the United States Department of
Health and Human Services, approximately 2% of TURP patients die as a result of
the procedure and related complications. At least 10% of TURP patients develop
BPH symptoms again and require retreatment within five years.
Recently, a device employing a roller ball instead of an
electrosurgical loop has been used to perform the TURP procedure. This procedure
is known as Transurethral electrovaporization of the prostate (TUEVP) and the
grooved construction of these roller ball devices allows for combined
coagulation and tissue vaporization. Like a conventional TURP, this procedure
must be performed in a hospital under general or regional anesthesia, results in
destruction of the prostatic urethra and requires insertion of a urinary
catheter. An early study indicates that many of the same complications of TURP
are experienced and that patients are generally required to stay in the hospital
at least overnight.
Transurethral Microwave Therapy. In transurethral microwave therapy
(TUMT) a catheter that is inserted into the urethra delivers microwave energy to
destroy prostatic tissue. TUMT is typically performed in an outpatient setting
under local anesthesia, which may be supplemented by intravenous sedation.
Although early experience with TUMT has demonstrated some success in alleviating
the symptoms of BPH, the Company believes the difficulty of controlling the
absorption of microwave energy in tissue may cause varying treatment outcomes.
A microwave system marketed by EDAP Techomed, Prostatron, received FDA
clearance in 1996 for treatment of symptoms associated with BPH. Microwave
systems have been marketed in certain European countries for several years. The
Company believes the Prostatron generator is currently priced at approximately
$295,000 in the United States and disposable per-procedure disposable costs are
estimated of around $600. In 1997, a U.S. based company, Urologix, received FDA
clearance to market the Targis System for the treatment of the symptoms
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associated with BPH. This system has a capital equipment list price of $150,000
with a per procedure disposable charge of about $1,200.
Dornier Medical Systems filed a PMA for its Urowave microwave
thermotherapy device in September 1997. Clinical results have not been
published. This unit is expected to sell at $100,000 with disposable component
charges of approximately $1,000 per procedure.
The Company believes that the cost of the capital equipment and
single-use disposable items combined with the postoperative morbidity will limit
the use of this treatment modality.
Interstitial Laser Coagulation. FDA cleared Johnson & Johnson's Indigo
LaserOptic(TM) Treatment System for U.S. marketing in December 1997. ILC uses a
diode laser under direct visualization to selectively ablate prostatic tissue
Preliminary studies indicate that treatment outcomes compare favorably to TURP
in terms of safety. Morbidity remains a concern with extended post-procedure
catheterization approaching 2 weeks and increased urinary tract infections.
Capital equipment costs approximately $50,000 and per procedure disposable laser
fibers are approximately $600.
Transurethral Evaporization of the Prostate. TUEP utilizes high wattage
laser energy at high power densities to cause evaporization of the prostate.
This procedure results in many of the same complications as TURP but usually
results in reduced blood loss. While clinical studies have indicated that when
properly performed, TUEP results in statistically significant improvements for
patients, the use of TUEP is generally limited due to its prolonged operative
time, requirement of general anesthesia, specialized equipment, and cost. TUEP
takes 25%-50% longer than a standard TURP and can be expensive due to the use of
multiple single-use fibers at a cost of approximately $500 each.
High Intensity Focused Ultrasound. High intensity focused ultrasound
(HIFU) uses a customized transrectal ultrasound probe to deliver precise high
energy ultrasound (acoustic energy) to small localized areas. This produces high
tissue temperatures and causes instantaneous coagulative necrosis in the target
tissue. Clinical trials for HIFU systems are currently underway in the United
States and Japan. The procedure may be performed in an outpatient setting under
local anesthesia, but general anesthesia may be required if the patient is
unable to remain still during the procedure. Additionally, HIFU is sub-optimal
in patients with large glands and contraindicated in the median lobe and for
patients with multiple prostatic calculi (calcium deposits). Early studies show
that treatment outcomes are variable, and complications include tissue sloughing
that may require catheterization and blood in the urine and seminal fluid. The
Company believes that ultrasound systems used in HIFU are currently being
marketed at a price of approximately $100,000.
In addition, various other procedures that attempt to create an opening
for urinary flow without removing prostatic tissue have been used for treatment
of BPH. These procedures include transurethral incision of prostate (TUIP),
balloon dilation and stenting. Open surgery, in which the entire prostate gland
is removed, is often used as a treatment for prostate cancer but is rarely used
for treatment of BPH.
The Company believes that none of these procedures offers patients,
physicians and payors collectively all of the advantages of the VidaMed TUNA
System and Procedure.
Marketing and Customers
The Company has positioned itself for worldwide distribution of the
VidaMed TUNA System. VidaMed's sales and marketing staff is currently located in
the United States, United Kingdom and Germany where direct distribution takes
place. In the United States, the Company markets the TUNA System through a
network of five VidaMed regional sales managers supported by both independent
dealers and sales representatives. Primarily a network of distributors,
supported by VidaMed staff, cover other countries throughout Asia, Europe and
South America.
Century Medical, Inc. (CMI) has paid the Company $1.0 million for
exclusive distribution rights in Japan for a period of five years commencing
with the receipt of Japanese regulatory approval for the TUNA System. In July
1997, the Japanese Ministry of Health and Welfare approved the VTS for sale and
a reimbursement level of 250,000 Yen for the procedure in Japan. VidaMed
commenced shipments to CMI at that time. The Company also received an additional
one-time, $500,000 royalty at this time. It is estimated that exclusive of the
cost of drug
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therapy and hospitalization fees, the cost of treating BPH in Japan is
approximately $80 million annually and that there are approximately 90,000 TURP
procedures are being performed each year in Japan.
Key urologists around the world have adopted VidaMed's TUNA Procedure
as a new treatment for symptomatic BPH. The Company believes that the
endorsements made by these early adopters will assist in the U.S. and worldwide
marketing efforts to create acceptance in the urological community. VidaMed will
continue to be represented at all major urology conferences in the United States
and the rest of the world. In 1997, over 1,800 U.S. urologists attended
workshops to learn more about VidaMed's TUNA Procedure. More than 10,000 TUNA
Procedures have now been performed worldwide with over 4,000 of those performed
in the U.S. The Company has prepared a Physician Practice Building Kit that
contains a number of patient awareness and education materials for urologists to
use to expand their medical practice.
VidaMed is committed to delivering a quality product to its customers
and to reinforce product delivery with excellent customer service and field
support.
Clinical Status
The Company is performing clinical trials of the VidaMed TUNA Procedure
to obtain clinical data to support new indications, to obtain long-term data,
and to gather data in supporting reimbursement approvals in various markets. The
Company began international clinical evaluation of the TUNA procedure in March
1993. The Company is currently conducting clinical trials in Germany, France,
and Spain for reimbursement approval or acceptance within the medical community.
In the clinical trials conducted both in the United States and
internationally, significant relief from BPH symptoms has been observed in the
majority of TUNA patients for whom follow-up data are available. Follow-up data
being collected include urine flow rates and two standard measures of BPH
symptom relief, known as symptom score and quality of life score. The Company
believes the results provide preliminary indication that treatment with the TUNA
System provides clinically significant relief from the symptoms associated with
BPH. To date, these results are based on data published in peer reviewed
articles and publications in top Urology journals on one-year follow-ups in the
United States and two-year follow-ups internationally. There can be no assurance
that equivalent results will be achieved over a longer follow-up period or in a
larger patient population, or that the results of clinical trials will be
sufficient to obtain required foreign regulatory and reimbursement approvals or
physician acceptance.
Manufacturing
The Company's strategy is to manufacture the VTS Hand Piece for
commercial sale at its facility in Fremont, California. The Company contracts
with a third party manufacturer for the production of the VTS Generator. The
Company is in the process of completing ISO 9001 certification for the
manufacturing of the VTS Hand Piece at the Fremont facility and obtaining the CE
Mark necessary for the ongoing sale of VTS products in Europe. The Company
previously manufactured the VTS Hand Piece at its ISO 9002 registered facility
in the U.K.
At various assembly stages, each production lot undergoes thorough
testing by trained personnel to ensure compliance with the Company's stringent
specifications, which are based on international quality assurance standards.
The Company's quality assurance group independently verifies, at various steps
in the manufacturing cycle, that product fabrication and inspection processes
meet the Company's specifications and applicable regulatory requirements.
Research and Development
The Company's research and development efforts are currently focused on
improving the features and reducing the cost of the TUNA System. These efforts
have resulted in improvements to the VidaMed TUNA System, including: (i)
improved optics for enhanced visualization during the VidaMed TUNA procedure,
(ii) the addition of irrigation and aspiration ports, (iii) automation of
certain functions of the VTS Generator, and (iv) reductions in the cost of the
VTS Hand Piece.
Ongoing research and development efforts include increasing the range
of energy output of the RF generator, providing support for clinical trials,
interfacing with physicians to develop product enhancements which include a new
hand piece product launch in 1998, and developing devices for urological
applications in addition to BPH. The Company's in-house research and development
program uses a network linking CAD/CAM capability and
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advanced graphic design workstations with a computerized machine shop. These
capabilities allow the Company to produce molds, custom parts and tooling,
enabling rapid prototyping and pre-production evaluation of devices. All
research and development has been fully funded by the Company. The amounts
expensed, in thousands, for 1995, 1996 and 1997 respectively are $6,542, $5,742,
$6,003.
Employees
As of December 31, 1997, the Company employed 94 individuals on a
full-time basis. Of these, 89 are located in the United States and 5 in the
United Kingdom. The Company also has several part-time employees and
consultants. The Company's employees in the United Kingdom are covered under
standard United Kingdom services agreements providing severance pay of one to
three months in the event of termination of employment without cause. None of
the Company's employees is covered under collective bargaining agreements. The
Company considers relations with its employees to be good.
Additional Risk Factors
Risk of Inadequate Funding. The Company expects its operating losses to
continue for at least the next nine to eighteen months as it continues to expend
substantial funds for the expansion of sales and marketing activities, clinical
trials in support of regulatory and reimbursement approvals, research and
development and establishment of commercial scale manufacturing capability. The
Company may be required to expend greater than anticipated funds if unforeseen
difficulties arise in the marketing and sales of the VidaMed TUNA System, the
completion of clinical trials of the VidaMed TUNA Procedure, and in connection
with obtaining necessary regulatory and reimbursement approvals or in other
aspects of the Company's business. Along with existing cash, cash equivalents,
short-term investments and a line of credit together with cash generated from
the future sale of products, the Company will likely require additional debt
and/or equity financing within this time frame or after. The Company's future
liquidity and capital requirements will depend upon numerous factors, including
progress of clinical trials, actions relating to regulatory and reimbursement
matters and the extent to which the VidaMed TUNA System gains market acceptance.
Any additional financing, if required, may not be available on satisfactory
terms or at all. Future equity financing would result in dilution to the holders
of the Company's Common Stock.
Possible Volatility of Stock Price. The stock market has from time to
time experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. In addition, the market price of the shares of Common Stock is likely to
be highly volatile. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new products by the
Company or its competitors, FDA and international regulatory actions, actions
with respect to reimbursement matters, developments with respect to patents or
proprietary rights, public concern as to the safety of products developed by the
Company or others, changes in health care policy in the United States and
internationally, changes in stock market analyst recommendations regarding the
Company, other medical device companies or the medical device industry generally
and general market conditions may have a significant effect on the market price
of the Common Stock.
Item 2 - PROPERTIES
The Company's principal facility is located in Fremont, California. The
Fremont facility, a 35,000 square foot facility, serves as corporate
headquarters and is the primary location for research & development activities.
The Fremont facility also serves as the manufacturing facility. The facility is
leased through May 2002. The Company has two other sales offices, located in
Heathfield, England and Sydney, Australia.
In order to meet future facility needs, the Company moved to Fremont,
California in July of 1997. The company believes that its Fremont facility will
be sufficient to meet the future additional space requirements in the United
States.
Item 3 - LEGAL PROCEEDINGS
On May 20, 1997 VidaMed, Inc., filed a complaint against ProSurg, Inc.,
in the United States District Court for the Northern District of California. The
complaint alleges that ProSurg, Inc., is infringing and inducing others to
infringe U.S. Patent Nos. 5,536,240, 5,531,676, and 5,531,677. On March 20,
1998, at the request of the parties, the Court dismissed without predjudice all
claims relating to U.S. Patent Nos. 5,531,676 and 5,531,677. Accordingly, the
only claims remaining in the litigation are those related to U.S. Patent No.
5,536,240. VidaMed seeks both damages and injunctive relief from the Court. A
factual discovery cut-off has been set for June 1, 1998, and the Court
tentatively has set October 19, 1998 as a trial date. In addition, the parties
have been offered to attempt to reach a settlement through mediation. The Court
ordered mediation is expected to be completed by June 1, 1998.
7
<PAGE>
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of the year ended December 31, 1997.
PART II
Item 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The section labeled "Market for Registrant's Common Equity and Related
Stockholders matters" appearing on the inside back cover of the Company's 1997
Annual Report to Stockholders is incorporated herein by reference and filed as
an exhibit to this annual report on Form 10-K.
In September 1997, the Company completed a private placement, in which
the Company issued 2,587,351 shares of common stock to certain investors at a
purchase price of $4.75 per share, resulting in net proceeds of $11,702,000 to
the Company. In connection with this financing, the Company issued warrants to
purchase an aggregate of 629,000 shares of Common stock at an exercise price of
$6.33 per share.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act of 1933 in reliance on section 4(2)
thereof, as transactions by an issuer not involving a public offering. The
purchasers of securities in such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
the share certificates and instruments issued in such transactions. All receipts
had adequate access, through their relationships with the company to information
about the Company.
Item 6 - SELECTED FINANCIAL DATA
The section labeled "Selected Financial Data" appearing on page 9 of the
Company's 1997 Annual Report to Stockholders is incorporated herein by reference
and filed as an exhibit to this annual report on Form 10-K.
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The section labeled "Management's Discussion & Analysis of Financial
Condition and Results of Operations" appearing on pages 1 through 8 of the
Company's 1997 Annual Report to Stockholders is incorporated herein by reference
and filed as an exhibit to this annual report on Form 10-K.
8
<PAGE>
ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKER RISK
Not applicable.
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes to Consolidated Financial
Statements appearing on pages 10 through 28, and the Report of Ernst & Young
LLP, Independent Auditors, appearing on page 28 of the Company's 1997 Annual
Report to Stockholders are incorporated herein by reference and filed as an
exhibit to this annual report on Form 10-K
Item 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
9
<PAGE>
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file a definitive proxy statement within
120 days after the end of the fiscal year pursuant to Regulation 14A with
respect to the 1998 Annual Meeting of Stockholders (the "Proxy Statement"
covered by this Form 10-K) and certain information that will be included therein
is incorporated herein by reference.
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to directors is
incorporated by reference to the information under the caption "Proposal No. 1 -
Election of Directors" in the Proxy Statement.
<TABLE>
The executive officers of the Registrant, who are appointed by the
board of directors, and their ages and positions with the Company as of March
19, 1998 are as follows:
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
*David J. Illingworth 44 President and Chief Executive Officer
James A. Heisch 54 President and Chief Executive Officer
Richard D. Brounstein 48 Vice President, Finance and Chief Financial Officer
Robin L. Bush 40 Vice President, Regulatory Affairs and Clinical Affairs
Carol A. Chludzinski 43 Senior Vice President, North American Sales
Patricia S. Garfield 48 Vice President of Marketing
John N. Hendrick 46 Vice President and Chief Operating Officer
* Effective April 6, 1998
</TABLE>
David J. Illingworth has agreed to become Chairman of the Board,
President and Chief Executive Officer on April 6, 1998. Mr. Illingworth also
serves as a Director of Somnus Medical Technologies, Inc., which manufactures
and markets a minimally invasive device to treat upper airway obstructions. From
1993 to the present, Mr. Illingworth was Executive Vice President of Nellcor
Puritan Bennett, a wholly owned subsidiary of Mallinckrodt Inc., a manufacturer
of medical devices. Prior to joining Nellcor, Mr. Illingworth spent 15 years
with General Electric in their medical systems business. Mr. Illingworth holds a
B.S. in Engineering from Texas A & M University.
James A. Heisch has served as President and Chief Executive Officer
since March 1996 and has served as Chief Financial Officer since October 1994.
He served as Vice President, Finance from October 1994 to May 1995 and was
appointed Executive Vice President in May 1995. From December 1990 until October
1994, Mr. Heisch was Chief Financial Officer, Vice President, Finance and
Secretary of SuperMac Technology, Inc., a supplier of color graphics systems.
From July 1983 until June 1990, Mr. Heisch held various senior management
positions, including Senior Vice President and Chief Financial Officer, with
Businessland, Inc., a distributor of computer products. Mr. Heisch holds a B.S.
in Accounting from San Jose State University and a M.B.A. from the University of
Santa Clara. He is a Certified Public Accountant.
Richard D. Brounstein has served as Vice President of Finance and Chief
Financial Officer since May 1997. From 1989 to 1997 he served as Vice President
Finance and Administration and Chief Financial Officer for MedaSonics, Inc., a
manufacturer of ultrasound medical equipment. Mr. Brounstein holds a B.S. in
Accounting and a MBA in Finance from Michigan State University. He is a
Certified Public Accountant.
10
<PAGE>
Robin L. Bush has served as Vice President of Regulatory Affairs and
Clinical Affairs since July 1997. From 1988 to 1997 Ms. Bush was Director of
Regulatory Affairs and Quality Assurance for Aesculap, Inc., a manufacturer of
surgical instruments Ms. Bush has 18 years experience in medical device
companies, managing regulatory affairs, quality assurance and compliance
functions. Ms. Bush is Regulatory Affairs Certified (RAC). Ms. Bush holds a B.A.
in Human Biology and Psychology from Stanford University and an MBA from Golden
Gate University.
Carol A. Chludzinski has served a Senior Vice President of North
American Sales and Marketing since February 1997. From March 1996 to February
1997, Ms. Chludzinski served as Vice President, North American Sales and
Marketing. Prior to joining the Company, from 1994 to 1995, Ms. Chludzinski was
Director of Sales for Cybex, Inc., a medical rehabilitation and equipment
manufacturer and distributor. From 1990 to 1994, Ms. Chludzinski served as
Director of Domestic Sales for Heraeus Surgical, Inc., a manufacturer and
distributor of surgical lasers and other medical equipment. Ms. Chludzinski
holds a B.A. in Liberal Arts from Chestnut Hill College.
Patricia S. Garfield joined the Company as Vice President of Marketing
in February 1997. From 1994 to 1997 Ms. Garfield was the President and Owner of
Health Care Recruiters, an executive search firm specializing in the healthcare
and biotechnology industries. From 1991 to 1994 Ms. Garfield was Vice President
of Marketing for Heraeus Surgical, Inc., a surgical laser and other medical
equipment manufacturer and distributor. Ms. Garfield holds a B.A. in Liberal
Arts from the University of California at Fullerton.
John N. Hendrick joined the Company in September 1994 as Vice President
and Chief Operating Officer. From 1988 until joining VidaMed, Mr. Hendrick was
Vice President of Operations for Allergan Medical Optics, a division of
Allergan, Inc. which manufactures ophthalmic and refractive surgical products.
Mr. Hendrick holds a B.A. in Business Administration from the University of San
Bernadino.
Item 11 - EXECUTIVE COMPENSATION
Executive Compensation information contained in the Company's Proxy
Statement is incorporated herein by reference.
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management
information contained in the Company's Proxy Statement is incorporated herein by
reference.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Relationships and Related Transactions information contained in
the Company's Proxy Statement is incorporated herein by reference.
11
<PAGE>
PART IV
Item 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) 1. Financial Statements
<TABLE>
Incorporated by reference to Part II, Item 8 of this Report:
<CAPTION>
Pages in 1997 Annual
Report to Stockholders
----------------------
<S> <C>
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 10
Consolidated Balance Sheets as of December 31, 1997 and 1996 11-12
Consolidated Statement of Stockholders' Equity (Net Capital
Deficiency) for the years ended December 31, 1997, 1996 and 1995 13-14
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 15-16
Notes to Consolidated Financial Statements 17-28
Independent Auditors' Report 28
</TABLE>
12
<PAGE>
2. Financial Statement Schedules
Schedule II is included, on page 19. All other schedules are omitted because
they are not applicable, or not required, or because the required information is
included in the consolidated financial statements or notes thereto.
3. Exhibits
Exhibit No. Description
----------- -----------
3.1 (1) Restated Certificate of Incorporation of the Company
filed with the Delaware Secretary of State on June
28, 1995.
3.2 (2) Certificate of Designation of Rights, preferences and
Privileges of Series A Participating Preferred Stock
of the Company filed with the Delaware Secretary of
State on January 13, 1997.
3.3 (1) Restated Bylaws of the Company.
4.1 (1) Form of common Stock Certificate of the Company.
4.2 (1) Warrant to Purchase Shares of Series B Preferred
Stock, dated April 13, 1993, issued to Dominion
Ventures, Inc.
4.3 (1) Warrant Purchase Agreement, dated November 8, 1993,
between the Company and Dominion Ventures, Inc. and
Warrant to Purchase Shares of Series C Preferred
Stock, issued to Dominion Ventures, Inc.
4.4 (1) Warrant Purchase Agreement, dated June 30, 1994,
between the Company and LINC Capital Management
Services, Ltd. and Warrant to Purchase Shares of
Series D Preferred Stock, dated June 30, 1994, issued
to LINC Capital Management Services, Ltd.
4.5 (1) Representative Form of Note Subscription Agreement
and Convertible Subordinated Promissory Note.
4.6 (2) Preferred Shares Rights Agreement dated as of January
27, 1997, between the Company and American Securities
Transfer & Trust, Inc. including the Certificate of
Designations, the Form of Rights Certificate and the
Summary of Rights attached thereto as Exhibit A,
Exhibit B and Exhibit C, respectively.
4.7 (3) Investment agreement, dated as of February 4, 1997,
between the Company and MeesPierson Clearing Services
B.V., including Form of Pricing Period Confirmation,
Form of Warrant and Form of Opinion attached thereto
as Exhibit A, Exhibit B and Exhibit C, respectively.
4.8 (4) Purchase Agreement, dated as of September 22, 1997,
among the Company and certain purchasers named
therein, including Schedule of Investors, Form of
Common Stock Purchase Warrant and Form of Opinion
attached thereto as Exhibit A, Exhibit B and Exhibit
C, respectively.
10.1 (1) Form of Indemnification Agreement between the Company
and each of its directors and officers.
10.2 (2) 1992 Stock Plan, as amended.
10.3 (5) 1995 Director Option Plan, as amended
10.4 (1) 1995 Employee Stock Purchase Plan.
10.5 (1) Dominion Ventures Master Lease Agreement, dated April
13, 1993, between
13
<PAGE>
the Company and Dominion Ventures, Inc., and First
Amendment thereto.
10.6 (1) Master Lease Agreement, dated June 24, 1994, between
the Company and LINC Capital Management Services,
Inc.
10.7 (1) Representative Form of International Distribution
Agreement.
10.8 (1) Cross License Agreement, dated August 2, 1994,
between the Company and RITA, formerly ZoMed
International, Inc.
10.9 (1) International Distribution Agreement, dated May 9,
1994, between the Company and Century Medical, Inc.
10.10 (1) Grant Agreement, dated July 19, 1993, between the
Company and the United Kingdom Department of Trade
and Industry.
10.11 (1) Letter employment agreement, dated August 26, 1994,
between the Company and John N. Hendrick.
10.12 (1) Letter employment agreement, dated August 31, 1994,
between the Company and James A. Heisch.
10.13 (1) Restated Shareholder Rights Agreement, dated November
23, 1994, among the Company and holders of the
Company's Registerable Securities
10.14 (1) Loan and Security Agreement dated April 20, 1995
between the Company and Venture Lending and Leasing,
Inc. and related letter agreement.
10.15 Operating Lease dated April 3, 1997, between the
Company and Hopkins Brothers.
10.16 Loan and Security Agreement, dated January 13, 1998,
between the Company and Silicon Valley Bank.
13.1 1997 Annual Report to Stockholders.
21.1 (1) Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors
(see page 17 of this report).
24.1 Power of Attorney (see signature page of this
Report).
27.1 Financial Data Schedule.
- --------------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(File No. 33-90746) and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form 8-A
filed with the Securities and Exchange Commission on January 31, 1997
and incorporated herein by reference thereto.
(3) Filed as an Exhibit to the Company's Current Report on form 8-K filed
with the Securities and Exchange Commission on March 14, 1997 and
incorporated herein by reference thereto.
(4) Filed as an Exhibit to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on September 24, 1997 and
incorporated herein by reference thereto.
(5) Filed as an Exhibit to the Company's Registration Statement on Form S-8
(File No. 33-80619) and incorporated herein by reference.
b) Reports on Form 8-K
14
<PAGE>
The Company was not required to and did not file any reports
on Form 8-K during the three months ended December 31, 1997.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Fremont, State of California, on the 24th day of March, 1997.
VIDAMED, INC.
By /s/ James A. Heisch
-----------------------------------
James A. Heisch, President,
Chief Executive Officer and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints James A. Heisch, and
Richard D. Brounstein as his attorneys-in-fact, with full power of substitution,
for him in any and all capacities, to sign any and all amendments to this Report
on Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys to any and all amendments to said Report.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons in the capacities and
on the dates indicated:
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ James A. Heisch President and Chief Executive Officer March 24, 1998
- ------------------------------ (Principal Executive Officer)
(James A. Heisch)
/s/ Richard D. Brounstein Vice President, Finance and Chief March 24, 1998
- ------------------------------ Financial Officer
(Richard D. Brounstein) (Principal Financial Officer)
/s/ David L. Douglass Director March 24, 1998
- ------------------------------
(David L. Douglass)
/s/ Franklin D. Brown Director March 24, 1998
- ------------------------------
(David L. Douglass)
/s/ Stuart D. Edwards Director March 24, 1998
- ------------------------------
(Stuart D. Edwards)
/s/ Robert J. Erra Director March 24, 1998
- ------------------------------
(Robert J. Erra)
/s/ Wayne I. Roe Director March 24, 1998
------------------------------
(Wayne I. Roe)
/s/ Michael H. Spindler Director March 24, 1997
------------------------------
(Michael H. Spindler)
</TABLE>
16
<PAGE>
<TABLE>
Schedule II - Valuation and Qualifying Accounts
<CAPTION>
Allowance for Doubtful Accounts (in thousands)
Description Balance at Beginning of Charged to costs Charged to Deductions Balance at
Period and Expenses Other Accounts End of Period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance 12/31/95 0 43 0 0 43
Balance 12/31/96 43 125 0 0 168
Balance 12/31/97 168 960 0 (69) 1,059
</TABLE>
17
STANDARD FORM
MULTI-TENANT INDUSTRIAL LEASE
(NET)
LANDLORD: Hopkins Brothers
a California general partnership
TENANT: VidaMed, Inc., a Delaware Corporation
PROJECT: 46107 Landing Parkway
CITY, STATE: Fremont, California
DATE: April 3, 1997
<PAGE>
STANDARD FORM MULTI-TENANT INDUSTRIAL LEASE
(NET)
TABLE OF CONTENTS
1. Basic Lease Terms ...................................................... 2
2. Premises ............................................................... 3
3. Lease Term ............................................................. 3
4. Possession ............................................................. 3
5. Rent ................................................................... 4
6. Additional Rent ........................................................ 4
7. Prepaid Rent ........................................................... 6
8. Security Deposit ....................................................... 6
9. Use of Premises and Project Facilities ................................. 7
10. Surrender of Premises; Holding Over ................................... 7
11. Signage ............................................................... 7
12. Personal Property Taxes ............................................... 8
13. Parking ............................................................... 8
14. Utilities ............................................................. 8
15. Maintenance ........................................................... 8
16. Alterations ........................................................... 8
17. Release and Indemnity ................................................. 9
18. Insurance ............................................................. 9
19. Destruction ........................................................... 10
20. Condemnation .......................................................... 11
21. Assignment or Sublease ................................................ 11
22. Default ............................................................... 12
23. Landlord's Remedies ................................................... 13
24. Default by Landlord ................................................... 13
25. Entry of Premises and Performance by Tenant ........................... 13
26. Subordination ......................................................... 14
27. Notice ................................................................ 14
28. Waiver ................................................................ 14
29. Limitation of Liability ............................................... 14
30. Force Majeure ......................................................... 15
31. Professional Fees ..................................................... 15
32. Examination of Lease .................................................. 15
33. Estoppel Certificate .................................................. 15
34. Rules and Regulations ................................................. 16
35. Liens ................................................................. 16
36. Miscellaneous Provisions .............................................. 16
EXHIBITS
A. Building Floor Plan Showing Premises ................................... 18
B. Project Site Plan ...................................................... 19
C. Work Letter Agreement .................................................. 20
D. Notice of Lease Term Dates ............................................. 21
E. Tenant Estoppel Certificate ............................................ 22
F. Rules and Regulations .................................................. 23
G. Project Signage Criteria ............................................... 25
H. Hazardous Materials Addendum ........................................... 26
I. Hazardous Materials Questionnaire ...................................... 28
J. Early Entry ............................................................ 31
RIDERS
ONE Option to Renew ..................................................... 32
TWO Right of First Offer ................................................ 33
2
December 16, 1995
<PAGE>
STANDARD INDUSTRIAL LEASE
(NET)
1. BASIC LEASE TERMS.
a. DATE OF LEASE EXECUTION: April 3, 1997
b. TENANT: VidaMed, Inc., a Delaware Corporation
Trade Name: VidaMed, Inc.
Address (Leased Premises): 46107 Landing Parkway, Fremont, California
94538
c. LANDLORD: Hopkins Brothers, a California general partnership
Notice Address: SARES REGIS Group, 18802 Bardeen, Irvine, Ca 92715 Attn:
Vince Ciavarella
Copy To: SARES REGIS Group of Northern California, 2815 Whipple Road,
Union City, CA 94587
d. TENANT'S PERMITTED USE OF PREMISES: Sales, storage, distribution, offices,
marketing, prototype machine shop, research, development, and manufacture
of medical devices.
e. PREMISES: Those Certain Premises Defined in PARAGRAPH 2 Below.
f. PREMISES AREA: Approximately 35,136 Rentable Square Feet
g. PROJECT AREA: Approximately 46,944 Rentable Square Feet
h. PREMISES PERCENT OF PROJECT: 74.85% on a Rentable Square Foot Basis
i. TERM: Commencement Date: May 1, 1997 Expiration Date: May 31, 2002 Number
of Months 61
j. MONTHLY BASIC RENT: See Rent schedule below in Paragraph 1(l).
k. ANNUAL BASIC RENT: See Rent schedule below in Paragraph 1(l).
<TABLE>
l. RENT SCHEDULE AND ADJUSTMENTS:
<CAPTION>
<S> <C> <C>
May 1, 1997 - May 31, 1997: $ 0.00 per month
June 1, 1997 - May 31, 1998: $ 32,325.00 per month (Annual Basic Rent = $ 387,900.00)
June 1, 1998 - May 31, 1999: $ 33,379.00 per month (Annual Basic Rent = $ 400,548.00)
June 1, 1999 - May 31, 2000: $ 34,433.00 per month (Annual Basic Rent = $ 413,196.00)
June 1, 2000 - May 31, 2001: $ 35,487.00 per month (Annual Basic Rent = $ 425,844.00)
June 1, 2001 - May 31, 2002: $ 36,541.00 per month (Annual Basic Rent = $ 438,492.00)
</TABLE>
m. TENANT ANNUAL EXPENSES: See Paragraph 6.
n. PREPAID RENT (for second month of term): $38,715.00 ($32,325.00, plus
additional rent of $6,390.00.)
o. TOTAL SECURITY DEPOSIT: $43,310.00, including a $ 500.00 non-refundable
cleaning fee.
p. BROKER(S): Cornish & Carey representing Tenant and CPS representing
Landlord.
q. GUARANTOR(S): NONE
r. TENANT IMPROVEMENTS:
All work performed by Landlord to prepare the Premises for occupancy
pursuant to the terms of the Work Letter Agreement attached hereto as
Exhibit C.
s. TENANT IMPROVEMENT ALLOWANCE: NONE.
t. PARKING:
Not more than 134 (3.8/1000) unreserved vehicle parking spaces, which
includes Tenant's prorata share of visitor parking spaces for the
building.
u. ADDITIONAL SECTIONS:
Additional sections of this Lease, contained in the "Addendum to the
Lease", numbered 36 through n/a are attached hereto and made a part
hereof. If none, so state in the following space NONE.
v. RIDERS: Rider numbered 1 through 2 is attached hereto and made a part
hereof.
w. EXHIBITS: Exhibits lettered A through J are attached hereto and made a
part hereof.
This Paragraph 1 represents a summary of the basic terms of this Lease. In
the event of any inconsistency between the terms contained in this
Paragraph 1 and any specific provision of this Lease, the terms of the
more specific provision shall prevail.
TENANT INITIAL__________ LAND LORD INITIAL______________
3
December 16, 1995
<PAGE>
2. PREMISES.
(a) Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, the premises referenced in Paragraph 1 and outlined in Exhibit A (the
"Premises"), located in the building (the "Building") which is part of the
project described on Exhibit B (the "Project"). Landlord reserves the right to
modify Tenant's percentage of the Project as set forth in Paragraph 1 if the
Project size is increased through the development of additional property or
decreased through the sale or other transfer of a portion of the Project. By
entry on the Premises, Tenant acknowledges that it has examined the Premises and
accepts the Premises in their present condition, subject to any additional work
Landlord has agreed to perform pursuant to the provisions of this Lease.
Notwithstanding the foregoing to the contrary, Landlord will deliver the
Premises and the Project, including the parking lot, in good condition and
repair and, as of the Commencement Date of the Lease, the electrical,
mechanical, HVAC, plumbing, fire safety, and roof serving the Premises and
Building will be in good condition and repair. Landlord shall be responsible for
correcting any of the foregoing, provided such repair is not required, caused by
or created by Tenant or Alterations by Tenant. As of the Commencement Date of
the Lease, and to the best of Landlord's actual knowledge, and without duty of
investigation, the Premises are in compliance with building codes and
regulations.
(b) The parties agree that the letting and hiring of the Premises is upon
and subject to the terms, covenants and conditions herein set forth and Tenant
covenants as a material part of the consideration for this Lease to keep and
perform each and all of said terms, covenants and conditions by it to be kept
and performed and that this Lease is made upon the condition of such
performance.
(c) The term "Rentable Square Feet" as used in this Lease shall include a
portion of the total square feet contained in any lobby or building common areas
of the Building, such portion to approximate Tenant's Percentage (as shown in
Subparagraph 1(h)) of said total square feet. Such portion shall be determined
by Landlord by measuring the area within the bounds of the outside surface of
the glass or outer wall of the Building and the midpoint of all partitions
separating the Premises from the building core, adjoining tenant space and
public corridors and other "Common Areas" as defined in this Lease. No
deductions shall be made for space occupied by structural or functional columns
or other projections. For purposes of establishing the initial Tenant's
Percentage, Annual Expense Allowance and Annual Basic Rent as shown in Paragraph
1 of this Lease, the number of Rentable Square Feet of the Premises is deemed to
be as set forth in Subparagraph 1(f) and the number of Rentable Square Feet of
the Project is deemed to be set forth in Subparagraph 1(g).
(d) Landlord reserves the right from time to time without unreasonable
interference with Tenant's use of the Premises to do and perform such acts and
make such changes in, to or with respect to the common areas within the Project
which are intended for the non-exclusive use of the tenants of the Project
("Common Areas"), the Building or the Project as Landlord may, in the exercise
of sound business judgment, deem to be appropriate. Except for governmental,
CC&R or other applicable agency requirement, the Landlord shall not unreasonably
reduce the number of parking spaces available to Tenant.
3. LEASE TERM.
The term of this Lease shall be for the period designated in Subparagraph
1(i) commencing on the Commencement Date, and ending on the Expiration Date as
set forth in said Subparagraph 1(i), unless the term hereby demised shall be
sooner terminated as herein provided ("Term"). Notwithstanding the foregoing, if
the Commencement Date falls on any day other than the first day of a calendar
month then the Term of this Lease shall be measured from the first day of the
month following the month in which the Commencement Date occurs.
4. POSSESSION.
(a) Delivery of Possession. Landlord agrees to deliver possession of the
Premises to Tenant upon the substantial completion of the Tenant Improvements as
determined by Landlord's architect or space planner in accordance with the terms
of this Lease and the Work Letter Agreement attached hereto as Exhibit C.
Notwithstanding the foregoing, Landlord shall not be obligated to deliver Early
Entry of the Premises to Tenant when until Landlord has received from Tenant all
of the following: (i) the Security Deposit and the first monthly installment of
Annual Basic Rent; (ii) executed copies of policies of insurance or certificates
thereof as required under Paragraph 18 of this Lease; (iii) copies of all
governmental permits and authorizations required in connection with Tenant's
operation of its business upon the Premises; and (iv) an executed original of
the Hazardous Materials Questionnaire in the form attached hereto as Exhibit I.
Tenant shall not interfere with Landlord's work hereunder.
(b) Late Delivery. Tenant agrees that if Landlord is unable to deliver
possession of the Premises to Tenant on or prior to the Commencement Date
specified in Subparagraph 1(i), this Lease shall not be void or voidable, nor
shall Landlord be liable to Tenant for any loss or damage resulting therefrom.
As the Tenant's sole remedy, the Commencement Date and the Expiration Date of
the Term shall be extended one (1) day for each day Landlord delays in
delivering possession of the Premises to Tenant, and all Monthly Basic Rent and
additional rent shall be abated during such delay. If the Premises are delivered
such that the commencement date is not the first day of the calendar month, then
the term of this Lease shall be for the term specified in 1(l), plus any partial
month at the beginning of the Term. The Monthly Basic Rent shall be prorated for
any partial month. If the Landlord cannot deliver the Premises within 120 days
from the date of full execution of the Lease, the Tenant may cancel the Lease
upon 3 days written notice to Landlord.
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December 16, 1995
<PAGE>
(c) Condition of Premises. Prior to the Commencement Date and in accordance
with the Work Schedule to be prepared by Landlord and Tenant pursuant to the
Work Letter Agreement attached hereto as Exhibit C, Landlord and Tenant shall
jointly conduct a walk-through inspection of the Premises and shall jointly
prepare a list (the "Punch-List") of items needing additional work; provided,
however, the Punch-List shall be limited to items required to be installed by
Landlord under the Work Letter Agreement and the Punch-List will not include any
items of damage to the Premises caused by Tenant's move-in or early entry, if
permitted. Damage caused by Tenant will be corrected or repaired by Landlord, at
Tenant's expense. Other than the items specified in the Punch-List, by taking
possession of the Premises, Tenant will be deemed to have accepted the Premises
and the Building in their condition on the date of delivery of possession and to
have acknowledged that Landlord has installed the Tenant Improvements as
required by the Work Letter Agreement and that there are no additional items
needing work or repair. Landlord shall cause all items set forth in the
Punch-List (including those items set forth in 2.(a) above) to be repaired or
corrected within thirty (30) days following the preparation of the Punch-List or
as soon as reasonably practicable after the preparation of the Punch-List.
Except as set forth in the Lease, Tenant acknowledges that neither Landlord nor
any agent of Landlord has made any representation or warranty with respect to
the Premises, the Building, the Project or any portions thereof or with respect
to the suitability of same for the conduct of Tenant's business. Without
limiting the foregoing, if the Building is newly constructed or renovated,
Tenant's execution of the Notice attached hereto as Exhibit D shall constitute a
specific acknowledgment and acceptance of the various start-up inconveniences
that may be associated with the use of the Project and the Common Areas such as
certain construction obstacles including scaffolding, uneven air conditioning
services and other typical conditions incident to recently constructed or
renovated buildings.
5. RENT.
(a) Basic Rent. Tenant agrees to pay Landlord as Annual Basic Rent for the
Premises the Annual Basic Rent designated in Subparagraphs 1(k) and 1(l)
(adjusted as hereinafter provided) in twelve (12) equal monthly installments as
designated in Subparagraph 1(j) and 1(l), each in advance on the first day of
each and every calendar month during the Term, except that one month's rent
shall be paid upon the execution of this Lease. If the Term of this Lease
commences on a day other than the first day of a calendar month or ends on a day
other than the last day of a calendar month, then the rent for such periods
shall be prorated in the proportion that the number of days this Lease is in
effect during such periods bears to thirty days (30), and such rent shall be
paid at the commencement of such period. In addition to the Annual Basic Rent,
Tenant agrees to pay additional rent as provided in Paragraph 6 and the amount
of all rental adjustments as and when hereinafter provided in this Lease. The
Annual Basic Rent, any additional rent payable pursuant to the provisions of
this Lease, and any rental adjustments shall be paid to Landlord, without any
prior demand therefor, and without any deduction or offset whatsoever in lawful
money of the United States of America, which shall be legal tender at the time
of payment, at the address of Landlord designated in Subparagraph 1(c) or to
such other person or at such other place as Landlord may from time to time
designate in writing. Further, all charges to be paid by Tenant hereunder,
including, without limitation, payments for real property taxes, insurance,
repairs, and parking, if any, shall be considered additional rent for the
purposes of this Lease, and the word "rent" in this Lease shall include such
additional rent unless the context specifically or clearly implies that only the
Annual Basic Rent is referenced. Annual Basic Rent and monthly Rent shall be
adjusted as provided in Subparagraph 1(l).
(b) Late Payments.
Tenant acknowledges that late payment by Tenant to Landlord of any rent or
other sums due under this Lease will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of such costs being extremely
difficult and impracticable to ascertain. Such costs include, without
limitation, processing and accounting charges and late charges that may be
imposed on Landlord by the terms of any encumbrance or note secured by the
Premises. Therefore, if any rent or other sum due from Tenant is not received
within ten (10) days after such payment is due, Tenant shall pay to Landlord
upon demand, an additional sum equal to ten percent (10%) of such overdue
payment. Landlord and Tenant hereby agree that such late charge represents a
fair and reasonable estimate of the costs that Landlord will incur by reason of
any such late payment. Additionally, all such delinquent rent or other sums,
plus this late charge, shall bear interest at the then maximum lawful rate
permitted to be charged by Landlord. Any payments of any kind returned for
insufficient funds will be subject to an additional handling charge of $25.00.
TENANT INTIALS _________
(d) Step Increase. If Subparagraph 1(l) so indicates, Annual Basic Rent and
monthly Rent shall be increased periodically to the amounts and at the times set
forth in Subparagraph 1(l).
6. ADDITIONAL RENT.
In addition to Annual Basic Rent, Tenant shall pay to Landlord additional
rent in accordance with the terms of this Paragraph 6, commencing with Tenant's
entry onto the Premises. The purpose of this Paragraph 6 is to
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December 16, 1995
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ensure that Tenant bears a share of all Expenses related to the use,
maintenance, repair or replacement, and insurance of the Project including,
without limitation, all assessments which are levied against the Project and/or
the Building pursuant to any covenants, conditions and restrictions which may
now or hereafter encumber the Project or any portion thereof which includes the
Building including any and all amendments made from time to time to such
covenants, conditions and restrictions (collectively, "CC&Rs"). Accordingly,
Tenant shall pay to Landlord additional rent equal to that portion of Tenant's
share of Expenses related to the Project as follows:
(a) Expenses Defined. The term "Expenses" shall mean all costs and expenses
of the operation, maintenance, repair or replacement, and insurance of the
Project, including without limitation, the following costs:
1. All supplies, materials, labor, equipment, and utilities used in or
related to the operation and maintenance of the Project;
2. All maintenance, replacement and repair costs (not including the
structural portions of the concrete floor or exterior walls) relating to the
areas within or around the Project, including, without limitation, air
conditioning systems (unless same are maintained by tenant(s)), sidewalks,
landscaping, service areas, driveways, parking areas (including resurfacing and
restriping parking areas), walkways, building exteriors (including painting),
signs and directories, repairing and replacing roofs, walls, etc., janitorial,
insurance, and service agreement costs related to the Project;
3. Amortization (along with reasonable financing charges, not to exceed 12%
per annum) of capital improvements made to the Project which may be required by
any government authority or which will improve the operating efficiency of the
Project (provided, however, that the amount of such amortization for
improvements not mandated by government authority shall not exceed in any year
the amount of costs reasonably determined by Landlord in its sole discretion to
have been saved by the expenditure either through the reduction or minimization
of increases which would have otherwise occurred). For any single repair or
replacement which a) is in excess of $20,000.00, and b) would normally be
considered a capital improvement under generally accepted accounting principles,
the Landlord shall amortize the repair or replacement over the useful life, as
reasonably determined by Landlord, and in accordance with this Paragraph; and
4. A management administration fee in an amount equal to fifteen percent
(15%) of the Expenses in items 1, 2 and 3 above;
5. Real Property Taxes including all taxes, assessments (general and
special) and other impositions or charges which may be taxed, charged, levied,
assessed or imposed with respect to any calendar year or part thereof included
within the term upon all or any portion of or in relation to the Project or any
portion thereof, any leasehold estate in the Premises or measured by rent from
the Premises, including any increase caused by the transfer, sale or encumbrance
of the Project or any portion thereof. "Real Property Taxes" shall also include
any form of assessment, levy, penalty, charge or tax (other than estate,
inheritance, net income or franchise taxes) imposed by any authority having a
direct or indirect power to tax or charge, including, without limitation, any
city, county, state, federal or any improvement or other district, whether such
tax is: (1) determined by the area of the Project or the rent or other sums
payable under this Lease; (2) upon or with respect to any legal or equitable
interest of Landlord in the Project or any part thereof; (3) upon this
transaction or any document to which Tenant is a party creating a transfer in
any interest in the Project; (4) in lieu of or as a direct substitute in whole
or in part of or in addition to any real property taxes on the Project; (5)
based on any parking spaces or parking facilities provided in the Project; or
(6) in consideration for services, such as police protection, fire protection,
street, sidewalk and roadway maintenance, refuse removal or other services that
may be provided by any governmental or quasi-governmental agency from time to
time which were formerly provided without charge or with less charge to property
owners or occupants. If assessments are levied against the Project, and if
Landlord has the option of paying such assessments in installments, then
Tenant's obligation to pay for such assessments during any year of the Term
shall not exceed that amount of principal and interest that would have become
payable during any such year had Landlord elected to pay such assessments in
installments.
(b) Annual Estimate of Expenses. At the commencement of each calendar year,
Landlord shall estimate Tenant's share of Expenses for the coming year based on
the Premises Percent of Project set forth in Subparagraph 1(h) or the amended
percent of Project pursuant to Paragraph 2(a).
(c) Monthly Payment of Expenses. Landlord, at its sole discretion, may
provide Tenant with an estimate of Expenses for the forthcoming calendar, and
Tenant shall pay to Landlord, as additional rent, such estimated excess in
monthly installments of one-twelfth (1/12) of such total amount beginning on
January 1 of the forthcoming calendar year, and one-twelfth (1/12) of such total
amount on the first day of each succeeding calendar month. As soon as practical
following each calendar year, Landlord shall prepare an accounting of actual
Expenses incurred during the prior calendar year and such accounting shall
reflect Tenant's share of Expenses. If the additional rent paid by Tenant under
this Subparagraph 6(c) during the preceding calendar year was less than the
actual amount of Tenant's share of Expenses, Landlord shall so notify Tenant and
Tenant shall pay such amount to Landlord within 30 days of receipt of such
notice. Such amount shall be deemed to have accrued during the prior calendar
year and shall be due and payable from Tenant even though the term of this Lease
has expired or this Lease has been terminated prior to Tenant's receipt of this
notice. Tenant shall have thirty (30) days from receipt of such notice to
contest the amount due; failure to so notify Landlord shall represent final
determination of Tenant's share of Expenses. If Tenant's payments were greater
than the actual amount, then such overpayment shall be credited by Landlord to
all present rent due under this Paragraph 5 and 6. In the event that no further
Rent is due under the Lease, the Landlord shall refund such overpayment to
Tenant. Tenant shall have the right to perform an audit of Landlord's books and
records for the purpose of determining the accuracy of Landlord's Expenses. The
audit shall: a) be performed at the sole cost and expense
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December 16, 1995
<PAGE>
of Tenant, b) shall be conducted for the immediately preceding calendar year
only, c) be performed at the Landlord's office where such records are kept, and
d) be conducted during normal business hours and shall not exceed one (1)
business day in length. If such audit reveals that the actual Expenses for any
given year were less that the amount that Tenant paid therefor, then Landlord
shall pay to Tenant the amount of the overpayment in the manner specified above.
If such audit reveals that the actual Expenses for any given year were more than
the amount that Tenant paid, then the Tenant shall pay to Landlord the amount of
the overpayment within thirty (30) days of such audit.
(d) Exclusions: Expenses shall not include the following: (I) costs caused
by fire or other casualty or condemnation in excess of $50,000.00; (ii) costs
for which Landlord has a right of reimbursement from others, (provided, however,
that to the extent Landlord does not actually receive reimbursement for such
costs, and such costs would otherwise be characterized as Expenses but for the
foregoing provisions of this clause (ii), then such costs shall be includable in
Expenses); (iii) costs or other disbursements incurred in connection with
negotiations or disputes with any other occupant of the Project; (iv)
depreciation or other expense reserves not allowable under Expenses; (v)
interest, charges and fees incurred on debt, payments on mortgages and rent
under ground leases; (vi) unrelated management fees, except as permitted under
Expenses; (vii) cost for maintenance, repair or replacement to or for the
structural elements of the exterior walls, concrete floor and foundation, except
if caused by Tenant.
7. PREPAID RENT.
Upon execution of this Lease, Tenant shall pay to Landlord the Prepaid Rent
set forth in Subparagraph 1(n), and if Tenant is not in default of any
provisions of this Lease, such Prepaid Rent shall be applied toward the rent due
for the first month of the Term. Landlord's obligations with respect to the
Prepaid Rent are those of a debtor and not of a trustee, and Landlord can
commingle the Prepaid Rent with Landlord's general funds. Landlord shall not be
required to pay Tenant interest on the Prepaid Rent. Landlord shall be entitled
to immediately endorse and cash Tenant's Prepaid Rent; however, such endorsement
and cashing shall not constitute Landlord's acceptance of this Lease. In the
event Landlord does not accept this Lease, Landlord shall return said Prepaid
Rent. If Landlord sells the Premises and deposits with the purchaser the Prepaid
Rent, Landlord shall be discharged from any further liability with respect to
the Prepaid Rent.
8. SECURITY DEPOSIT.
Upon execution of this Lease, Tenant shall deposit the Security Deposit set
forth in Subparagraph 1(o) with Landlord, in part as security for the
performance by Tenant of the provisions of this Lease and in part as a cleaning
fee. If Tenant is in default, regardless if such default is monetary or
non-monetary, Landlord can use the Security Deposit or any portion of it to cure
the default or to compensate Landlord for any damages sustained by Landlord
resulting from Tenant's default. Upon demand, Tenant shall immediately pay to
Landlord a sum equal to the portion of the Security Deposit expended or applied
by Landlord to maintain the Security Deposit in the amount initially deposited
with Landlord. If Tenant is not in default at the expiration or termination of
this Lease, Landlord shall return the entire Security Deposit to Tenant except
for $500.00 which Landlord shall retain as a non-refundable cleaning fee.
Landlord's obligations with respect to the Security Deposit are those of a
debtor and not of a trustee, and Landlord can commingle the Security Deposit
with Landlord's general funds. Landlord shall not be required to pay Tenant
interest on the Security Deposit. Landlord shall be entitled to immediately
endorse and cash Tenant's Security Deposit; however, such endorsement and
cashing shall not constitute Landlord's acceptance of this Lease. In the event
Landlord does not accept this Lease, Landlord shall return said Security
Deposit. If Landlord sells the Premises and deposits with the purchaser the then
amount of the Security Deposit, Landlord shall be discharged from any further
liability with respect to the Security Deposit.
Within five (5) days following execution of this Lease, but as a condition
precedent to Landlord's obligations hereunder, and in addition to the Security
Deposit, Tenant shall provide Landlord with an irrevocable Letter of Credit in
the principal sum of $225,000 (the "Letter of Credit"). The Letter of Credit
shall secure the performance by Tenant of Tenant's obligations under this Lease.
The Letter of Credit shall be issued by a financial institution reasonably
acceptable to Landlord and shall be on a form and contain such terms that are
acceptable to Landlord and its counsel. The Letter of Credit shall provide that
Landlord may draw upon the Letter of Credit upon written demand certifying that
Tenant is in default of the performance of its obligations under this Lease. The
Letter of Credit shall not expire without thirty (30) days' prior written notice
to Landlord. Following the expiration of any applicable cure period, the
Landlord may draw on the Letter of Credit upon the occurrence of any default by
Tenant hereunder, whether monetary or non-monetary, to compensate Landlord for
any damages sustained by Landlord resulting from Tenant's default; provided,
however, that Landlord shall first have given to Tenant any notices required
under Paragraph 22, and Tenant's cure period, if any, shall have expired before
Landlord draws on the Letter of Credit. So long as Landlord has not drawn on the
Letter of Credit, the principal amount of the Letter of Credit shall be reduced
as follows:
Year 2: $150,000.00 (June 1, 1998)
Year 3: $ 75,000.00 (June 1, 1999)
Year 4: 0.00 (June 1, 2000)
Tenant's failure to renew the Letter of Credit as provided in this Paragraph
shall permit Landlord to draw against same. Amounts collected by Landlord under
the Letter of Credit shall be applied against the obligation of Tenant with
respect to which it is in default with any excess draw returned to the issuing
bank, except in connection with a draw on the Letter of Credit due to Tenant's
failure to renew the Letter of Credit. In the event that Landlord draws on the
Letter of Credit due to Tenant's failure to renew the Letter of Credit, the
amount withdrawn shall be held by Landlord as security for Tenant's performance
under this Lease, except if Tenant provides a replacement Letter of Credit in
the form and amounts required herein, and with any remaining amount thereof
returned to Tenant at the expiration of the Lease, pursuant to the provisions of
the Security Deposit contained herein.
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December 16, 1995
<PAGE>
9. USE OF PREMISES AND PROJECT FACILITIES.
(a) Tenant's Use of the Premises. Tenant shall use the Premises for the use
or uses set forth in Subparagraph 1(d) above, and shall not use or permit the
Premises to be used for any other purpose without the prior written consent of
Landlord, which consent Landlord may withhold in its sole and absolute
discretion. Nothing contained herein shall be deemed to give Tenant any
exclusive right to such use in the Project.
(b) Compliance. At Tenant's sole cost and expense, Tenant shall procure,
maintain and hold available for Landlord's inspection, all governmental licenses
and permits required for the proper and lawful conduct of Tenant's business from
the Premises. Tenant shall maintain (except to the extent that Landlord is
required to maintain under Paragraph 15 and such maintenance is not as a result
of Tenant's specific use of the Premises) the Premises in compliance with any
and all CC&Rs and all laws, statutes, zoning restrictions, ordinances or
governmental laws, rules, regulations or requirements of any duly constituted
public authority having jurisdiction over the Premises now or hereafter in
force, the requirements of the Board of Fire Underwriters or any other similar
body now or hereafter constituted, or of the Certificate of Occupancy issued for
the Building. Tenant shall not use or occupy the Premises in violation of any of
the foregoing. Tenant shall, upon written notice from Landlord, discontinue any
use of the Premises which is declared by any authority having jurisdiction over
the Premises, governmental or otherwise, to be a violation of law or of said
Certificate of Occupancy. Tenant shall comply with all rules, orders,
regulations and requirements of any insurance authority having jurisdiction over
the Project or any present or future insurer relating to the Premises or the
Project. Tenant shall promptly, upon demand, reimburse Landlord for any
additional premium charged for any existing insurance policy or endorsement
required by reason of Tenant's failure to comply with the provisions of this
Paragraph 9. Tenant shall not do or permit anything to be done in or about the
Premises which will in any manner obstruct or interfere with the rights of other
tenants or occupants of the Project, or injure or annoy them, or use or allow
the Premises to be used for any improper, immoral, unlawful or objectionable
purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about
the Premises. Tenant shall comply with all restrictive covenants and obligations
created by private contracts which affect the use and operation of the Premises,
the Common Areas or the Project including, without limitation, the Rules and
Regulations referred to in Paragraph 34 and attached hereto as Exhibit F. Tenant
shall not commit or suffer to be committed any waste in or upon the Premises and
shall keep the Premises in first class repair and appearance. Further, Tenant's
business machines and mechanical equipment which cause vibration or noise that
may be transmitted to the Building structure or to any other space in the
Building shall be so installed, maintained and used by Tenant as to eliminate or
minimize such vibration or noise. Tenant shall be responsible for all structural
engineering required to determine structural load, as well as the expense
thereof.
10. SURRENDER OF PREMISES; HOLDING OVER.
Upon expiration of the Term of this Lease, Tenant shall surrender to
Landlord the Premises and all Tenant Improvements and alterations in good
condition, except for ordinary wear and tear and alterations Tenant has the
right or is obligated to remove under the provisions of Paragraph 16 herein.
Tenant shall remove all personal property including, without limitation, all
wallpaper, paneling and other decorative improvements or fixtures (if installed
by Tenant) and shall, at Landlord's request, perform all restoration made
necessary by the removal of any alterations or Tenant's personal property before
the expiration of the Term, including for example, restoring all wall surfaces
to their condition prior to the commencement of this Lease. Landlord can elect
to retain or dispose of in any manner Tenant's personal property not removed
from the Premises by Tenant prior to the expiration of the Term. Tenant waives
all claims against Landlord for any damage to Tenant resulting from Landlord's
retention or disposition of Tenant's personal property. Tenant shall be liable
to Landlord for Landlord's costs for storage, removal or disposal of Tenant's
personal property, provided Landlord's storage, removal or disposal is in
compliance with applicable law.
If Tenant, with Landlord's consent, remains in possession of the Premises
after expiration or termination of the Term, or after the date in any notice
given by Landlord to Tenant terminating this Lease, such possession by Tenant
shall be deemed to be a month-to-month tenancy terminable on written 30-day
notice at any time, by either party. All provisions of this Lease, except those
pertaining to term and rent, shall apply to the month-to-month tenancy. Tenant
shall pay monthly rent in an amount equal to 150% of Monthly Basic Rent, subject
to increases as provided in Subparagraph 5(c), if applicable, for the last full
calendar month during the regular Term plus 100% of said last month's estimate
of Tenant's share of Expenses pursuant to Paragraph 6, subject to increase as
provided therein. If Tenant fails to surrender the Premises after expiration or
termination of the Term, Tenant shall indemnify, defend and hold Landlord
harmless from all loss or liability, including, without limitation, any loss or
liability resulting from any claim against Landlord made by any succeeding
tenant founded on or resulting from Tenant's failure to surrender the Premises
and losses to Landlord due to lost opportunities to lease any portion of the
Premises to succeeding tenants, together with, in each case, actual attorneys'
fees and costs.
11. SIGNAGE.
Landlord shall designate the location on the Building and/or the Premises,
if any, for one or more exterior Tenant identification sign(s). Tenant shall
install and maintain its identification sign(s) consistent with current Tenant
signs at the project in such designated location in accordance with this
Paragraph 11 and Exhibit G. Tenant shall have no right to install or maintain
Tenant identification signs in any other location in, on or about the Premises
or the Project and shall not display or erect any other signs, displays or other
advertising materials that are visible from the exterior of the Building,
without obtaining the prior written consent of Landlord. The size, design, color
and other physical aspects of permitted sign(s) shall be subject to: (i)
Landlord's written approval prior to installation, which shall not be
unreasonbly withheld,
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December 16, 1995
<PAGE>
(ii) any covenants, conditions or restrictions encumbering the Premises, and
(iii) any applicable municipal or governmental permits and approvals. The cost
of the sign(s), including the installation, maintenance and removal thereof
shall be at Tenant's sole cost and expense. If Tenant fails to install or
maintain its sign(s), or if Tenant fails to remove same upon termination of this
Lease and repair any damage caused by such removal including, without
limitation, repainting the Building (if required by Landlord, in Landlord's sole
but reasonable judgment), Landlord may do so at Tenant's expense. Tenant shall
reimburse Landlord for all reasonable costs incurred by Landlord to effect such
installation, maintenance or removal, which amount shall be deemed additional
rent, and shall include, without limitation, all sums disbursed, incurred or
deposited by Landlord including Landlord's costs, expenses and actual attorney's
fees with interest thereon at the maximum interest rate permitted by law from
the date of Landlord's demand until payment. Any sign rights granted to Tenant
under this Lease are personal to Tenant and may not be assigned, transferred or
otherwise conveyed to any assignee or subtenant of Tenant without Landlord's
prior written consent, which consent Landlord may withhold in its sole and
absolute discretion.
12. PERSONAL PROPERTY TAXES.
Tenant shall pay before delinquency all taxes, assessments, license fees and
public charges levied, assessed or imposed upon its business operations as well
as upon all trade fixtures, leasehold improvements, merchandise and other
personal property in or about the Premises.
13. PARKING.
Landlord grants to Tenant and Tenant's customers, suppliers, employees and
invitees, a non-exclusive license to use vehicle parking spaces as set forth in
Subparagraph 1(t) within the designated parking areas in the Project for the use
of motor vehicles during the Term of this Lease. Landlord reserves the right at
any time to grant similar non-exclusive use to other tenants, to promulgate
rules and regulations relating to the use of such parking areas, including
reasonable restrictions on parking by tenants and employees, to designate
specific spaces for the use of any tenant, to make changes in the parking layout
from time to time, and to establish reasonable time limits on parking. Except
for governmental, CC&R or other applicable agency requirement, Landlord shall
not unreasonably reduce the number of parking spaces available to Tenant.
Overnight parking is prohibited and any vehicle violating this or any other
vehicle regulation adopted by Landlord is subject to removal at the owner's
expense.
14. UTILITIES.
Tenant shall pay directly to the utility companies providing such services,
the cost of all water, gas, heat, light, power, sewer, electricity, telephone or
other service metered, chargeable or provided to the Premises. Landlord reserves
the right to install separate meters for any such utility and to charge Tenant
for the cost of such installation.
15. MAINTENANCE.
Landlord shall maintain, in good condition, the structural parts of the
Premises, which shall include only the foundations, bearing and exterior walls
(excluding glass), subflooring and roof (excluding skylights), the unexposed
electrical, plumbing and sewerage systems, including, without limitation, those
portions of the systems lying outside the Premises, window frames, gutters and
downspouts on the Building, the heating, ventilating and air conditioning system
servicing the Premises, the outside areas of the project, including landscaping,
sidewalks, service areas, driveways, parking areas, walkways and outside
lighting; provided, however, the cost of all such maintenance shall be
considered "Expenses" (except for the structural elements of the concrete floor,
foundation or exterior walls, unless if caused by Tenant) for purposes of
Subparagraph 6(a). Except as provided above, Tenant shall maintain and repair
the Premises in good condition, including, without limitation, maintaining and
repairing all walls, floors, ceilings, and doors, servicing the Premises,
exterior and interior windows and fixtures as well as damage caused by Tenant,
its agents, contractors, employees or invitees. In its sole discretion, Landlord
reserves the right to require Tenant to contract directly, maintain, repair and
service the heating, ventilating and air conditioning equipment. Upon expiration
or termination of this Lease, Tenant shall surrender the Premises to Landlord in
the same condition as existed at the commencement of the Term, except for
reasonable wear and tear or damage caused by fire or other casualty for which
Landlord has received all funds necessary for restoration of the Premises from
insurance proceeds. Except as provided in Paragraph 19, there shall be no
abatement of rent and no liability of Landlord by reason of any injury to or
interference with Tenant's business arising from the making of any repairs,
alterations or improvements in or to any portion of the Project or the Premises.
Landlord shall use reasonable good faith efforts to minimize any injury or
interference. Tenant hereby waives any and all rights to make repairs at the
expense of Landlord under the provisions of Sections 1941 and 1942 of the
California Civil Code or any similar statute now or hereafter enacted.
16. ALTERATIONS.
a) Tenant shall not make any alterations to the Premises, or to the Project,
including any changes to the existing landscaping, without Landlord's prior
written consent, As of the commencement of this Lease, the Tenant intends to
construct a 7,000 - 8,000 square foot, light manufacturing, research and
development area within the existing warehouse area of the Premises ("Clean
Room"). Provided that the Tenant is in compliance with the provisions herein,
and the construction of such Clean Room would not (I) cause Landlord to incur
any cost or expense, or (ii) require Landlord to perform any improvements,
alterations, or other work to the Premises, the Building, or the Project, then
the Landlord shall not unreasonably withhold its consent for the Clean Room. If
Landlord gives its consent to such alterations, Landlord may post notices in
accordance with the laws of the state
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December 16, 1995
<PAGE>
in which the Premises are located. Any alterations made shall remain on and be
surrendered with the Premises upon expiration of the Term, except that Landlord
may, within 30 days before or 30 days after expiration of the Term, elect to
require Tenant to remove any alterations which Tenant may have made to the
Premises. When submitting the proposed Alteration to the Landlord, the Tenant
may request whether or not the Alterations will be required to be removed and
the Premises restored at the end of the term or earlier expiration. Such request
shall be in writing and the Landlord must be provided with detailed plans and
specifications in order to properly evaluate the request. If Landlord so elects,
Tenant shall, at its own cost, restore the Premises to the condition designated
by Landlord in its election, before the last day of the Term or within 30 days
after notice of its election is given, whichever is later. Such restoration
shall be performed by Tenant to a similar condition that existed immediately
prior to entry into the Premises by Tenant.
b) Tenant may perform, without Landlord approval, Alterations to the
Premises, provided that the following conditions are met: a) the Alterations
shall not, collectively, exceed $10,000.00 per calendar year, b) the Alterations
shall not penetrate the roof, concrete floor or exterior walls, c) the
Alterations shall not be visible from the exterior of the building or affect the
exterior in any way, d) the Alterations shall not be structural, e) Alterations
to the electrical system shall not affect the main service to the building or
require changes to the main service, f) Alterations to the plumbing system shall
not affect the system below the concrete floor, g) the Alterations must be
performed in a professional and workmanlike manner by a licensed contractor
(whose insurance meets the reasonable requirements of Landlord), and h) the
Tenant shall notify Landlord, in advance, of the work to be performed. All
Alterations, whether or not prior approval is required, are subject to removal
and restoration, as stated herein.
c) Should Landlord consent in writing to Tenant's alteration of the
Premises, Tenant shall contract with a contractor reasonably approved by
Landlord for the construction of such alterations, shall secure all appropriate
governmental approvals and permits, and shall complete such alterations with due
diligence in compliance with plans and specifications approved by Landlord, and
in compliance with all applicable laws, statutes and regulations. All such
construction shall be performed in a manner which will not interfere with the
quiet enjoyment of other tenants of the Project. Tenant shall pay all costs for
such construction and shall keep the Premises and the Project free and clear of
all mechanics' liens which may result from construction by Tenant.
17. RELEASE AND INDEMNITY.
As material consideration to Landlord, Tenant agrees that Landlord, its
agents, and its employees shall not be liable to Tenant, its agents, employees,
sublessees, invitees, licensees and other persons claiming under Tenant for: (i)
any damage to any property entrusted to employees of the Project, (ii) loss or
damage to any property by theft or otherwise, (iii) consequential damages
arising out of any loss of the use of the Premises or any equipment or
facilities therein; or (iv) any injury or damage to person or property resulting
from fire, explosion, falling plaster, steam, gas, electricity, water or rain
which may leak from any part of the Project or from pipes, appliances or
plumbing work therein or from the roof, street, sub-surface or from any other
place or resulting from dampness or any other cause whatsoever. Landlord or its
agents shall not be liable for interference with light or other incorporeal
hereditaments, nor shall Landlord be liable for any latent defects in the
Premises or the Project. Nothing contained herein shall require Tenant to
indemnify Landlord for Landlord's sole gross negligence or willful misconduct.
Tenant shall give prompt notice to Landlord in case of fire or accidents in the
Premises or in the Project, and of defects therein or in the fixtures or
equipment located therein.
To the fullest extent permitted by law, Tenant agrees to indemnify, defend (
with counsel reasonably satisfactory to Landlord) and hold harmless Landlord,
its agents, successors in interest with respect to the Building and their
directors, officers, partners, employees, shareholders, agents and
representatives and the directors, officers, partners, employees, shareholders,
agents and representatives of the partners of Landlord from (i) all claims,
actions, liabilities, and proceedings arising from Tenant's use of the Premises
or the conduct of its business or from any activity, work or thing done,
permitted or suffered by Tenant, its agents, contractors, sublessees, employees
or invitees, in or about the Premises, the Building, or the Project and any
breach or default in the performance of any obligation to be performed by Tenant
under the terms of this Lease, or arising from any act, neglect, fault or
omission of Tenant, or of its agents, contractors, sublessees, employees or
invitees, and (ii) and all costs, attorneys' fees, expenses and liabilities
incurred with respect to any such claims, actions, liabilities, or proceedings,
and in the event any actions or proceedings shall be brought against Landlord by
reason of any such claims, Tenant, upon notice from Landlord, shall defend the
same at Tenant's expense by counsel reasonably approved in writing by Landlord.
Tenant hereby assumes all risk of damage to property or injury to person in,
upon or about the Premises from any cause whatsoever except that which is caused
by the failure of Landlord to observe any of the terms and conditions of this
Lease where such failure has persisted for an unreasonable period of time after
Landlord receives written notice of such, and Tenant hereby waives all its
claims in respect thereof against Landlord. Nothing contained herein shall
require Tenant to indemnify Landlord for Landlord's sole gross negligence or
willful misconduct.
As used herein, the term "liabilities" shall include all suits, actions,
claims and demands and all expenses (including attorneys' fees and costs of
defense) incurred in or about any such liability and any action or proceeding
brought thereon. If any claim shall be made or any action or proceeding brought
against Landlord on the basis of any liability described in this Paragraph,
Tenant shall, upon notice from Landlord defend the same at Tenant's expense by
counsel reasonably satisfactory to Landlord. It is understood that payment shall
not be a condition precedent to recovery upon the foregoing indemnity.
18. INSURANCE.
Tenant, at its cost, shall pay for and keep in full force and effect
throughout the Term of this Lease:
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December 16, 1995
<PAGE>
(a) COMPREHENSIVE GENERAL LIABILITY OR COMMERCIAL GENERAL LIABILITY
insurance with respect to the Premises and the operations of or on behalf of
Tenant, in, of or about the Premises, including, but not limited to, personal
injury, product liability (if applicable), blanket contractual, owner's
protective, broad form property damage liability, liquor liability (if
applicable) and owned and non-owned automobile liability in amounts not less
than $1,000,000 per occurrence on the commencement date of this Lease. The
insurance policy or policies shall contain the following provisions: (1)
severability of interest, (2) cross liability, (3) an endorsement naming
Landlord, Landlord's Mortgagees and any other parties in interest designated by
Landlord as additional insureds, (4) an endorsement stating "such insurance as
is afforded by this policy for the benefit of the Landlord and any other
additional insured shall be primary as respects any liability or claims arising
out of the occupancy of the Premises by the Tenant, or Tenant's operations and
any insurance carried by Landlord, or any other additional insured shall be
non-contributory," (5) with respect to improvements or alterations permitted
under this Lease, contingent liability and builder's risk insurance, (6) an
endorsement allocating to the Premises the full amount of liability limits
required by this Lease, and (7) coverage must be on an "occurrence basis".
"Claims-Made" forms are not acceptable.
(b) WORKERS COMPENSATION COVERAGE as required by law, together with
Employers Liability coverage with a limit of not less than $1,000,000.
(c) TENANT'S PROPERTY INSURANCE: Tenant shall at all times during the Term
hereof and at its cost and expense, maintain in effect policies of insurance
covering (1) all Tenant Improvements on the Premises installed by Tenant, (2)
all personal property of Tenant located in or at the Premises including, but not
limited to, fixtures, furnishings, equipment and furniture, in an amount not
less than their full replacement value, and (3) loss of income or business
interruption insurance covering a period of one (1) year. These policies shall
provide protection against any peril included within the classification "All
Risk" including, but not limited to, insurance against sprinkler leakage,
vandalism and malicious mischief. The proceeds of such insurance shall be used
to repair or replace the Tenant Improvements and personal property so insured.
All policies of insurance required hereunder shall include a clause or
endorsement denying the insurer any rights of subrogation against the other
party to the extent rights have been waived by the insured before the occurrence
of injury or loss, if same are obtainable without unreasonable cost. Landlord
and Tenant each hereby waive any rights of recovery against the other for injury
or loss to such waiving party or to its property or the property of others under
its control, arising from any cause required to be insured against under any
policy of insurance required to be carried by such waiving party under this
Lease. The foregoing waiver shall be effective whether or not the waiving party
shall actually obtain and maintain the insurance which such waiving party is
obligated to obtain and maintain under this Lease.
All insurance required to be provided by Tenant under this Lease: (a) shall
be issued by insurance companies authorized to do business in the state in which
the Premises are located and holding a General Policyholders Rating of "A" and a
Financial Rating of "X" or better, as set forth in the most recent edition of
Best's Insurance Reports; (b) shall contain an endorsement requiring at least 30
days prior written notice to Landlord and Landlord's lender, before cancellation
or change in coverage scope or amount of any policy. Tenant shall deliver a
certificate or copy of such policy together with evidence of payment of all
current premiums to Landlord within 30 days of execution of this Lease and
within thirty (30) days of expiration of each policy. Tenant's failure to
provide evidence of such coverage to Landlord shall constitute a default under
this Lease. Landlord shall insure the Building (excluding all property which
tenants of the Building are obligated to insure) against damage with "All Risk"
insurance and public liability insurance, including rental abatement insurance,
all in such amounts and with such deductibles as Landlord considers appropriate,
in Landlord's reasonable discretion. The Landlord's liability insurance shall be
in an amount of not less than $1,000,000.00 per occurance. The cost of any
insurance maintained by Landlord hereunder and any other insurance Landlord may
elect to obtain for the Project from time to time during the Term (including,
without limitation, earthquake and/or flood insurance) shall be included as part
of "Expenses" under Subparagraph 6(a). Notwithstanding any contribution by
Tenant to the cost of insurance premiums as provided herein, Tenant acknowledges
that it has no right to receive any proceeds from any insurance policies carried
by Landlord.
19. DESTRUCTION.
If during the Term of this Lease, any portion of the Premises, access to the
Premises or any part of the Building which is essential to the use of the
Premises is damaged or destroyed and such damage or destruction, can, in
Landlord's reasonable estimation, be repaired within 180 days following such
damage or destruction, this Lease shall remain in full force and effect and
Landlord shall promptly commence to repair and restore the damage or destruction
to substantially the same condition as existed prior to such damage and shall
complete such repair and restoration with due diligence in compliance with all
then existing laws. If (1) such damage or destruction cannot, in Landlord's
reasonable estimation, be repaired within 180 days following such damage or
destruction; or (2) more than forty percent (40%) of the Building is damaged or
destroyed (regardless of its impact on the Premises); or (3) any mortgagee of
the Building will not allow the application of insurance proceeds to be applied
to repair and restoration; or (4) the damage or destruction is not covered in
full by Landlord's insurance required by Paragraph 18 (excluding any
deductible), or (5) the damage or destruction occurs within the last twelve (12)
months of the Term of this Lease or any extension hereof, then Landlord may, in
its sole discretion, terminate this Lease by delivery of notice to Tenant within
30 days of the date Landlord learns of the damage. If a) the destruction occurs
during the last 12 months of the original term, b) any of the conditions in
number 1 through 4 above have been met, and c) the Tenant has not exercised its
option to renew, the Tenant may exercise such option within three (3) business
days of its receipt of Landlord's notice to terminate. Failure by Tenant to
exercise its option to renew will render the option null and void and the
Landlord shall have no further obligation to repair and restore. In the event of
repair, reconstruction and restoration by
11
December 16, 1995
<PAGE>
Landlord as herein provided, the rent payable under this Lease shall be abated
proportionately with the degree to which Tenant's use of the Premises is
impaired during the period of such repair, reconstruction or restoration;
provided that there shall be no abatement of rent if such damage is the result
of Tenant's negligence or intentional wrongdoing. Tenant shall not be entitled
to any compensation or damages for loss of the use of the whole or any part of
the Premises, damage to Tenant's Personal Property and/or any inconvenience or
annoyance occasioned by such damage, repair, reconstruction or restoration.
If Landlord is obligated to or elects to repair or restore as herein
provided, Landlord shall be obligated to make repair or restoration only to
those portions of the Building and the Premises which were originally provided
at Landlord's expense, and the repair and restoration of items not provided at
Landlord's expense shall be the obligation of Tenant. Tenant agrees to
coordinate the restoration and repair of those items it is required to restore
or repair with Landlord's repair and restoration work and in coordination with a
work schedule prepared by Landlord, or Landlord's contractor. Further, Tenant's
work shall be performed in accordance with the terms, standards and conditions
contained in Paragraph 16 above.
The provisions of California Civil Code Section 1932, Subsection 2, and
Section 1933, Subsection 4, and any other similarly enacted statute or court
decision relating to the abatement or termination of a lease upon destruction of
the leased premises, are hereby waived by Tenant; and the provisions of this
Paragraph 19 shall govern in case of such destruction.
20. CONDEMNATION.
(a) Definitions. The following definitions shall apply: (1) "Condemnation"
means (a) the exercise of any governmental power of eminent domain, whether by
legal proceedings or otherwise by condemnor and (b) the voluntary sale or
transfer by Landlord to any condemnor either under threat of condemnation or
while legal proceedings for condemnation are proceeding; (2) "Date of Taking"
means the date the condemnor has the right to possession of the property being
condemned; (3) "Award" means all compensation, sums or anything of value
awarded, paid or received on a total or partial condemnation; and (4)
"Condemnor" means any public or quasi-public authority, or private corporation
or individual, having a power of condemnation.
(b) Obligations to be Governed by Lease. If during the Term of this Lease
there is any taking of all or any part of the Premises or the Project, the
rights and obligations of the parties shall be determined pursuant to this
Lease.
(c) Total or Partial Taking. If the Premises are totally taken by
condemnation, this Lease shall terminate on the date of taking. If any portion
of the Premises is taken by condemnation, this Lease shall remain in effect,
except that Tenant can elect to terminate this Lease if the remaining portion of
the Premises is rendered unsuitable for Tenant's continued use of the Premises.
If any portion of the parking area is taken by condemnation, this Lease shall
remain in effect, except that Tenant can elect to terminate this Lease if the
taking renders the Premises unsuitable for Tenant's continued use. If Tenant
elects to terminate this Lease, Tenant must exercise its right to terminate by
giving notice to Landlord within 30 days after the nature and extent of the
taking have been finally determined. If Tenant elects to terminate this Lease,
Tenant shall also notify Landlord of the date of termination, which date shall
not be earlier than 30 days nor later than 90 days after Tenant has notified
Landlord of its election to terminate; except that this Lease shall terminate on
the date of taking if the date of taking falls on a date before the date of
termination as designated by Tenant. If any portion of the Premises is taken by
condemnation and this Lease remains in full force and effect, on the date of
taking the rent shall be reduced by an amount in the same ratio as the total
number of rentable square feet in the portion of the Premises taken bears to the
total number of rentable square feet in the Premises immediately before the date
of taking. In the case where a portion of the Premises is taken and the Lease
remains in full force and effect, Landlord shall, at its own cost and expense,
make all alterations or repairs to the Premises so as to make the portion of the
Premises not taken a complete architectural unit. Such work shall not, however,
exceed the scope of work done by Landlord in originally constructing the
Premises. If any portion of the Building other than the Premises is taken and in
Landlord's reasonable opinion the Building should be restored in a manner that
materially alters the Premises, or if severance damages from the condemning
authority are not available to Landlord in sufficient amounts to permit such
restoration, Landlord may terminate this Lease upon written notice to Tenant.
Basic Monthly Rent due and payable hereunder shall be temporarily abated during
such restoration period in proportion to the degree to which there is material
and adverse interference with Tenant's use of the Premises, as reasonably
determined by Landlord or Landlord's architect. Each party hereby waives the
provisions of Section 1265.130 of the California Code of Civil Procedure and any
present or future law allowing either party to petition the Superior Court to
terminate this Lease in the event of a partial taking of the Building or
Premises.
If the Premises are totally or partially taken by condemnation, Tenant shall
not assert any claim against Landlord or the taking authority for any
compensation because of such taking, and Landlord shall be entitled to receive
the entire amount of the award without any deduction for any estate or interest
of Tenant. Tenant shall be entitled to make a claim to the condemning authority
for moving expenses, trade fixtures, business interruption and Tenant's
unamortized specialized Tenant Improvements, if the specialized Tenant
Improvements were paid for directly by Tenant, and if permitted under California
Law.
21. ASSIGNMENT OR SUBLEASE.
(a). Tenant shall not assign or encumber its interest in this Lease or the
Premises or sublease all or any part of the Premises or allow any other person
or entity (except Tenant's authorized representatives, employees, invitees, or
guests) to occupy or use all or any part of the Premises without first obtaining
Landlord's consent which Landlord shall not unreasonably withhold. Landlord
shall be deemed reasonable in withholding its consent
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December 16, 1995
<PAGE>
if it determines in its sole discretion that: (i) the financial net worth of the
proposed assignee or sublessee is not equal to or greater than Tenant's
financial net worth as of the date of this Lease as increased by the increase in
the Consumer Price Index, if any, between the date of this Lease and the date of
the assignment or sublease; (ii) the intended use of the Premises by the
proposed assignee or sublessee is inconsistent or incompatible or competes with
other uses in the Project; (iii) the intended use of the Premises by the
proposed assignee or sublessee will require more than insignificant alteration
(as defined in Paragraph 16.b of the Lease) of the Premises; (iv) the intended
use of the Premises by the proposed assignee or sublessee will constitute a
violation of this Lease or any governmental law, rule, ordinance or regulation
governing the Premises or would involve the storage, use or keeping of Hazardous
Materials (in addition to permitted Hazardous Materials as defined in Exhibit H
attached hereto) in, on or about the Premises, the Common Areas or any other
portion of the Project. Any assignment, encumbrance or sublease without
Landlord's written consent shall be voidable and at Landlord's election, shall
constitute a default. Landlord's waiver or consent to any assignment or
subletting shall not relieve Tenant or any assignee or sublessee from any
obligation under this Lease whether or not accrued.
(b). If Tenant is a partnership, a withdrawal or change, voluntary,
involuntary or by operation of law of any partner, or the dissolution of the
partnership, shall be deemed a voluntary assignment. If Tenant is a corporation,
any dissolution, merger, consolidation or other reorganization of Tenant, or
sale or other transfer of a controlling percentage of the capital stock of
Tenant, or the sale of at least 25% of the value of the assets of Tenant shall
be deemed a voluntary assignment. The phrase "controlling percentage" means
ownership of and right to vote stock possessing at least 25% of the total
combined voting power of all classes of Tenant's capital stock issued,
outstanding and entitled to vote for election of directors. The preceding two
sentences of this paragraph shall not apply to corporations the stock of which
is traded through a public exchange. If Landlord shall consent to any assignment
or sublease of this Lease, one-half (1/2) of all sums and other consideration
payable to or for the benefit of the Tenant from its assignee or subtenant in
excess of the rent payable by Tenant to Landlord under this Lease, or in the
case of a sublease, in excess of the rent fairly allocable to such subleased
portion as reasonably determined by Landlord, shall be paid to Landlord, as and
when such sums are due and payable. Tenant shall be permitted to deduct
brokerage commissions (as reasonably determined by local market conditions)
actually paid by Tenant and attorney's fees (attorney's fees not to exceed
$5,000.00) actually paid by Tenant from the excess paid to Landlord. If Tenant
requests Landlord to consent to a proposed assignment or subletting Tenant shall
pay to Landlord, whether or not consent is ultimately given, $100 or Landlord's
reasonable attorneys' fees incurred in connection with such request, whichever
is greater.
(c). Notwithstanding the above paragraph, Tenant shall have the right to
assign its entire interest under this Lease, and Landlord shall not withhold its
consent thereto (provided that all of the conditions set forth in clauses (A)
through (B) below shall be met), if such assignment is one of the following
"Permitted Transfers": (i) an assignment in connection with the initial public
offering of the stock of Tenant; or (ii) an assignment in connection with the
non-bankruptcy reorganization or merger of the corporate entity constituting the
Tenant under this Lease, where substantially the same shareholders own
substantially the same amounts and proportions of stock before and after such
reorganization or merger; or (iii) an assignment to a corporation controlling,
controlled by or under common control with Tenant, provided that the financial
net worth of the new corporation is equal or greater than Tenant at the time of
the proposed transfer. However, the foregoing Permitted Transfer shall be exempt
from the requirement of Landlord's consent only if all of the following
conditions shall be met: (A) there shall be no change in the use or operation of
the Premises; and (B) Tenant shall have provided to Landlord all information to
allow Landlord to determine, and Landlord shall have determined, that the
proposed transfer is a Permitted Transfer which is exempt from the requirement
of Landlord's consent. No transfer of the type described in this paragraph, or
any other transfer, shall release Tenant from its obligations under this Lease.
(d). No interest of Tenant in this Lease shall be assignable by involuntary
assignment through operation of law (including, without limitation, the transfer
of this Lease by testacy or intestacy). Each of the following acts shall be
considered an involuntary assignment: (a) If Tenant is or becomes bankrupt or
insolvent, makes an assignment for the benefit of creditors, or institutes
proceedings under the Bankruptcy Act in which Tenant is the bankrupt; or if
Tenant is a partnership or consists of more than one person or entity, if any
partner of the partnership or other person or entity is or becomes bankrupt or
insolvent, or makes an assignment for the benefit of creditors; or (b) If a writ
of attachment or execution is levied on this Lease; or (c) If in any proceeding
or action to which Tenant is a party, a receiver is appointed with authority to
take possession of the Premises. An involuntary assignment shall constitute a
default by Tenant and Landlord shall have the right to elect to terminate this
Lease, in which case this Lease shall not be treated as an asset of Tenant.
22. DEFAULT.
The occurrence of any of the following shall constitute a default by Tenant:
(a) A failure to pay rent or any other charge when due; (b) Abandonment of the
Premises (failure to occupy the Premises for fifteen(15) ten consecutive days
shall be deemed an abandonment); (c) The making by Tenant or any guarantor of
this Lease ("Guarantor") of any general assignment for the benefit of creditors;
the filing by or against Tenant or any Guarantor of a petition to have Tenant or
such Guarantor adjudged a bankrupt or a petition for reorganization or
arrangement under any law relating to bankruptcy (unless, in the case of a
petition filed against Tenant or a Guarantor, the same is dismissed within
thirty (30) days); the appointment of a trustee or receiver to take possession
of substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, or of substantially all of Tenant's assets located at
the Premises or of Tenant's interest in this Lease, or of substantially all of
Guarantor's assets, where possession is not restored to Tenant or such
Guarantor, as the case may be, within thirty (30) days; the attachment,
execution or other judicial seizure of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease where such seizure
is not discharged within (30) days; or if this Lease shall, by operation of law
or otherwise, pass to any person or persons other than
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December 16, 1995
<PAGE>
Tenant except as provided in Paragraph 21 herein; (d) The failure of Tenant to
timely comply with the provisions of Paragraph 26 or Paragraph 33 of this Lease
regarding, respectively, Subordination and Estoppel Certificates; or (e) The
failure to perform any other provision of this Lease within ten (10) days notice
from Landlord. If such default under (e) cannot be reasonably completed within
such ten (10) day period, then Tenant shall not be in default provided the cure
has commenced and the Tenant is diligently pursuing completion.
23. LANDLORD'S REMEDIES.
Landlord shall have the remedies described in this Paragraph 23 if Tenant is
in default. These remedies are not exclusive; they are cumulative and in
addition to any remedies now or later allowed by law.
Upon any such default, Landlord may terminate Tenant's right to possession
of the Premises at any time. No act by Landlord other than giving notice to
Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the
Premises, or the appointment of a receiver on Landlord's initiative to protect
Landlord's interest under this Lease shall not constitute a termination of
Tenant's right to possession. Upon termination of Tenant's right to possession,
Landlord has the right to recover from Tenant: (1) The worth at the time of
award of any unpaid rent which had been earned at the time of termination of
Tenant's right to possession; (2) The worth at the time of award of the amount
by which the unpaid rent which would have been earned after the date of
termination of Tenant's right to possession until the time of award exceeds the
amount of such rental loss that Tenant proves could have been reasonably
avoided; (3) The worth at the time of award of the amount by which the unpaid
rent for the balance of the Term after the time of award exceeds the amount of
such rental loss that Tenant proves could be reasonably avoided; (4) Any other
amount, including court, attorney and collection costs, necessary to compensate
Landlord for all detriment proximately caused by Tenant's default. "The worth",
as used for Items (1) and (2) in this Paragraph 23 is to be computed by allowing
interest at the lesser of 12% or the maximum rate an individual is permitted to
charge by law or 12%, whichever is greater. "The worth" as used for Item (3) in
this Paragraph 23 is to be computed by discounting the amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of termination
plus one percent (1%).
In the event of any default by Tenant, Landlord shall also have the right,
with or without terminating this Lease, to re-enter the Premises and remove all
persons and property from the Premises (provided such entry and removal is in
accordance with California law); such property may be removed and stored in a
public warehouse or elsewhere at the cost of and for the account of Tenant or
disposed of in a reasonable manner by Landlord. No re-entry or taking possession
of the Premises by Landlord pursuant to this Paragraph 23 shall be construed as
an election to terminate this Lease unless a written notice of such intention is
given to Tenant or unless the termination thereof is decreed by a court of
competent jurisdiction.
24. DEFAULT BY LANDLORD.
Landlord shall not be in default hereunder unless Landlord fails to perform
the obligations required of Landlord within a reasonable time, but in no event
later than thirty (30) days after written notice by Tenant to Landlord and to
the holder of any first mortgage or deed of trust covering the Premises, or the
lessor of any underlying or ground lease affecting the Project, in writing
specifying wherein Landlord has failed to perform such obligation; provided,
however, that if the nature of Landlord's obligation is such that more than
thirty (30) forty-five (45) days is required for performance, then Landlord
shall not be in default if Landlord commences performance within thirty (30) day
period and thereafter diligently prosecutes the same to completion. In no event
shall Tenant have the right to terminate this Lease as a result of Landlord's
default, except if provided under Tenant's remedies, which shall be limited to
any other remedy available at law or in equity. Nothing herein contained shall
be interpreted to mean that Tenant is excused from paying rent due hereunder as
a result of any default by Landlord.
25. ENTRY OF PREMISES AND PERFORMANCE BY TENANT.
Landlord and its authorized representatives shall have the right to enter
the Premises at all reasonable times, upon reasonable advance notice to Tenant
(emergencies exempted), for any of the following purposes: (a) To determine
whether the Premises are in good condition and whether Tenant is complying with
its obligations under this Lease; (b) To do any necessary maintenance and to
make any restoration to the Premises or the Project that Landlord has the right
or obligation to perform under this Lease; (c) To post "for sale" signs at any
time during the Term, to post "for rent" or "for lease" signs during the last 90
days of the Term, or during any period while Tenant is in default; (d) To show
the Premises to prospective brokers, agents, buyers, or persons interested in an
exchange, at any time during the Term; (e) To repair, maintain or improve the
Project and to erect scaffolding and protective barricades around and about the
Premises but not so as to prevent entry to the Premises and to do any other act
or thing reasonably necessary for the safety or preservation of the Premises or
the Project; (f) to discharge Tenant's obligations hereunder when Tenant has
failed to do so in accordance with the terms of this Lease; or g) to show the
Premises to prospective tenants if there are less than 180 days remaining in the
term or the Tenant is in default, or as mutually agreed between the parties.
Notwithstanding the foregoing, the Landlord shall not be obligated to provide
advance notice to Tenant for access to the Premises or the Building for routine
maintenance, routine inspections, or daily operations. Landlord shall not be
liable in any manner for any inconvenience, disturbance, loss of business,
nuisance or other damage arising out of Landlord's entry onto the Premises as
provided in this Paragraph 25, unless Tenant is materially and adversely
affected by Landlord's activities. Tenant shall not be entitled to an abatement
or reduction of rent if Landlord exercises any rights reserved in this Paragraph
25, unless Tenant is materially and adversely affected by Landlord's activities.
Landlord shall reasonably attempt to conduct his activities on the Premises as
provided herein in a manner that will cause the least inconvenience, annoyance
or disturbance to Tenant. For each of these purposes, Tenant shall provide
Landlord with a contact person and phone number for access during all normal
business hours and for emergency access. If Tenant does not make the Premises
available to Landlord for the above purposes during normal business hours
(Monday through Friday, 9 a.m. to 5 p.m.) Landlord shall
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December 16, 1995
<PAGE>
retain a key with which to unlock all the doors in, upon and about the Premises,
excluding Tenant's vaults and safes. Tenant shall not alter any lock or install
a new or additional lock or bolt on any door of the Premises without the prior
written consent of Landlord. If Landlord gives its consent, Tenant shall furnish
Landlord with a key for any such lock.
All covenants and agreements to be performed by Tenant under any of the
terms of this Lease shall be performed by Tenant at Tenant's sole cost and
expense without any abatement of rent. If Tenant shall fail to pay any sum of
money, other than Monthly Basic Rent, required to be paid by it hereunder or
shall fail to perform any other act on its part to be performed hereunder, and
such failure shall continue for ten (10) days after notice thereof by Landlord
(or such other period as specifically provided herein), Landlord may, without
waiving or releasing Tenant from any obligations of Tenant, but shall not be
obligated to, make any such payment or perform any such other act on Tenant's
part to be made or performed in this Lease; provided, however, all sums so paid
by Landlord and all necessary incidental costs together with interest thereon at
the lesser of 12% or the maximum rate an individual is permitted to charge by
law from the date of such payment by Landlord, shall be payable to Landlord on
demand. Tenant covenants to pay any such sums, and Landlord shall have (in
addition to all other rights or remedies of Landlord) the same rights and
remedies in the event of the nonpayment thereof by Tenant as in the case of
default by Tenant in the payment of the rent. Further, following each fourth
consecutive late payment of rent, Landlord shall have the option, upon written
notice to Tenant, to require that Tenant increase the amount of the Security
Deposit required under Paragraph 8 by one hundred percent (100%), which
additional Security Deposit shall be retained by Landlord and may be applied by
Landlord in the manner provided in Paragraph 8.
26. SUBORDINATION.
Without the necessity of any additional document being executed by Tenant
for the purpose of effecting a subordination, and unless otherwise elected by
Landlord or any mortgagee or any beneficiary of a Deed of Trust with a lien on
the Project or any ground lessor with respect to the Project (or any part
thereof), this Lease shall be subject and subordinate at all times to (a) all
ground leases or underlying leases which may now exist or hereafter be executed
affecting the Project, or the land upon which the Project is situated, or both,
and (b) the lien of any mortgage or deed of trust which may now exist or
hereafter be executed in any amount for which the Project, ground leases or
underlying leases, or Landlord's interest or estate in any of said items is
specified as security. Notwithstanding the foregoing, Tenant acknowledges that
Landlord shall have the right to subordinate or cause to be subordinated this
Lease to any such ground leases or underlying leases or any such liens to this
Lease. In the event that any ground lease or underlying lease terminates for any
reason or any mortgage or Deed of Trust is foreclosed or a conveyance in lieu of
foreclosure is made for any reason, Tenant shall, notwithstanding any
subordination, attorn to and become the tenant of the successor in interest to
Landlord, at the option of such successor in interest under the terms and
conditions of this Lease. Tenant covenants and agrees to execute and deliver,
upon demand by Landlord and in the form reasonably requested by Landlord any
additional documents evidencing the priority or subordination of this Lease with
respect to any such ground lease or underlying leases or the lien of any such
mortgage or Deed of Trust.
27. NOTICE.
Any notice, demand, request, consent, approval or communication desired by
either party or required to be given, shall be in writing and served either
personally or sent by prepaid certified first class mail, return receipt
requested, addressed as set forth in Subparagraph 1(b) and 1(c). Either party
may change its address by notification to the other party. Notice shall be
deemed to be communicated 48 hours from the time of mailing, or at the time of
service as provided in this Paragraph 27.
28. WAIVER.
No delay or omission in the exercise of any right or remedy by Landlord
shall impair such right or remedy or be construed as a waiver. No act or conduct
of Landlord, including, without limitation, acceptance of the keys to the
Premises, shall constitute acceptance of the surrender of the Premises by Tenant
before the expiration of the Term. Only written notice from Landlord to Tenant
shall constitute acceptance of the surrender of the Premises and accomplish
termination of this Lease. Landlord's consent to or approval of any act by
Tenant requiring Landlord's consent or approval shall not be deemed to waive or
render unnecessary Landlord's consent to or approval of any subsequent act by
Tenant. Any waiver by Landlord of any default must be in writing and shall not
be a waiver of any other default concerning the same or any other provision of
this Lease.
29. LIMITATION OF LIABILITY.
In consideration of the benefits accruing hereunder, Tenant and all
successors and assigns of Tenant covenant and agree that, in the event of any
actual or alleged failure, breach or default hereunder by Landlord:
(a) The sole and exclusive remedy against Landlord shall be against the
Landlord's interest in the Building;
(b) No partner of Landlord shall be sued or named as a party in any suit or
action (except as may be necessary to secure jurisdiction of the partnership);
(c) No service of process shall be made against any partner of Landlord
(except as may be necessary to secure jurisdiction of the partnership);
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December 16, 1995
<PAGE>
(d) No partner of Landlord shall be required to answer or otherwise plead to
any service of process;
(e) No judgment may be taken against any partner of Landlord;
(f) Any judgment taken against any partner of Landlord may be vacated and
set aside at any time after the fact;
(g) No writ of execution will ever be levied against the assets of any
partner of Landlord;
h) The obligations under this Lease do not constitute personal obligations
of the individual partners, directors, officers or shareholders of Landlord, or
the partners, directors, officers or shareholders of the partners of Landlord,
and Tenant shall not seek recourse against any such persons or entities of
Landlord or any of their personal assets for satisfaction of any liability in
respect to this Lease; and
(i) These covenants and agreements are enforceable both by Landlord and also
by any partner of Landlord.
Tenant agrees that each of the foregoing provisions shall be applicable to
any covenant or agreement either expressly contained in this Lease or imposed by
statute or at common law.
30. FORCE MAJEURE.
Neither Landlord nor Tenant shall have any liability whatsoever to the other
party Tenant on account of (a) the inability or delay of such party in
fulfilling any of such party's obligations under this Lease by reason of strike,
other labor trouble, governmental restrictions, controls or inaction, or
shortages of fuel, supplies or labor resulting therefrom or any other cause,
whether similar or dissimilar to the above, beyond Landlord's such party's
reasonable control. The Landlord shall have no liability whatsoever to Tenant on
account of any failure or defect in the supply, quantity or character of
electricity or water furnished to the Premises, by reason of any requirement,
act or omission of the public utility or others furnishing the Project with
electricity or water, or for any other reason, whether similar or dissimilar to
the above, beyond Landlord's reasonable control. If this Lease specifies a time
period for performance of an obligation, that time period shall be extended by
the period of any delay in Landlord's or Tenant's performance, as applicable,
caused by any of the events of force majeure described above. Nothing in this
Paragraph 30 shall result in a delay in the Commencement Date or excuse Tenant
from paying rent as and when due under this Lease.
31. PROFESSIONAL FEES.
(a) If Landlord should engage any professional including, without
limitation, attorneys, appraisers, accountants, environmental or other
consultants for the purpose of bringing suit for possession of the Premises, for
the recovery of any sum due under this Lease, or because of the breach of any
provisions of this Lease, or for any other relief against Tenant hereunder, or
in the event of any other litigation between the parties with respect to this
Lease, including, without limitation, any action brought by Tenant against
Landlord for recovery of any sum due under this Lease in connection with a
breach of this Lease by Landlord, or for other relief against Landlord
hereunder, then all costs and expenses including, without limitation, actual
professional fees such as appraisers', accountants', attorneys' and other
consultants' fees, incurred by the prevailing party therein shall be paid by the
other party, which obligation on the part of the other party shall be deemed to
have accrued on the date of the commencement of such action and shall be
enforceable whether or not the action is prosecuted to judgment. If Landlord
employs a collection agency to recover delinquent charges, Tenant agrees to pay
all collection agency fees charged to Landlord in addition to rent, late
charges, interest and other sums payable under this Lease.
(b) If Landlord is named as a defendant in any suit brought against Tenant
(by no fault of Landlord) in connection with or arising out of Tenant's
occupancy hereunder, Tenant shall pay to Landlord its costs and expenses
incurred in such suit including, without limitation, its actual professional
fees such as appraisers', accountants' and attorneys' fees.
32. EXAMINATION OF LEASE.
Submission of this instrument for examination or signature by Tenant shall
not create a binding agreement between Landlord and Tenant nor shall it
constitute a reservation or option to lease on the part of Tenant and this
instrument shall not be effective as a lease and shall not create any
obligations on the part of Landlord or Tenant until this Lease has been validly
executed by, and delivered to, both Landlord and Tenant.
33. ESTOPPEL CERTIFICATE.
(a) Within ten (10) business days following any written request which
Landlord may make from time to time, Tenant shall execute and deliver to
Landlord a statement, ("Estoppel Certificate") in a form substantially similar
to the form of Exhibit E attached hereto or in such other form as Landlord's
lender or purchaser may reasonably require, certifying: (i) the date of
commencement of this Lease; (ii) the fact that this Lease is unmodified and in
full force and effect (or, if there have been modifications, stating the nature
and date of such modifications), (iii) the date to which the rent and other sums
payable under this Lease have been paid; (iv) that there are no current defaults
under this Lease by either Landlord or Tenant except as specified in Tenant's
statement; and (v) such other matters reasonably requested by Landlord. Landlord
and Tenant intend that any statement delivered pursuant to this Paragraph 33 may
be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser
of the Project or any interest therein.
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December 16, 1995
<PAGE>
(b) Tenant's failure to deliver such statement within such time shall be
conclusive upon Tenant (i) that this Lease is in full force and effect, without
modification except as may be represented by Landlord, (ii) that there are no
uncured defaults in Landlord's performance, and (iii) that not more than one (1)
month's rent has been paid in advance (unless Landlord has knowledge to the
contrary). Tenant's failure to deliver said statement to Landlord within ten
(10) business days of receipt, shall constitute a default under this Lease and
Landlord may, at Landlord's option, terminate this Lease.
34. RULES AND REGULATIONS.
Tenant shall faithfully observe and comply with the "Rules and Regulations",
a copy of which is attached hereto and marked Exhibit F, and all reasonable and
nondiscriminatory modifications thereof and additions thereto from time to time
put into effect by Landlord. Landlord shall not be responsible to Tenant for the
violation or non-performance by any other tenant or occupant of the Project of
any of said Rules and Regulations.
35. LIENS.
Tenant shall, within ten (10) days after receiving notice of the filing of
any mechanic's lien for material or work claimed to have been furnished to the
Premises on Tenant's behalf or at Tenant's request, discharge the lien or post a
bond equal to the amount of the disputed claim with a bonding company reasonably
satisfactory to Landlord. If Tenant posts a bond, it shall contest the validity
of the lien with all due diligence. Tenant shall indemnify, defend and hold
Landlord harmless from any and all losses and costs incurred by Landlord as a
result of any such liens attributable to Tenant. If Tenant does not discharge
any lien or post a bond for such lien within such ten (10) day period, Landlord
may discharge such lien at Tenant's expense and Tenant shall promptly reimburse
Landlord for all costs incurred by Landlord in discharging such lien including,
without limitation, attorney's fees and costs and interest on all sums expended
at the maximum interest rate permitted by law. Tenant shall provide Landlord
with not less than ten (10) days prior written notice of its intention to have
work performed at or materials furnished to the Premises so that Landlord may
post appropriate notices of non-responsibility.
36. MISCELLANEOUS PROVISIONS.
(a) Time of Essence. Time is of the essence of each provision of this Lease.
(b) Successor. This Lease shall be binding on and inure to the benefit of
the parties and their successors, except as provided in Paragraph 21 herein.
(c) Landlord's Consent. Any consent required by Landlord under this Lease
must be granted in writing and may be withheld by Landlord in its sole and
absolute discretion, unless otherwise expressly provided herein. Landlord shall
act in good faith.
(d) Commissions. Each party represents that it has not had dealings with any
real estate broker, finder or other person with respect to this Lease in any
manner, except for the broker identified in Subparagraph 1(p). If Tenant has
dealt with any other person or real estate broker with respect to leasing or
renting space in the Project, Tenant shall be solely responsible for the payment
of any fees due said person or firm and Tenant shall hold Landlord free and
harmless and indemnify and defend Landlord from any liabilities, damages or
claims with respect thereto, including attorneys fees and costs.
(e) Landlord's Successors. In the event of a sale or conveyance by Landlord
of the Project, the same shall operate to release Landlord from any liability
under this Lease, and in such event Landlord's successor in interest shall be
solely responsible for all obligations of Landlord under this Lease. Prior to
sale or conveyance by the Landlord of the Project, the Landlord shall notify a
buyer or prospective buyer of Tenant's Lease in the Premises and shall request
(but Landlord shall not be required to obtain) a non-disturbance agreement in
favor of Tenant from the new buyer. Provided that the Tenant is not in default
under this lease or the Security Deposit has been previously withheld, Landlord
shall transfer the Security Deposit to the new buyer.
(f) Prior Agreement or Amendments. This Lease contains all of the agreements
of the parties hereto with respect to any matter covered or mentioned in this
Lease, and no prior agreement or understanding pertaining to any such matter
shall be effective for any purpose. No provisions of this Lease may be amended
or added to except by an agreement in writing signed by the parties hereto or
their respective successors-in-interest.
(g) Recording. Tenant shall not record this Lease nor a short form
memorandum thereof without the consent of Landlord. Landlord may record a short
form memorandum of this Lease and Tenant shall execute and acknowledge such form
if requested to do so by Landlord.
(h) Separability. Any provision of this Lease which shall prove to be
invalid, void or illegal shall in no way affect, impair or invalidate any other
provision hereof, and all other provisions of this Lease shall remain in full
force and effect.
(i) No Partnership or Joint Venture. Nothing in this Lease shall be deemed
to constitute Landlord and Tenant as partners or joint venturers. It is the
express intent of the parties hereto that their relationship with regard to this
Lease and the Premises be and remain that of lessor and lessee.
17
December 16, 1995
<PAGE>
(j) Interpretation. This Lease shall be construed and interpreted in
accordance with the laws of the state in which the Premises are located. This
Lease constitutes the entire agreement between the parties with respect to the
Premises and the Project, except for such guarantees or modifications as may be
executed in writing by the parties from time to time. When required by the
context of this Lease, the singular shall include the plural, and the masculine
shall include the feminine and/or neuter. "Party" shall mean Landlord or Tenant.
If more than one person or entity constitutes Tenant, the obligations imposed
upon Tenant shall be joint and several as to all persons or entities
constituting Tenant. The enforceability, invalidity or illegality of any
provision shall not render the other provisions unenforceable, invalid or
illegal.
(k) Mortgagee Protection. In the event of any default on the part of
Landlord, Tenant will give notice by registered or certified mail to any
beneficiary of a deed of trust, mortgagee, or ground lessor covering the
Premises, and shall offer such beneficiary, mortgagee, or ground lessor, a
reasonable opportunity to cure the default, including time to obtain possession
of the Premises by power of sale or a judicial foreclosure, or in the event of a
ground lessor, by appropriate judicial action, if such should prove necessary to
effect a cure. As of the commencement of this Lease, there is no beneficiary of
a deed of trust, mortgage or ground lessor. In the event of a beneficiary of a
deed of trust, mortgagee, or ground lessor, the name and address shall be
provided to Tenant by Landlord.
IN WITNESS WHEREOF, the parties have executed this Lease as of the date first
above written.
Landlord: Hopkins Brothers, Tenant: VidaMed, Inc.,
a California general partnership a Delaware Corporation
By: By:
---------------------------------- ---------------------------
Howard V. Hopkins
Its: Managing Partner Print Name James A. Heisch
---------------------------------- --------------------
Its: President and Chief
Executive Officer
-------------------------
Date: Date:
----------------------------- -------------------------
18
December 16, 1995
<PAGE>
Exhibit A
BUILDING FLOOR PLAN SHOWING PREMISES
19
December 16, 1995
<PAGE>
Exhibit B
PROJECT SITE PLAN
20
December 16, 1995
<PAGE>
Exhibit C
WORK LETTER AGREEMENT
THIS WORK LETTER AGREEMENT is entered into as April 3, 1997 by and between
Hopkins Brothers ("Landlord") and VidaMed ("Tenant").
RECITALS:
A. Concurrently with the execution of this Work Letter Agreement, Landlord and
Tenant have entered into a lease (the "Lease") covering certain premises (the
"Premises") more particularly described in Exhibit A attached to the Lease.
B. In order to induce Tenant to enter into the Lease (which is hereby
incorporated by reference to the extent applicable) and in consideration of the
mutual covenants hereinafter contained, Landlord and Tenant hereby agree as
follows:
1. Premises Design/Landlord Work. Landlord shall provide the following at its
sole cost and expense:
a) Install carpet (32oz), pad and rubber base throughout existing office
areas. Colors to be selected by Tenant. Tenant shall be permitted to
substitute vinyl coated tile ("VCT"), provided there is no additional
cost to Landlord or delay in completion of Landlord's work hereunder.
b) Paint all existing offices. Color to be selected by Tenant.
c) Replace all damaged or stained ceiling tiles. Repair damaged doors and
walls.
d) Deliver the Premises in a fully operational condition and in good working
order, including HVAC, doors, roll up doors, outlets, electrical
lighting, and plumbing.
2. Completion Schedule. Except for Punch-List items the work noted above will be
completed prior to, delivery of space by Landlord to Tenant, and Tenant shall
not interfere with Landlord's work.
3. Other Tenant Requirements. Tenant Alterations shall be executed by the Tenant
in accordance with Paragraph 16 of this Lease.
4. Force Majeure. Landlord shall have no liability whatsoever to Tenant on
account of the inability or delay of Landlord to fulfill any of Landlord's
obligations under this Work Letter Agreement by reason of strike, other labor
trouble, inclement weather, acts of God, governmental restrictions, controls or
inaction, or shortages of fuel, supplies or labor resulting therefrom or any
other cause, whether similar or dissimilar to the above, beyond Landlord's
reasonable control. If this Work Letter Agreement specifies a time period for
performance of an obligation of Landlord, that time period shall be extended by
the period of any delay in Landlord's performance caused by any of the events of
force majeure described above.
IN WITNESS WHEREOF, this Work Letter Agreement is executed as of the date first
written above.
Landlord: Hopkins Brothers, Tenant: VidaMed, Inc.,
a California general partnership a Delaware Corporation
By: By:
---------------------------------- ---------------------------
Howard V. Hopkins
Its: Managing Partner Print Name James A. Heisch
---------------------------------- --------------------
Its: President and Chief
Executive Officer
-------------------------
Date: Date:
----------------------------- -------------------------
21
December 16, 1995
<PAGE>
Exhibit D
NOTICE OF LEASE TERM DATES
To: VidaMed Date: _____________
- ------------------------------------
46107 Landing Parkway
- ------------------------------------
Fremont, CA 94538
Re: Lease dated April 3, 1997, by and between Hopkins Brothers, Landlord, and
VidaMed, Tenant, concerning 46107 Landing Parkway, Fremont, California.
Gentlemen:
In accordance with the subject Lease, we wish to advise and/or confirm as
follows:
2. That the Tenant has possession of the subject Premises and acknowledges
that under the provisions of the subject Lease the Term of the Lease shall
commence as of May 1, 1997 for a term of 61 months, ending on May 31, 2002.
3. That in accordance with the subject Lease, rent commenced to accrue on
May 1, 1997.
4. If the Commencement Date of the subject Lease is other than the first day
of the month, the first billing will contain a pro rata adjustment. Each billing
thereafter shall be for the full amount of the monthly installment as provided
for in said Lease.
5. Rent is due and payable in advance on the first day of each and every
month during the term of said Lease. Your rent checks should be made payable to
Hopkins Brothers, c/o SARES REGIS Group at 2815 Whipple Road, Hayward, CA 94587
6. Tenant's obligation to pay monthly installments of Annual Basic Rent will
be waived for a period of one (1) month months beginning on May 1, 1997 and
ending on May 31, 1997 in accordance with this Lease.
7. The number of Rentable Square Feet contained within the Premises for all
purposes of this Lease is 35,136 rentable square feet.
8. Tenant's Percentage, based upon the number of Rentable Square Feet
contained within the Premises and the Building, is 74.85%.
AGREED AND ACCEPTED
LANDLORD: Hopkins Brothers, a California General Partnership
By:
--------------------
Its:
--------------------
Date:
--------------------
TENANT: VidaMed, Inc., a Delaware Corporation
By:
--------------------
Print Name: James A Heisch
--------------------
Its: President
--------------------
Dated:
--------------------
22
December 16, 1995
<PAGE>
Exhibit E
TENANT ESTOPPEL CERTIFICATE
The undersigned, ____________________, a ____________________, ("Tenant"),
hereby certifies to ____________________, a ____________________, as follows:
1. Attached hereto is a true, correct and complete copy of that certain lease
dated __________________, 19__, between ____________________, a
____________________ ("Landlord") and Tenant (the "Lease"), which demises
premises located ____________________ (the "Premises).
The Lease is now in full force and effect and has not been amended, modified
or supplemented, except as set forth in Paragraph 4 below.
2. The Term of the Lease commenced on ____________________, 19__.
3. The Term of the Lease shall expire on ____________________, 19__.
4. The Lease has: (Initial one):
_____ (______) not been amended, modified, supplemented, extended, renewed or
assigned.
_____ (______) been amended, modified, supplemented, extended, renewed or
assigned by the following described agreements, copies of which are attached
hereto:
5. Tenant has accepted and is now in possession of said premises.
6. Tenant acknowledges that the Lease will be assigned to _________________ and
that no modification, adjustment, revision or cancellation of the Lease or
amendments thereto shall be effective unless written consent of
____________________ is obtained, and that until further notice, payments under
the Lease may continue as heretofore.
7. The amount of fixed monthly rent is $____________________.
8. The amount of security deposits (if any) is $____________________. No other
security deposits have been made, except for a Letter of Credit in the amount of
$____________________.
9. Tenant is paying the full lease rental which has been paid in full as of the
date hereof. No rent or other charges under the Lease have been paid for more
than thirty (30) days in advance of its due date.
10. To Tenant's actual knowledge, all work required to be performed by Landlord
under the Lease has been completed.
11. To Tenant's actual knowledge, there are no defaults on the part of the
Landlord or Tenant under the Lease.
12. As of the date hereof, Tenant has no defense as to its obligations under the
Lease and claims no set-off or counterclaim against Landlord.
13. Tenant has no right to any concession (rental or otherwise) or similar
compensation in connection with renting the space it occupies except as provided
in the Lease. All provisions of the Lease and the amendments thereto (if any)
referred to above are hereby ratified
The foregoing certification is made with the knowledge that ____________________
is about to fund a loan to Landlord or ____________________ is about to purchase
the Project (or part thereof) from Landlord and that ____________________ is
relying upon the representations herein made in funding such loan or in
purchasing the Project (or part thereof).
IN WITNESS THEREOF, this certificate has been duly executed and delivered by the
authorized officers of the undersigned as of ____________________, 19__.
TENANT: _____________________, a
________________________
By: ____________________________
Print Name: ____________________
Its: ___________________________
By: ____________________________
Print Name: ____________________
Its: ___________________________
SAMPLE ONLY
(Not for Execution)
23
December 16, 1995
<PAGE>
Exhibit F
RULES AND REGULATIONS
This Exhibit is hereby attached to and made a part of the Lease dated April
3, 1997, by and between Hopkins Brothers, as Landlord and VidaMed as Tenant for
the Premises known as 46107 Landing Parkway, Fremont, CA 94538.
1. Tenant and the operations and activities of Tenant shall not cause or
permit any disturbing noises or objectionable odors to be produced upon or to
emanate from the Premises.
2. Tenant shall not block or obstruct any of the entries, passages, doors,
or sidewalks of the Project, or place, empty, or throw any rubbish, litter,
pallets, or material of any nature into such areas, or permit such areas to be
used at any time except for the ingress and egress of Tenant.
3. All trash, rubbish or litter removed from the Premises by Tenant shall be
placed only in such areas and/or receptacles as may be designated or provided by
Landlord.
4. Tenant shall not store any materials, equipment, products, pallets, etc.,
outside the Premises without the prior written consent of Landlord.
5. Tenant shall have the nonexclusive use in common with Landlord, other
tenants, their guests and invitees, of the automobile surface parking areas,
subject to reasonable rules and regulations for the use thereof as prescribed
from time to time by Landlord. Landlord shall have the right to designate
parking areas for use of the Project's tenants and their employees.
6. Tenant shall not leave vehicles parked in the Project's parking areas
overnight. Subject to reasonable advance notice, Landlord reserves the right to
tow any vehicle parked overnight, without prior approval, at the vehicle owner's
expense.
7. Subject to the provisions of Paragraph 11 of this Lease, no sign,
placard, picture, advertisement, name or notice shall be displayed, painted, or
affixed by Tenant in or on any part of the Building or the Premises without the
prior written consent of Landlord and then only of such color, size, character,
style, material, installation and in such places as shall be approved and
designated by Landlord.
8. Tenant shall not use the Project or the Premises for housing, lodging, or
sleeping purposes. No immoral or unlawful purpose will be allowed in or on any
portion of the Project.
9. No birds, fowl, or animals shall be brought into or kept in or about the
Premises without the prior written consent of Landlord.
10. Landlord shall have the right to control and operate the common areas of
the Project, as well as facilities and areas furnished for the common use of the
tenants, in such manner as it deems best for the benefit of the tenants
generally.
11. If Tenant requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with, Landlord's instructions in
their installation.
12. Canvassing, soliciting, distribution of handbills or any other written
material and peddling on or about Project are prohibited, and each tenant shall
cooperate to prevent the same.
13. The only window treatment permitted for the windows in the Premises is
that installed by or approved in writing by Landlord. If Landlord objects to any
curtains, blinds, shades, screens, hanging plants or other similar objects
attached to or used in connection with any window or door of the Premises,
Tenant shall immediately discontinue such use. No awning shall be permitted on
any part of the Premises. Tenant shall not place anything against or near glass
partitions or doors or windows which may appear unsightly from outside the
Premises.
14. Tenant shall not do or permit anything to be done in any Premises, or
bring or keep anything therein which will in any way increase the rate of fire
insurance on the Building or Project (unless such increase is paid by Tenant and
is approved by Landlord, in its sole discretion) or on property kept therein or
obstruct or interfere with the use of the Premises for their intended purposes
or with the rights of other tenants, or in any way injure or annoy them, or
conflict with the laws relating to fires, or with the regulations of the Fire
Department or with any insurance policy upon the Building or Project or any part
thereof, or cause a cancellation of or otherwise affect any fire or other
insurance on the Building or Project or conflict with any of the rules and
ordinances of the Department of Health. Unless approved by Landlord, no
kerosene, gasoline, oil, acids, caustics or any other inflammable or combustible
fluid, explosive or hazardous material shall be used or kept in or about any
premises, nor shall any method or heating or air conditioning be used for any
premises other than that approved by Landlord. In the event any use or activity
shall lead to an increase in fire or other insurance premiums payable on the
insurance obtained by Landlord, or insurance procured by an individual tenant,
the party causing such increase shall be liable for payment of the same to
Landlord or such individual tenant, as the case may be. Tenant understands and
agrees that the vehicle of any tenant, or a vehicle belonging to any employee,
licensee, invitee, agent, client or visitor of a tenant or occupant, obstructing
any unauthorized area, particularly in areas designated by specially painted
curbs such as fire lane areas, may be towed away at the Tenant's risk and
expense.
15. No tenant shall install any radio or television antenna, loudspeaker or
other devise on the roof or exterior walls of the Building. No television, radio
or recorder shall be played in such a manner as to cause a nuisance to any other
tenant.
24
<PAGE>
16. Landlord will not be responsible for lost, stolen or damaged personal
property, equipment, money, merchandise or any article from the Premises or
common areas regardless of whether loss, theft, or damage occurs when the
Premises are locked against entry or not.
17. Any damage done to the Project or the Premises in any way by the
movement of furniture, equipment, or merchandise within, into or out of the
Project or the Premises by Tenant's servants, subtenants, agents, employees,
visitors or invitees shall be the responsibility of and paid by Tenant.
18. Landlord reserves the right to exclude or expel from the Project any
person who, in Landlord's judgment, is intoxicated or under the influence of
liquor or drugs or who is in violation or any of the Rules and Regulations of
the Project.
19. Landlord shall have the right, exercisable upon 30 days notice, without
notice and without liability to any tenant, to change the name or street address
of the Building or the Project. Such notice is not required if address change is
beyond the reasonable control of Landlord.
20. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify, alter or amend, in whole or in part, the terms,
covenants, agreements, and conditions of any lease of premises in the Project.
21. Landlord may waive any one or more of these Rules and Regulations for
the benefit of any particular tenant or tenants, but no such waiver by Landlord
shall be construed as a waiver of such Rules and Regulations in favor of any
other tenant or tenants, nor prevent Landlord from thereafter enforcing any such
Rules and Regulations against any or all of the tenants of the Project.
22. Landlord reserves the right to amend or repeal these Rules and
Regulations and to make such other Rules and Regulations as in its judgment may
from time to time be needed for the safety, care and cleanliness of the Project
and for the preservation of good order therein.
23. Tenant shall be responsible for the observance of all the foregoing
rules by Tenant's employees, subtenants, agents, clients, customers, invitees
and guests.
24. For the purposes of the foregoing Rules and Regulations, the term
"Tenant" shall include Tenant's agents, subtenants, employees, servants,
licensees, invitees, clients and visitors.
- ---------------------------------- -----------------------------------
Landlord Initials Tenant Initials
25
December 16, 1995
<PAGE>
Exhibit G
PROJECT SIGNAGE CRITERIA
All signs require written approval of Landlord, subject to the terms and
conditions of this Lease.
Temporary signs (such as banners, balloons, kiosks, A-frame signs) of any kind
are strictly prohibited.
26
December 16, 1995
<PAGE>
Exhibit H
HAZARDOUS MATERIALS ADDENDUM
This Exhibit H is hereby attached to and made part of the Lease dated April 3,
1997, by and between Hopkins Brothers, as Landlord, and VidaMed, as Tenant, for
the Premises known as 46107 Landing Parkway, Fremont, CA 94538.
1. Tenant shall not cause or permit any Hazardous Materials to be brought upon,
stored, used, generated, released into the environment or disposed of on, in,
under or about the Premises, the Common Areas or any other portion of the
Project by Tenant, its agents, employees, contractors or invitees, without the
prior written consent of Landlord, which consent Landlord may withhold in its
sole and absolute discretion. Landlord, in its sole and absolute discretion, may
consent to Tenant's generation, storage or use of Hazardous Materials on or in
the Premises provided Tenant demonstrates to Landlord, in its sole and absolute
judgment, that such Hazardous Materials (in incidental quantities) are necessary
to or required as part of Tenant's business and will be generated, used, kept,
stored and/or disposed of in a manner that complies with all laws regulating any
such Hazardous Materials and with good business practices, and provided that
Tenant first obtains the written consent of Landlord and the owner(s) and/or
operator(s) of the Common Areas, if any, and provided further that Tenant
indemnifies Landlord, and any owner(s) and operator(s) of the Common Areas from
any and all liability with respect to such Hazardous Materials as more
particularly described below. Following Landlord's acceptance of Exhibit I and
after commencement of the Lease, the Tenant may, through its ordinary course of
business, use and store additional Hazardous Materials not included on Exhibit
I, subject to the following conditions: a) the Hazardous Material must be
necessary to Tenant's specific use of the Premises, b) the Hazardous Material
shall not create an unreasonable risk to the Project, increase insurance
rates (unless Tenant agrees to pay all such costs), change the occupancy of the
Premises or Project or create additional regulation of the Premises by any
entity, c) not less than 15 days prior to the presence of the proposed Hazardous
Material being brought onto the Premises, the Tenant must complete any updated
Exhibit I, provide copies of all permits, a copy of a Hazardous Material
Business Plan (or equivalent as required by local regulations), provide copies
of Materials Safety Data Sheets, and all disposal manifests for any existing or
contemplated Hazardous Material, and d) the quantities of materials shall not
exceed reasonable amounts for the permitted use, as stated in Paragraph 1.d of
the Lease, and contemplated at the commencement of the Lease, and e) the Tenant
shall at all times use, keep, store, dispose of, and handle all such Hazardous
Materials consistent with good and prudent business practices, and in full
compliance with all laws and regulations. Notwithstanding the foregoing, the
Tenant shall not be permitted in to install storage tanks or sumps at or on the
Project. Upon the expiration or sooner termination of this Lease, Tenant
covenants to remove from the Premises and/or the Project, at its sole cost and
expense, any and all Hazardous Materials, including any equipment or systems
containing Hazardous Materials, which are brought upon, stored, used, generated
or released into the environment by Tenant, its agents, employees, contractors
or invitees. To the fullest extent permitted by law, Tenant hereby indemnifies
Landlord and agrees to hold Landlord, the Premises and the Project free and
harmless from and against any and all claims, judgments, damages, penalties,
fines, costs, liabilities and losses (including, without limitation, diminution
in the value of the Premises or the Project, damages for the loss or restriction
on use of rentable space or of any amenity of the Premises, the Common Areas or
any other portion of the Project, and sums paid in settlement of claims,
attorneys' fees consultant fees and expert fees) which arise during or after the
Lease Term directly or indirectly from the presence of Hazardous Materials on,
in or about the Premises or any other portion of the project which is caused or
permitted by Tenant, its agents employees, contractors or invitees. This
indemnification by Tenant or Landlord and any owner(s) and operator(s) of the
Common Areas includes, without limitation, any and all costs incurred in
connection with any investigation of site conditions or any clean up, remedial,
removal or restoration work required by any federal, state or local governmental
agency or political subdivision because of the presence of such Hazardous
Material in, on or about the Premises, the Common Areas or the soil or ground
water on or under the Project or any portion. Tenant shall promptly notify
Landlord of any release of Hazardous Materials in the Premises, the Common Areas
or any other portion of the Project which Tenant becomes aware of during the
Term of this Lease, whether caused by Tenant or any other persons or entities.
As used in this Lease, the term "Hazardous Materials" shall mean and include any
hazardous or toxic materials, substances or wastes including (A) those materials
identified in Sections 66680 through 66685 and Sections 66693 through 66740 of
Title 22 of the California Administrative Code, Division 4, Chapter 30, as
amended from time to time, (B) those materials defined in Section 25501(j) of
the California Health and Safety Code, (C) any materials, substances or wastes
which are toxic, ignitable, corrosive or reactive and which are regulated by any
local governmental authority, any agency of the State of California or any
agency of the United States Government, (D) asbestos, (E) petroleum and
petroleum based products, (F) urea formaldehyde foam insulation, (G)
polychlorinated biphenyls ("PCBs"), and (H) freon and other chlorofluorocarbons.
2. Tenant shall promptly notify Landlord of, and shall promptly provide Landlord
with true, correct, complete and legible copies of, all of the following
environmental items relating to the Premises which may be filed or prepared by
or on behalf of, or delivered to or served upon, Tenant: reports filed pursuant
to any self-reporting requirements, reports filed pursuant to any applicable
laws or this Lease, all permit applications, permits, monitoring reports,
workplace exposure and community exposure warnings or notices and all other
reports, disclosures, plans or documents (even those which may be characterized
as confidential) relating to water discharges, air pollution, waste generation
or disposal, underground storage tanks or Hazardous Materials.
3. In addition to Tenant's routine reporting obligations described in Paragraph
2 above, Tenant shall promptly notify Landlord of, and shall promptly provide
Landlord with true, correct, complete and legible copies of, all of the
following environmental items relating to the Premises which may be filed or
prepared by or on behalf of, or delivered to or served upon, Tenant: all orders,
reports, notices, listings and correspondence (even those which may be
considered confidential) of or concerning the release, investigation of,
compliance, clean up, remedial and corrective actions, and abatement of
Hazardous Materials whether or not required by any applicable laws, including,
but not limited to, reports and notices required by or given pursuant to any
applicable laws, and all complaints, pleadings and other legal documents filed
against Tenant related to Tenant's use, handling storage or disposal of
Hazardous Materials. In the event of a release of any Hazardous Materials in, on
or about the Premises or the Project, Tenant shall promptly provide Landlord
with copies of all reports and correspondence with or from all governmental
agencies, authorities or any other persons relating to such release.
4. Prior to the execution of this Lease, Tenant shall complete, execute and
deliver to Landlord a Hazardous Materials Questionnaire (the "Hazardous
Materials Questionnaire") in the form of Exhibit I, and Tenant shall certify to
Landlord all
27
December 16, 1995
<PAGE>
information contained in the Hazardous Materials Questionnaire as true and
correct to the best of Tenant's knowledge and belief. The completed Hazardous
Materials Questionnaire shall be deemed incorporated into this Lease for all
purposes, and Landlord shall be entitled to rely fully on the information
contained therein. On each anniversary of the Commencement Date (each such date
is hereinafter referred to as a "Disclosure Date"), until and including the
first Disclosure Date occurring after the expiration or sooner termination of
this Lease, Tenant shall disclose to Landlord in writing the names and amounts
of all Hazardous Materials, or any combination thereof, which were stored,
generated or used or disposed of on, in, under or about the Premises for the
twelve-month period prior to and after each Disclosure Date, or which Tenant
intends to store, generate, use or dispose of on, under or about the Premises.
At Landlord's option, Tenant's disclosure obligations under this Paragraph 4
shall include a requirement that Tenant update, execute and deliver to Landlord
the Hazardous Materials Questionnaire, as the same may be modified by Landlord
from time to time.
5. Landlord and Landlord's agents and employees shall have the right, but not
the obligation, to inspect, investigate, sample and/or monitor the Premises,
including any soil, water, groundwater or other sampling, and any other testing,
digging, drilling or analyses, at any time to determine whether Tenant is
complying with the terms of this Exhibit H, and in connection therewith, Tenant
shall provide Landlord with full access to all relevant facilities, records and
personnel. If Tenant is not in compliance with any of the provisions of this
Exhibit H, Landlord and Landlord's agents and employees shall have the right,
but not the obligation, without limitation upon any of Landlord's other rights
and remedies under this Lease, to immediately enter upon the Premises and to
discharge Tenant's obligations under this Exhibit H at Tenant's expense,
notwithstanding any other provision of this Lease. Landlord and Landlord's
agents and employees shall endeavor to minimize interference with Tenant's
business but shall not be liable for any such interference. All sums reasonably
disbursed, deposited or incurred by Landlord in connection therewith, including,
but not limited to, all costs, expenses and actual attorneys' fees, shall be due
and payable by Tenant to Landlord, as an item of additional rent, on demand by
Landlord, together with interest thereon at the maximum interest rate permitted
by law from the date of such demand until paid by Tenant.
6. If there has been a release, or suspected release (as evidenced by reasonable
documentation provided by Landlord), of Hazardous Materials by the Tenant in the
Premises or the Project, or if Landlord reasonably believes that Tenant is in
violation of any Hazardous Material laws, regulations or any provision of this
Exhibit H, Landlord, at Tenant's sole cost and expense, shall have the right,
but not the obligation, to join and participate in any legal proceedings or
actions initiated in connection with any claims or causes of action arising out
of the storage, generation, use or disposal by Tenant, its agents, employees,
contractors or invitees, of Hazardous Materials in, on, under, from or about the
Premises or any other portion of the Project. If the presence of any Hazardous
Materials in, on, under or about the Premises or any other portion of the
Project caused or permitted by Tenant, its agents, employees, contractors,
sublessees or invitees, results in (i) injury to any person, (ii) injury to or
any contamination of the Premises or (iii) injury to or contamination of any
real or personal property wherever situated, Tenant, at its sole cost and
expense, shall promptly take all actions necessary to return the Premises or
such other portion of the Project, to the condition existing prior to the
introduction of such Hazardous Materials to the Premises and to remedy or repair
any such injury or contamination. Notwithstanding the foregoing, Tenant shall
not, without Landlord's prior written consent, take any remedial action in
response to the presence of any Hazardous Materials in, on, under or about the
Premises or any other portion of the Project, or enter into any settlement
agreement, consent decree or other compromise with any governmental agency with
respect to any Hazardous Materials claims; provided, however, Landlord's prior
written consent shall not be necessary in the event that the presence of
Hazardous Materials in, on, under or about the Premises or any other portion of
the Project (i) poses an immediate threat to the health, safety or welfare of
any individual or (ii) is of such a nature that an immediate remedial response
is necessary and it is not possible to obtain Landlord's consent before taking
such action.
7. Promptly upon the expiration or sooner termination of this Lease, Tenant
shall represent to Landlord in writing that (i) Tenant has made a diligent
effort to determine whether any Hazardous Materials are in, on, under or about
the Premises or any other portion of the Project, and (ii) no Hazardous
Materials exist in, on, under or about the Premises or any other portion of the
other than as specifically identified to Landlord by Tenant in writing. To
ensure performance of Tenant's obligations under this Paragraph 7, Landlord may,
at any time within one (1) year of the expiration of the Term, or upon the
occurrence of an Event of Default by notice to Tenant, require that Tenant
promptly commence and diligently prosecute to completion an environmental
evaluation of the Premises or any other portion of the Project. In connection
therewith, Landlord may require Tenant, at Tenant's sole cost and expense, to
immediately hire an outside consultant satisfactory to Landlord to perform a
complete environmental audit of the Premises or any other portion of the
Project, an executed copy of which shall be delivered to Landlord within thirty
(30) days after landlord's request therefor. If Tenant or the environmental
audit discloses the existence of Hazardous Materials in, on, under or about the
Premises or any other portion of the Project, Tenant shall, at Landlord's
request, immediately prepare and submit to Landlord within thirty (30) days
after such request a comprehensive plan, subject to Landlord's approval,
specifying the actions to be taken by Tenant to return the Premises or any other
portion of the Project to the condition existing prior to the introduction of
such Hazardous Materials. Upon Landlord's approval, of such clean up plan,
Tenant shall, at Tenant's sole cost and expense, without limitation on any
rights and remedies of Landlord under this Lease, immediately implement such
plan and proceed to clean up Hazardous Materials in accordance with all
applicable laws and as required by such plan and this Lease.
8. Tenant's obligations under the provisions hereof shall not extend to any
claim, judgment, damage, penalty, fine, cost, remediation, liability, or loss,
caused by or resulting from any Hazardous Material which is or was brought upon,
stored, used, generated or released into the environment by someone other than
Tenant, its agents, employees, officers, contractors, consultants, invitees,
sublessees or assigns prior to, during or subsequent to the commencement of the
Term of this Lease. Landlord, to Landlord's actual knowledge, without any duty
of independent inquiry, represents that: (a) the Landlord has not stored,
generated or released Hazardous Materials in the Project, provided however, that
the foregoing representation shall not apply to Hazardous Materials used in
connection with Landlord's normal maintenance and operation of the Project,
including, but not limited to, the HVAC equipment, and (b) the Landlord has
received no written notice regarding the presence of Hazardous Materials in the
Premises.
9. The provisions of this Exhibit H shall survive any termination of this Lease.
- ------------------------------- ----------------------------
Landlord's Initials Tenant's Initials
28
December 16, 1995
<PAGE>
Exhibit I
HAZARDOUS MATERIALS QUESTIONNAIRE
This questionnaire is designed to solicit information regarding your proposed
use of hazardous or toxic materials. Please complete the questionnaire and
return it to Tom Sheaff, SARESoREGIS Group, 2815 Whipple Road, Union City, CA
94587 for evaluation. If your use of materials or generation of wastes is
considered to be significant, further information may be requested regarding
your plans for hazardous and toxic materials management.
Your cooperation in this matter is appreciated. If you have any questions do not
hesitate to call us for assistance.
I. PROPOSED LESSEE OR TENANT
VidaMed, Inc. a Delaware Corporation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Corporation, Individual, Corporate or Individual DBA, or Public Agency)
Corporation
- --------------------------------------------------------------------------------
Standard Industrial Classification Code (SIC) none
----------------------------------
Street Address 1380 Willow Road, Menlo Park, California, 94025
-----------------------------------------------------------------
- --------------------------------------------------------------------------------
City, State, Zip Code
Contact Person & Title: John Hendrick - Chief Operating Officer
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Telephone Number: (415) 328-8781 Facsimile Number: (415) 328-8784
------------- -------------
II. LOCATION AND ADDRESS OF PROPOSED LEASE
Address 46107 Landing Parkway, Fremont, California, 94538
-----------------------------------------------------------------------
- --------------------------------------------------------------------------------
III. DESCRIPTION OF PROPOSED FACILITY USE
Describe proposed use and operation of Premises including principal products or
service to be conducted at facility: Sales, storage, distribution, offices,
marketing, light manufacturing, prototype machine shop, research and development
for the manufacture of medical devices.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Does the operation of your business involve the use, generation, treatment,
storage, transfer or disposal of hazardous wastes or materials? Yes _XXX_ No
____. If yes, or if your SIC code number is between 2000 to 4000, please
complete Section IV.
IV. PERMIT DISCLOSURE
Does the operation of your business require permits, license or plan approval
from any of the following agencies?
XXXXX U.S. Environmental Protection Agency (Cal 000156960 = EPA
identification number)
_______City or County Sanitation District
_______State Department of Health Services
_______U.S. Nuclear Regulatory Commission
_______Air Quality Management District
_______Bureau of Alcohol, Firearms and Tobacco
_______City or County Fire Department
_______Regional Water Quality Control Board
Indicate permit or license numbers, issuing agency and expiration date
or renewal date, if applicable.
See above
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
29
December 16, 1995
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If your answer is yes to any of the above questions please complete Sections V
and VI.
V. HAZARDOUS MATERIALS DISCLOSURE
Will any hazardous or toxic materials or substances be stored on site? Yes ____
No ____. If yes, please describe the materials or substances to be stored,
quantities and proposed method of storage (i,e. , drums, aboveground or
underground storage tanks, cylinders, other), and whether the material is a
Solid (S), Liquid (L) or Gas (G):
Quantity On A
Material Storage Method Monthly Basis
Blasocut 2000 55 gallon drum 1 drum
(machining cutting fluid)
- --------------------------------------------------------------------------------
Solder flux fire cabinet 1 five gallon container
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Attach additional sheets if necessary.
Is any facility modification required or planned to mitigate the release of
toxic or hazardous substance or wastes into the environment? Yes ____ No _XX_.
If yes, please describe the proposed facility modifications:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VI. HAZARDOUS WASTE DISCLOSURE
Will any hazardous waste, including recyclable waste, be generated by the
operation of your business? Yes ____ No _XXX_. If yes, please list the hazardous
waste which will be generated at the facility, its hazard class and
volume/frequency of generation on a monthly basis.
Waste Name Hazard Class Volume/Month
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Attach additional sheets if necessary.
If yes, please also indicate if any such wastes are to be stored within the
Premises and the proposed method of storage (i.e., drums, aboveground or
underground storage tanks, cylinders, other).
Waste Name Storage Method
Material in (V.) above are stored in as safety cabinet. The large volume
Blasocut drum is stored in the machine shop in a 55 gallon drum.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If yes, please also describe the method(s) of disposal for each waste. Indicate
where disposal will take place and method of transportation to be used:
As waste containers become 2/3 full, the following company is contacted:
Safe-Way Chemical Company, 599 West Taylor, No., 2, San Jose, CA 95110-1835.
Phone 408-292-9289.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Is any treatment or processing of hazardous wastes to be conducted onsite? Yes
____ No _XXX_. If yes, please describe proposed treatment/processing methods:
30
December 16, 1995
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Which agencies are responsible for monitoring and evaluating compliance with
respect to the storage and disposal of hazardous materials or wastes at or from
the Premises?
(Please list all agencies)
San Mateo County Environmental Health Division
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Have there been any agency enforcement actions regarding the company facilities,
or any existing company facilities, or any past, pending or outstanding
administrative orders or consent decrees? Yes ____ No _XXX_. If yes, have there
been any continuing compliance obligations imposed on your company as a result
of decrees or orders? Yes ____ No _XXX_. If yes, please describe:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Has the company been the recipient of requests for information, notice and
demand letters, cleanup and abatement orders, or cease and desist orders or
other administrative inquiries? Yes ____ No _XX_. If yes, please describe:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Are there any pending citizen lawsuits, or have any notices of violations been
provided to the company or any existing facilities pursuant to the citizens suit
provisions of any statute? Yes ____ No _XX_. If yes, please describe:
Have there been any previous lawsuits against the company regarding
environmental concerns? Yes ____ No _XX_. If yes, please describe how these
lawsuits were resolved?
Has an environmental audit ever been conducted at any of your company's existing
facilities? Yes ____ No ____. If yes, please describe:
2/20/97 - San Mateo County Environmental Health Division
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Does your company carry environmental impairment insurance? Yes ____ No ___. If
yes, what is the name of the carrier and what are the effective periods and
monetary limits of such coverage?
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Hazardous Materials Questionnaire is certified as being true and accurate
and has been completed by the party whose signature appears below on behalf of
Tenant as of the date set forth below.
Signature ____________________________________________________
Print Name ___________________________________________________
Title ________________________________________________________
Dated ________________________________________________________
31
December 16, 1995
<PAGE>
Exhibit J
EARLY ENTRY
This Lease Rider is attached to and made a part of that certain lease
dated April 3, 1997 (the "Lease") between Hopkins Brothers, Landlord and
VidaMed, Inc., Tenant.
Notwithstanding the fact that the Term of this Lease has not commenced,
Landlord hereby agrees that from and after the date hereof and until the
commencement of the Term of this Lease and prior to the completion of Landlord's
work of construction, if any portion of the Premises may be occupied by Tenant
without interfering with Landlord's work of construction, upon written request
by Tenant to Landlord Tenant may elect to enter upon the Premises following not
less than seven (7) days prior written notice to Landlord in order to install
trade fixtures and equipment, commence construction of any improvements, and
commence operations within the Premises which are to be constructed by Tenant at
Tenant's sole cost and expense (collectively, "Tenant's Finishing Work"). Such
entry by Tenant for the purpose of construction of Tenant's Finishing Work shall
be subject to all of the conditions set forth in this Rider.
(i) Landlord's Direction. Tenant, together with its employees, agents,
independent contractors, suppliers and any other personnel under Tenant's
control ("Tenant's Personnel") installing Tenant's Finishing Work on the
Premises, shall be subject to and shall work under the direction of Landlord and
Landlord's general contractor. If, in the sole judgment of Landlord, Tenant's
Personnel and/or the work that is being performed by Tenant's Personnel shall
interfere with Landlord's construction work or shall detrimentally affect
Landlord's ability to comply with its commitments for completing its
improvements on the Premises or cause labor difficulties, Landlord shall have
the right to order Tenant's early entry to cease on twenty-four (24) hours
written notice to Tenant, and if Landlord so requires in connection therewith
because such items are interfering with Landlord's work of construction, Tenant
shall have Tenant's Personnel remove all tools, equipment and materials from the
Premises.
(ii) Lease Terms Apply. Tenant agrees that any such early entry shall
be subject to all of the terms and conditions of this Lease except for those
relating to the payment of rent and other monetary obligations which have a
specific commencement time, which provisions shall become applicable in
accordance with the terms of this Lease.
(iii) Utility Charges. Tenant agrees to pay to the Landlord on request
all utility charges for service to the Premises reasonably allocated to Tenant
by Landlord as a result of Tenant's early entry on the Premises and a delay in
transfer of utilities to Tenant's name.
(iv) Rent. Notwithstanding Subparagraph (ii) above, if Tenant shall use
a portion of the Premises for the operation of its regular business prior to the
Commencement Date, then Tenant shall advise Landlord of such use and shall be
charged only Additional Rent, utilities and services to the Premises.
(v) Not Possession. Tenant's early entry to carry out Tenant's
Finishing Work shall not be deemed a taking of possession of the Premises by
Tenant for the purpose of either setting the Commencement Date or signaling the
substantial completion of the Tenant Improvements which are to be constructed by
Landlord.
(vi) Insurance. Prior to any entry upon the Premises by Tenant or
Tenant's personnel, Tenant shall pay for and provide to Landlord certificates
evidencing the existence and amounts of liability insurance carried by Tenant,
which coverage shall comply with the provisions of the Lease relating to
insurance.
(vii) Laws. Tenant and Tenant's Personnel shall comply with all
applicable laws regulations, permits and other approvals required to perform
Tenant's Finishing Work or by Tenant's early entry on the Premises.
(viii) Indemnity. Tenant shall indemnify and save Landlord and the
Premises harmless from and against any and all liens, liabilities, losses,
damages, costs, expenses, demands, actions, causes of action and claims
(including, without limitation, attorneys' fees and legal costs) arising out of
the use, construction, or occupancy of the Premises by Tenant or Tenant's
Personnel arising from or relating to such early entry.
- ---------------------------- -------------------------------
Landlord's Initials Tenant's Initials
32
December 16, 1995
<PAGE>
RIDER ONE
OPTION TO EXTEND AT MARKET RENTAL RATE
This Lease Rider Two is attached to and made a part of that certain Lease dated
April 3, 1997 (the "Lease") by and between Hopkins Brothers, a California
General Partnership ( "Landlord") and VidaMed Inc., a Delaware Corporation, as
("Tenant").
(a) Option. Provided Tenant is not in default under the terms of the Lease, or
would be in default but for the passage of time or the giving or notice, or
both, Landlord hereby grants to Tenant one (1) option ("Extension Option") to
extend the Term of the Lease for a period of five (5) years ("Option Period")
upon and subject to the terms and conditions set forth hereinbelow. If Tenant
desires to exercise its Extension Option granted herein, Tenant shall deliver to
landlord written notice of such election ("Extension Notice") not later that one
hundred eighty (180) days nor earlier that three hundred sixty (360) days prior
to the expiration of the initial term of this Lease.
(b) Proper Exercise. Despite a timely exercise by Tenant, Tenant's Extension
Option shall not be deemed to be properly exercised if at the end of the initial
Term of the Lease Tenant is in default of any of the terms, covenants or
conditions of the Lease. Provided Tenant properly exercises the Extension
Option, the Term of the Lease shall be extended for the Option Period, and all
of the terms, covenants, and conditions of the Lease shall remain unmodified and
in full force and effect during the Option Period, except that the Annual Basic
Rents shall be modified as set forth in Subparagraphs (c) and (d) below.
(c) Rent. The Annual Base Rent payable during the Option Period shall be the
fair market rental value of the Premises, as determined herein. The fair market
rental value of the Premises shall be determined by landlord based on prevailing
market rentals then being paid for similar space in the projects comparable to
the Project in the Fremont area. Provided Tenant has paid for the installation
of the Clean Room, the Fair Market Value for this Extension Option shall
consider the Premises as if the Clean Room is not present. Landlord shall use
its best efforts to provide Tenant with written notice of its determination the
fair market rental value of the Premises within thirty (30) days (but in no
event later that sixty (60) days) after the earlier of (I) Landlord's receipt of
Tenant's Extension Notice and (ii) the last day upon which Tenant's Extension
Notice could be given, as required in Subparagraph (a) above. Tenant shall have
fifteen (15) days ("Tenant Review Period") after receipt of Landlord's notice of
the new Annual Basic Rent within which to accept such new Annual Basic Rent or
to reasonably object thereto in writing. If Tenant fails to respond to Landlord
within Tenant's Review Period, Tenant shall conclusively be deemed to have
approved of the new Annual Basic Rent determined by Landlord. In the event
Tenant objects to the fair market rental value submitted by Landlord, landlord
and Tenant shall attempt to agree upon the fair market rental value for the
Premises, using their best good faith efforts. If Landlord and Tenant fail to
reach agreement on the fair market value of the Premises within fifteen (15)
days following the expiration of Tenant's Review Period (the "Outside Agreement
Date"), then the fair market rental value for the Premises shall be determined
by arbitration in accordance with Subparagraph (d) below.
(d) Arbitration. Landlord and Tenant shall each, within fifteen (15) days of the
Outside Agreement Date, appoint one arbitrator who shall by profession be a real
estate appraiser who shall have been active over the five (5) year period ending
on the date of such appointment in the appraisal of commercial properties in the
Fremont area. The two arbitrators so appointed shall, within fifteen (15) days
of the date of the appointment of the last appointed arbitrator, agree upon and
appoint a third arbitrator who shall be qualified under the same criteria set
forth hereinabove for qualification of the initial two arbitrators.
The determination of the three arbitrators shall be limited solely to the
issue of whether Landlord's or Tenant's submitted fair market rental value for
the Premises is the closet to the actual fair market rental value for the
Premises as determined by the arbitrators, taking into account the requirements
of Subparagraph (c) above. Once the three arbitrators have been selected,
Landlord and Tenant shall, each submit to the arbitrators their respective
determinations of the fair market rental value of the Premises. The three
arbitrators shall, within thirty (30) days of the submittal of Landlord's and
Tenant's determinations of the fair market value of the Premises, reach a
decision as to whether the e parties shall use Landlord's or Tenant's submitted
fair market rental value as the Annual Basic Rent, and shall notify Landlord and
Tenant of their decision. Such decision shall be based upon the projected
prevailing fair market rental value for similar space in projects similar to the
Project in the Fremont area. The decision of the majority of the three
arbitrators shall be binding upon landlord and Tenant.
If either Landlord or Tenant fails to appoint an arbitrator within the time
period set forth above, the arbitrator appointed by one of them shall reach a
decision in accordance with this Subparagraph (d), notify Landlord and Tenant
thereof, and such arbitrator's decision shall be binding upon Landlord and
Tenant. If the two arbitrators fail to agree upon and appoint a third
arbitrator, both arbitrators shall be dismissed and the matter shall be decided
by submission the arbitration under the provision of the American Arbitration
Association. All costs of arbitration shall be shared equally by Landlord and
Tenant. The arbitrators shall not be affiliated with either party.
Notwithstanding the foregoing provisions of this Lease Rider One, in no event
shall the Annual Basic Rent during the Option Period be less that the Annual
Basic Rent payable by Tenant during the last full month of initial Term of this
Lease or the last full month of the preceding Option Period, as applicable.
- -------------------------- --------------------------
Landlord's Initials Tenant's initials
33
December 16, 1995
<PAGE>
RIGHT OF FIRST OFFER
TO LEASE ADJACENT SPACE
This Rider No. 2 is attached to and made a part of that certain Lease, dated
April 3, 1997 between Hopkins Brothers, a California General Partnership, as
Landlord and VidaMed Inc., a Delaware Corporation, as Tenant, for the Premises
known as 46107 Landing Parkway, Fremont, California. The capitalized terms used
and not otherwise defined herein shall have the same definitions as set forth in
the Lease. The provisions of this Lease Rider shall supersede an inconsistent or
conflicting provisions of the Lease.
Provided Tenant is not in default under the terms of the Lease, or would be in
default but for the passage of time or the giving or notice, or both, if
rentable space within the Building adjacent to the Premises in the approximate
amount of 11,808 square feet ("Adjacent Space") shall become available for
leasing by other than the existing tenant(s), said Adjacent Space shall be made
available to Tenant to lease, on a one (1) time basis only, upon the terms and
conditions hereinafter set forth ("Right of First Offer"). If at any time during
the Term of the Lease any Adjacent Space becomes available, Landlord shall,
prior to making the Adjacent Space available to other third parties, first
deliver written notice of such availability to Tenant and the terms upon which
Landlord is willing to lease such space to Tenant ("Landlord's Notice"). For a
period of three (3) business days following Tenant's receipt of Landlord's
Notice, Tenant shall have the first opportunity to lease the Adjacent Space upon
the terms and conditions set forth in Landlord's Notice by delivering to
Landlord within said three (3) business day period written notice ("Election
Notice") of its election to exercise its Right of First Offer. If Tenant fails
or elects not to exercise its Right of First Offer granted pursuant to this
paragraph within said three (3) business day period, the Right of First Offer
shall automatically terminate without further action of the parties, and
Landlord shall be free to lease the Adjacent Space to any third party upon such
terms and conditions as Landlord desired. If Tenant timely and properly
exercises its Right of First Offer as hereinabove provided, Tenant shall, within
five(5) days after receipt from Landlord enter into a new lease with Landlord
upon Landlord's then current standard lease form for the Building, which new
lease incorporates the terms set forth in Landlord's Notice with respect to the
Adjacent Space. If Tenant fails to execute and deliver such new lease within
said five (5) day period, the Right of First Offer shall automatically terminate
without further action of the parties, and Landlord shall be thereafter free to
lease the Adjacent Space to any third party upon such terms and conditions as
Landlord desires.
Tenant's Right of First Offer is personal to Tenant, is not transferable, and
may not be exercised by or assigned to any person or entity other than Tenant,
and shall terminate and be of no further force or effect upon any assignment of
the Lease or subletting of the Premises.
- --------------------------- ---------------------------
Landlord Initials Tenant Initials
34
December 16, 1995
- --------------------------------------------------------------------------------
VIDAMED, INC.
LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
<S> <C> <C>
1. DEFINITIONS AND CONSTRUCTION........................................................................... 1
1.1 Definitions................................................................................... 1
1.2 Accounting and Other Terms.................................................................... 8
2. LOANS AND TERMS OF PAYMENT............................................................................. 8
2.1 Advances...................................................................................... 8
2.2 Overadvances.................................................................................. 10
2.3 Interest Rates, Payments, and Calculations.................................................... 10
2.4 Crediting Payments............................................................................ 11
2.5 Fees.......................................................................................... 11
2.6 Additional Costs.............................................................................. 12
2.7 Term.......................................................................................... 12
3. CONDITIONS OF LOANS.................................................................................... 13
3.1 Conditions Precedent to Initial Advance....................................................... 13
3.2 Conditions Precedent to all Advances ......................................................... 13
4. CREATION OF SECURITY INTEREST.......................................................................... 13
4.1 Grant of Security Interest.................................................................... 13
4.2 Delivery of Additional Documentation Required................................................. 14
4.3 Right to Inspect.............................................................................. 14
5. REPRESENTATIONS AND WARRANTIES......................................................................... 14
5.1 Due Organization and Qualification............................................................ 14
5.2 Due Authorization; No Conflict................................................................ 14
5.3 No Prior Encumbrances......................................................................... 14
5.4 Bona Fide Eligible Accounts................................................................... 15
5.5 Merchantable Inventory........................................................................ 15
5.6 Intellectual Property......................................................................... 15
5.7 Name; Location of Chief Executive Office...................................................... 15
5.8 Litigation.................................................................................... 15
5.9 No Material Adverse Change in Financial Statements............................................ 15
5.10 Solvency...................................................................................... 16
5.11 Regulatory Compliance......................................................................... 16
5.12 Environmental Condition....................................................................... 16
5.13 Taxes......................................................................................... 16
5.14 Subsidiaries.................................................................................. 16
5.15 Government Consents........................................................................... 16
5.16 Full Disclosure............................................................................... 17
6. AFFIRMATIVE COVENANTS.................................................................................. 17
6.1 Good Standing................................................................................. 17
6.2 Government Compliance......................................................................... 17
6.3 Financial Statements, Reports, Certificates................................................... 17
6.4 Inventory; Returns............................................................................ 18
6.5 Taxes......................................................................................... 18
6.6 Insurance..................................................................................... 18
6.7 Principal Depository.......................................................................... 19
6.8 Quick Ratio................................................................................... 19
6.9 Total Liabilities/Tangible Net Worth.......................................................... 19
6.10 Minimum Liquidity/Debt Service Coverage....................................................... 19
6.11 Net Losses.................................................................................... 19
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<PAGE>
6.12 Further Assurances............................................................................ 19
7. NEGATIVE COVENANTS..................................................................................... 19
7.1 Dispositions.................................................................................. 20
7.2 Changes in Business, Ownership, Management or Business Locations.............................. 20
7.3 Mergers or Acquisitions....................................................................... 20
7.4 Indebtedness.................................................................................. 20
7.5 Encumbrances.................................................................................. 20
7.6 Distributions................................................................................. 20
7.7 Investments................................................................................... 20
7.8 Transactions with Affiliates.................................................................. 21
7.9 Subordinated Debt............................................................................. 21
7.10 Inventory..................................................................................... 21
7.11 Compliance.................................................................................... 21
8. EVENTS OF DEFAULT...................................................................................... 21
8.1 Payment Default............................................................................... 21
8.2 Covenant Default.............................................................................. 21
8.3 Material Adverse Change....................................................................... 22
8.4 Attachment.................................................................................... 22
8.5 Insolvency.................................................................................... 22
8.6 Other Agreements.............................................................................. 22
8.7 Subordinated Debt............................................................................. 22
8.8 Judgments..................................................................................... 23
8.9 Misrepresentations............................................................................ 23
9. BANK'S RIGHTS AND REMEDIES............................................................................. 23
9.1 Rights and Remedies........................................................................... 23
9.2 Power of Attorney............................................................................. 24
9.3 Accounts Collection........................................................................... 24
9.4 Bank Expenses................................................................................. 25
9.5 Bank's Liability for Collateral............................................................... 25
9.6 Remedies Cumulative........................................................................... 25
9.7 Demand; Protest............................................................................... 25
10. NOTICES................................................................................................ 25
11. CHOICE OF LAW AND VENUE................................................................................ 26
12. GENERAL PROVISIONS..................................................................................... 26
12.1 Successors and Assigns........................................................................ 26
12.2 Indemnification............................................................................... 27
12.3 Time of Essence............................................................................... 27
12.4 Severability of Provisions.................................................................... 27
12.5 Amendments in Writing, Integration............................................................ 28
12.6 Counterparts.................................................................................. 28
12.7 Survival...................................................................................... 28
12.8 Confidentiality............................................................................... 28
</TABLE>
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<PAGE>
This LOAN AND SECURITY AGREEMENT is entered into effective as of
January 13, 1998, by and between SILICON VALLEY BANK ("Bank") and VIDAMED, INC.
("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions.
As used in this Agreement, the following terms shall
have the following definitions:
"Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.
"Advance" or "Advances" means a cash advance under
the Committed Revolving Line.
"Affiliate" means, with respect to any Person, any
Person that owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is under common control with such Person, and
each of such Person's senior executive officers, directors, partners and, for
any Person that is a limited liability company, such Persons, managers and
members.
"Bank Expenses" means all: Bank's reasonable costs or
expenses (including reasonable attorneys' fees and expenses) incurred in
connection with the preparation, negotiation, administration, and enforcement of
the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred
in amending, enforcing or defending the Loan Documents (including fees and
expenses of appeal or review, or those incurred in any Insolvency Proceeding),
whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and
records including without limitation: ledgers; records concerning Borrower's
assets or liabilities, the Collateral, business operations or financial
condition; and all computer programs, or tape files, and the equipment,
containing such information.
"Borrowing Base" means an amount equal to
seventy-five percent (75%) of Eligible Accounts, provided, that Bank reserves
the right to adjust such percentage of Eligible Accounts based on the results of
any audit of the Collateral.
"Business Day" means any day that is not a Saturday,
Sunday, or other day on which banks in the State of California are authorized or
required to close.
"Closing Date" means the effective date of this
Agreement.
"Code" means the California Uniform Commercial Code.
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"Collateral" means the property described on Exhibit
A attached hereto.
"Committed Revolving Line" means a credit extension
of up to Three Million Dollars ($3,000,000).
"Committed Equipment Line" means a credit extension
of up to One Million Five Hundred Thousand Dollars ($1,500,000).
"Contingent Obligation" means, as applied to any
Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to (i) any indebtedness, lease, dividend, letter of credit
or other obligation of another, including, without limitation, any such
obligation directly or indirectly guaranteed, endorsed, co-made or discounted or
sold with recourse by that Person, or in respect of which that Person is
otherwise directly or indirectly liable; (ii) any obligations with respect to
undrawn letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Credit Extension" means each Advance, Equipment
Advance or any other extension of credit by Bank for the benefit of Borrower
hereunder.
"Current Assets" means, as of any applicable date,
all amounts that should, in accordance with GAAP, be included as current assets
on the consolidated balance sheet of Borrower and its Subsidiaries as at such
date.
"Current Liabilities" means, as of any applicable
date, all amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its Subsidiaries,
as at such date, plus, to the extent not already included therein, all
outstanding Credit Extensions made under this Agreement, including all
Indebtedness that is payable upon demand or within one year from the date of
determination thereof unless such Indebtedness is renewable or extendable at the
option of Borrower or any Subsidiary to a date more than one year from the date
of determination.
"Eligible Accounts" means those Accounts that arise
in the ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided, that
standards of eligibility may be fixed and revised from time to time by Bank in
Bank's reasonable judgment and upon thirty (30) days prior written notification
thereof to Borrower in accordance with the provisions hereof. Unless otherwise
agreed to by Bank in writing, Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed
to pay within ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor,
fifty percent (50%) of whose Accounts the account debtor has failed to pay
within ninety (90) days of invoice date;
(c) Accounts with respect to an account debtor,
whose total obligations to Borrower exceed twenty-five percent (25%) of all
Accounts, except as approved in writing by Bank;
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<PAGE>
(d) Accounts with respect to which the account
debtor does not have its principal place of business in the United States except
for Eligible Foreign Accounts;
(e) Accounts with respect to which the account
debtor is a federal, state or local governmental entity or any department,
agency, or instrumentality thereof except for those Accounts of the United
States or any department, agency or instrumentality thereof as to which the
payee has assigned its rights to payment thereof to Bank and the assignment has
been acknowledged, pursuant to the Assignment of Claims Act of 1940, as amended
(31 U.S.C. 3727);
(f) Accounts with respect to which Borrower is
liable to the account debtor, but only to the extent of any amounts owing to the
account debtor (sometimes referred to as "contra" accounts, e.g. accounts
payable, customer deposits, credit accounts, etc.);
(g) Accounts generated by demonstration or
promotional equipment, or with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or other terms
by reason of which the payment by the account debtor may be conditional;
(h) Accounts with respect to which the account
debtor is an Affiliate, officer, employee, or agent of Borrower;
(i) Accounts with respect to which the account
debtor disputes liability or makes any claim with respect thereto as to which
Bank believes, in its sole discretion, that there may be a basis for dispute
(but only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business; and
(j) Accounts the collection of which Bank
reasonably determines after reasonable inquiry and reasonable consultation with
Borrower to be doubtful.
"Eligible Foreign Accounts" means Accounts with
respect to which the account debtor does not have its principal place of
business in the United States and that are: (1) covered by credit insurance in
form and amount, and by an insurer satisfactory to Bank less the amount of any
deductible(s) which may be or become owing thereon; or (2) supported by one or
more letters of credit either advised or negotiated through Bank or in favor of
Bank as beneficiary, in an amount and of a tenor, and issued by a financial
institution, acceptable to Bank; or (3) that Bank approves on a case-by-case
basis.
"Equipment" means all present and future machinery,
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts,
substitutions, accessions and attachments in which Borrower has any interest.
"Equipment Advance" has the meaning set forth in
Section 2.1.2.
"Equipment Availability End Date" has the meaning set
forth in Section 2.1.2.
"ERISA" means the Employee Retirement Income Security
Act of 1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles
as in effect in the United States from time to time.
"Indebtedness" means (a) all indebtedness for
borrowed money or the deferred purchase price of property or services, including
without limitation reimbursement and other obligations with respect to surety
bonds and letters of credit, (b) all obligations evidenced by notes, bonds,
debentures or similar instruments, (c) all capital lease obligations and (d) all
Contingent Obligations.
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<PAGE>
"Insolvency Proceeding" means any proceeding
commenced by or against any Person or entity under any provision of the United
States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency
law, including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or proceedings
seeking reorganization, arrangement, or other similar relief.
"Inventory" means all present and future inventory in
which Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above.
"Investment" means any beneficial ownership of
(including stock, partnership interest or other securities) any Person, or any
loan, advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust,
charge, pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement,
any note or notes executed by Borrower, and any other present or future
agreement entered into between Borrower and/or for the benefit of Bank in
connection with this Agreement, all as amended, extended, supplemented or
restated from time to time.
"Material Adverse Effect" means a material adverse
effect on (i) the business operations or condition (financial or otherwise) of
Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower
to repay the Obligations or otherwise perform its obligations under the Loan
Documents.
"Maturity Date" means July 13, 2001.
"Negotiable Collateral" means all of Borrower's
present and future letters of credit of which it is a beneficiary, notes,
drafts, instruments, securities, documents of title, and chattel paper.
"Obligations" means all debt, principal, interest,
Bank Expenses and other amounts owed to Bank by Borrower pursuant to this
Agreement or any other agreement, whether absolute or contingent, due or to
become due, now existing or hereafter arising, including any interest that
accrues after the commencement of an Insolvency Proceeding and including any
debt, liability, or obligation owing from Borrower to others that Bank may have
obtained by assignment or otherwise.
"Payment Date" means the thirteenth (13th) calendar
day of each month, commencing on the first such date after the Closing Date and
ending on the Maturity Date.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank
arising under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date
and disclosed in the attached financial reports or the Schedule;
(c) Indebtedness to trade creditors and with
respect to surety bonds and similar obligations incurred in the ordinary course
of business;
4
<PAGE>
(d) Subordinated Debt;
(e) Indebtedness of Borrower to any Subsidiary;
(f) Indebtedness secured by Permitted Liens;
(g) Capital leases or indebtedness incurred
solely to purchase equipment which is secured in accordance with clause (c) of
"Permitted Liens" below and is not in excess of the lesser of the purchase price
of such equipment or the fair market value of such equipment on the date of
acquisition; and
(h) Extensions, refinancings, modifications,
amendments and restatements of any of items of Permitted Indebtedness (a)
through (g) above, provided that the principal amount thereof is not increased
or the terms thereof are not modified to impose more burdensome terms upon
Borrower.
"Permitted Investment" means:
(a) Investments existing on the Closing Date and
disclosed in the Schedule;
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Rating Services or Moody's Investors Service, Inc. and (iii)
certificates of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank or money market deposit accounts issued by a
domestic commercial bank or other financial institution having capital and
surplus in excess of $100 million in which Bank has a Lien prior to any other
Lien;
(c) Investments consisting of the endorsement of
negotiable instruments for deposit or collection or similar transaction in the
ordinary course of business;
(d) Investments accepted in connection with
Transfers permitted by Section 7.1;
(e) Investments consisting of (i) compensation
of employees, officers and directors of Borrower or its Subsidiaries so long as
the Board of Directors of Borrower determines that such compensation is in the
best interests of Borrower, (ii) travel advances, employee relocation loans and
other employee loans and advances in the ordinary course of business, and (iii)
loans to employees, officers or directors relating to the purchase of equity
securities of Borrower or its Subsidiaries pursuant to employee stock purchase
plans or agreements approved by Borrower's Board of Directors;
(f) Investments (including debt obligations)
received in connection with the bankruptcy or reorganization of customers or
suppliers and in settlement of delinquent obligations of, and other disputes
with, customers or suppliers arising in the ordinary course of business;
(g) Investments pursuant to or arising under
currency agreements or interest rate agreements entered into in the ordinary
course of business;
(h) Investments consisting of notes receivable
of, or prepaid royalties and other credit extensions to, customers and suppliers
who are not Affiliates, in the ordinary course of business; provided that this
paragraph (h) shall not apply to Investments by Borrower in any Subsidiary;
(i) Investments constituting acquisitions
permitted under Section 7.3;
(j) Deposit accounts of Borrower in which Bank
has a Lien prior to any other Lien; and
5
<PAGE>
(k) Deposit accounts of any Subsidiaries
maintained in the ordinary course of business.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and
disclosed in the Schedule or arising under this Agreement or the other Loan
Documents;
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings and as to which adequate reserves are
maintained on Borrower's Books in accordance with GAAP, provided the same have
no priority over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired
or held by Borrower or any of its Subsidiaries to secure the purchase price of
such Equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such Equipment, or (ii) existing on such Equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such Equipment;
(d) Liens on Equipment leased by Borrower or any
Subsidiary pursuant to an operating or capital lease in the ordinary course of
business (including proceeds thereof and accessions thereto) incurred solely for
the purpose of financing the lease of such Equipment (including Liens pursuant
to leases permitted pursuant to Section 7.1 and Liens arising from UCC financing
statements regarding leases permitted by this Agreement);
(e) Leases or subleases and licenses or
sublicenses granted to others in the ordinary course of Borrower's business not
interfering in any material respect with the business of Borrower and its
Subsidiaries taken as a whole, and any interest or title of a lessor, licensor
or under any lease or license, provided that such leases, subleases, licenses
and sublicenses do not prohibit the grant of the security interest granted
hereunder;
(f) Liens on assets (including the proceeds
thereof and accessions thereto) that existed at the time such assets were
acquired by Borrower or any Subsidiary (including Liens on assets of any
corporation that existed at the time it became or becomes a Subsidiary);
provided such Liens are not granted in contemplation of or in connection with
the acquisition of such asset by Borrower or a Subsidiary;
(g) Liens arising from judgments, decrees or
attachments in circumstances not constituting an Event of Default under Section
8.8;
(h) Easements, reservations, rights-of-way,
restrictions, minor defects or irregularities in title and other similar charges
or encumbrances affecting real property not constituting a Material Adverse
Effect;
(i) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payments of customs duties in
connection with the importation of goods;
(j) Liens that are not prior to the Lien of Bank
which constitute rights of set-off of a customary nature or banker's Liens with
respect to amounts on deposit, whether arising by operation of law or by
contract, in connection with arrangements entered in to with banks in the
ordinary course of business;
(k) Earn-out and royalty obligations existing on
the date hereof or entered into in connection with an acquisition permitted by
Section 7.3;
(l) Liens on insurance proceeds in favor of
insurance companies granted solely as security for financed premiums;
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(m) Liens arising in the ordinary course of
business arising by operation of law or regulation, but only if payment in
respect of any such Lien is not at the time required and such Liens do not, in
the aggregate, materially detract from the value of the property of Borrower or
materially impair the use thereof in the operation of Borrower's business;
(n) Liens securing reimbursement of obligations
in respect of documentary letters of credit; provided, that such Liens attach
only to the documents, the goods covered thereby and the proceeds thereof;
(o) Liens of landlords arising under lease
contracts or by operation of law in the ordinary course of business; and
(p) Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured by Liens of the
type described in clauses (a), (c), (d), (e), (f) and (k) above, provided that
any extension, renewal or replacement Lien shall be limited to the property
encumbered by the existing Lien and the principal amount of the indebtedness
being extended, renewed or refinanced does not increase.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.
"Prepayment Fee" means a fee on any portion of the
Obligations with a fixed interest rate (the "Fixed Obligations") that is paid
before the payment due date. The Prepayment Fee is calculated as follows: First,
Bank determines a "Current Market Rate" based on what the Bank would receive if
it loaned the amount on the prepayment date in a wholesale funding market
matching maturity, principal amount and principal and interest payment dates
(such aggregate payments received being deemed the "Current Market Rate
Amount"). Bank, in its sole discretion, may select any wholesale funding market
rate as the Current Market Rate. Second, Bank will take the prepayment amount
and calculate the present value of each principal and interest payment which,
without prepayment, the Bank would have received during term of the Fixed
Obligations using the applicable interest rate set forth in this Agreement. The
sum of the present value calculations is the "Mark to Market Amount". Third, the
Bank will subtract the Mark to Market Amount from the Current Market Rate
Amount. Any amount greater than zero is the Prepayment Fee.
"Prime Rate" means the variable rate of interest, per
annum, most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, as of any applicable date, the
unrestricted cash; unrestricted cash-equivalents; net, billed accounts
receivable and investments with maturities of fewer than one year of Borrower
determined in accordance with GAAP.
"Responsible Officer" means each of the Chief
Executive Officer, the President, the Chief Financial Officer and the Controller
of Borrower.
"Revolving Maturity Date" means the day before the
first anniversary of the Closing Date.
"Schedule" means the schedule of exceptions attached
hereto, if any.
"Subordinated Debt" means any debt incurred by
Borrower that is subordinated to the debt owing by Borrower to Bank on terms
acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to any Person,
corporation, partnership, company association, joint venture, or any other
business entity of which more than fifty percent (50%) of the voting
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stock or other equity interests is owned or controlled, directly or indirectly,
by such Person or one or more Affiliates of such Person.
"Tangible Net Worth" means, as of any applicable
date, the consolidated total assets of Borrower and its Subsidiaries minus,
without duplication, (i) the sum of any amounts attributable to (a) goodwill,
(b) intangible items such as unamortized debt discount and expense, patents,
trade and service marks and names, copyrights and research and development
expenses except prepaid expenses, and (c) all reserves not already deducted from
assets, plus Subordinated Debt and (ii) Total Liabilities.
"Total Liabilities" means, as of any applicable date,
all obligations that should, in accordance with GAAP, be classified as
liabilities on the consolidated balance sheet of Borrower and its subsidiaries,
including in any event all Indebtedness, minus Subordinated Debt.
1.2 Accounting and Other Terms.
All accounting terms not specifically defined herein
shall be construed in accordance with GAAP and all calculations and
determinations made hereunder shall be made in accordance with GAAP. When used
herein, the term "financial statements" shall include the notes and schedules
thereto.
2. LOANS AND TERMS OF PAYMENT
2.1 Advances.
Borrower promises to pay to the order of Bank, in
lawful money of the United States of America, the aggregate unpaid principal
amount of all Advances made by Bank to Borrower hereunder. Borrower shall also
pay interest on the unpaid principal amount of such Advances at rates in
accordance with the terms hereof.
2.1.1 Revolving Advances
(a) Subject to and upon the terms and
conditions of this Agreement, Bank agrees to make Advances to Borrower in an
aggregate outstanding amount not to exceed (i) the lesser of the Committed
Revolving Line or the Borrowing Base, minus (ii) in each case the face amount of
all Outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit). Subject to the terms and conditions of this Agreement, amounts borrowed
pursuant to this Section 2.1.1 may be repaid and reborrowed at any time up until
the Revolving Maturity Date. Prior to the first Advance, Bank shall have
conducted an audit of Borrower's Accounts with results satisfactory to Bank.
(b) Whenever Borrower desires an
Advance, Borrower will notify Bank by facsimile transmission or telephone no
later than 3:00 p.m. Pacific time, on the Business Day that the Advance is to be
made. Each such notification shall be promptly confirmed by a Loan
Payment/Advance Telephone Request Form in substantially the form of Exhibit B
hereto. Bank is authorized to make Advances under this Agreement, based upon
instructions received from a Responsible Officer or a designee of a Responsible
Officer. Bank shall be entitled to rely on any telephonic notice given by a
Person who Bank reasonably believes to be a Responsible Officer or a designee
thereof, and Borrower shall indemnify and hold Bank harmless for any damages or
loss suffered by Bank as a result of such reliance. Bank will credit the amount
of Advances made under this Section 2.1 to Borrower's deposit account.
(c) The Committed Revolving Line shall
terminate on the Revolving Maturity Date, at which time all outstanding Advances
made under this Section 2.1.1 shall be immediately due and payable.
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2.1.2 Equipment Advances.
(a) Subject to and upon the terms and
conditions of this Agreement, Bank agrees to make a single advance (the
"Equipment Advance") to Borrower in an aggregate outstanding amount not to
exceed the Committed Equipment Line. To evidence the Equipment Advance, Borrower
shall deliver to Bank, at the time of the Equipment Advance request, an invoice
for the Equipment to be purchased. The Equipment Advance shall be used only to
purchase or refinance Equipment purchased on or before six (6) months prior to
the Closing Date and shall not exceed one hundred percent (100%) of the invoice
amount of such equipment or leasehold improvement cost approved from time to
time by Bank, excluding taxes, shipping, warranty charges, freight discounts and
installation expense. Leasehold improvements may not constitute in excess of
fifty percent (50%) of the Equipment Advance.
(b) Interest shall accrue from the date of
the Equipment Advance at the rate specified in Section 2.3(a). The Equipment
Advance will be payable in forty-two (42) equal monthly installments of
principal, plus interest, beginning on February 16, 1998, and continuing on the
Payment Date of each month thereafter through the Maturity Date, at which time
all outstanding Obligations under this Section 21.2 shall be immediately due and
payable. The Equipment Advance, once repaid, may not be reborrowed.
(c) When Borrower desires to obtain the
Equipment Advance, Borrower shall notify Bank (which notice shall be
irrevocable) by facsimile transmission no later than 3:00 p.m. Pacific time one
(1) Business Day before the day on which the Equipment Advance is to be made.
Such notice shall be substantially in the form of Exhibit B. The notice shall be
signed by a Responsible Officer or its designee and include a copy of the
invoice relating to the Equipment to be financed.
2.1.3 Letters of Credit.
(a) Subject to the terms and conditions
of this Agreement, Bank agrees to issue or cause to be issued letters of credit
(each a "Letter of Credit," collectively, the "Letters of Credit") for the
account of Borrower in an aggregate face amount not to exceed (i) the lesser of
the Committed Line or the Borrowing Base (ii) minus in each case the sum of the
then outstanding principal balance of the Advances; provided that the face
amount of outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit) shall not in any case exceed Five Hundred Thousand Dollars
($500,000). Each such Letter of Credit shall have an expiry date no later than
one hundred eighty (180) days after the Revolving Maturity Date provided that
Borrower's Letter of Credit reimbursement obligation shall be secured by cash
terms acceptable to Bank at any time after the Revolving Maturity Date if the
term of this Agreement is not extended by Bank. All such Letters of Credit shall
be, in form and substance, acceptable to Bank in its sole discretion and shall
be subject to the terms and conditions of Bank's form of application and letter
of credit agreement. All amounts actually paid by Bank in respect of a letter of
credit shall, when paid, constitute an Advance under this Agreement.
(b) The obligation of Borrower to
immediately reimburse Bank for drawings made under Letters of Credit shall be
absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement and such Letters of Credit, under
all circumstances whatsoever. Borrower shall indemnify, defend and hold Bank
harmless from any loss, cost, expense or liability, including, without
limitation, reasonable attorneys' fees, arising out of or in connection with any
Letters of Credit.
(c) Borrower may request that Bank issue
a Letter of Credit payable in a currency other than United States Dollars. If a
demand for payment is made under any such Letter of Credit, Bank shall treat
such demand as an advance to Borrower of the equivalent of the amount thereof
(plus cable charges) in United States currency at the then prevailing rate of
exchange in San Francisco, California, for sales of that other currency for
cable transfer to the country of which it is the currency.
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(d) Upon the issuance of any Letter of
Credit payable in a currency other than United States Dollars, Bank shall create
a reserve under the Committed Line for Letters of Credit against fluctuations in
currency exchange rates, in an amount equal to ten percent (10%) of the face
amount of such Letter of Credit. The amount of such reserve may be amended by
Bank from time to time to account for fluctuations in the exchange rate. The
availability of funds under the Committed Line shall be reduced by the amount of
such reserve for so long as such Letter of Credit remains outstanding.
2.2 Overadvances.
If, at any time or for any reason, the outstanding
principal amount of Obligations owed by Borrower to Bank pursuant to Section
2.1.1 of this Agreement is greater than the lesser of (i) the Committed
Revolving Line, minus the face amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit) or (ii) the Borrowing Base,
minus the face amount of all outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit), Borrower shall immediately pay to Bank, in
cash, the amount of such excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth in
Section 2.3(b), any Advances shall bear interest on the average daily balance
thereof, at a per annum rate equal to one percentage point (1.0) above the Prime
Rate. The Equipment Advance shall bear interest at the following rate elected by
Borrower on or before the date of the Equipment Advance (if such election is not
made by Borrower on or before the date of the Equipment Advance, then the rate
under subsection (i) shall be applicable to the Equipment Advance): (i) a per
annum floating rate equal to one and one quarter (1.25) percentage points above
the Prime Rate, or (ii) a per annum fixed rate equal to the forty-two (42) month
United States Treasury Bill, plus four and one quarter (4.25) percentage points.
If Borrower elects the rate set forth in subsection (ii), then any amounts
prepaid on the Equipment Advance shall be accompanied by a Prepayment Fee,
payable on the date of prepayment (the "Prepayment Date").
(b) Default Rate. All Obligations shall bear
interest, from and after the occurrence of an Event of Default, at a rate equal
to five (5) percentage points above the interest rate applicable immediately
prior to the occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due
and payable on each Payment Date. Borrower hereby authorizes Bank to debit any
accounts with Bank, including, without limitation, Account Number 3300109852 for
payments of principal and interest due on the Obligations and any other amounts
owing by Borrower to Bank on the Payment Date or applicable due date, as the
case may be, in each case, taking into account any applicable grace periods.
Bank will notify promptly Borrower of all debits which Bank has made against
Borrower's accounts. Any such debits against Borrower's accounts in no way shall
be deemed a set-off. Any interest not paid when due shall be compounded by
becoming a part of the Obligations, and such interest shall thereafter accrue
interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is
changed from time to time hereafter, the applicable rate of interest hereunder
shall be increased or decreased effective as of 12:01 a.m. on the day the Prime
Rate is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis of a
three hundred sixty (360) day year for the actual number of days elapsed.
2.4 Crediting Payments.
Prior to the occurrence of an Event of Default, Bank
shall credit a wire transfer of funds, check or other item of payment to such
deposit account or Obligation as Borrower specifies. After the occurrence of an
Event of Default, the receipt by Bank of any wire transfer of funds, check, or
other item of payment, whether directed to Borrower's deposit account with Bank
or to the Obligations or otherwise, shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment in
respect of the
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Obligations unless such payment is of immediately available federal funds or
unless and until such check or other item of payment is honored when presented
for payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon Pacific time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due and payable (except by reason of acceleration)
on a date that is not a Business Day, such payment shall instead be due and
payable on the next Business Day, and additional fees or interest, as the case
may be, shall accrue and be payable for the period of such extension.
2.5 Fees.
Borrower shall pay to Bank the following:
(a) Facility Fee. A facility fee equal to
Fifteen Thousand Dollars ($15,000) for the Committed Revolving Line, a facility
fee of Fifteen Thousand Dollars ($15,000) for the Committed Equipment Line,
which fees shall be due and payable on the Closing Date and shall be fully
earned and non-refundable;
(b) Letter of Credit Fee. With respect to the
issuance of any Letter of Credit, a non-refundable fee for the period from and
including the date of issuance of the Letter of Credit, to and including the
date such Letter of Credit is drawn in full, expires or is terminated, equal to
two percent (2%) per annum on the stated amount of such Letter of Credit,
payable monthly in arrears on the Payment Date;
(c) Financial Examination and Appraisal Fees.
Bank's customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents;
provided, that unless an Event of Default has occurred and is continuing, such
audits and appraisals shall occur no more frequently than once every six
calendar months;
(d) Bank Expenses. Upon receipt of invoice
therefor from Bank which shall be paid in accordance with Borrower's customary
procedures for payment of such invoices, all Bank Expenses incurred through the
date hereof, including reasonable attorneys' fees and expenses and, after the
date hereof, all Bank Expenses, including reasonable attorneys' fees and
expenses.
2.6 Additional Costs.
In case any change in any law, regulation, treaty or
official directive or the interpretation or application thereof by any court or
any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law), in each case
after the date of this Agreement:
(a) subjects Bank to any tax with respect to
payments of principal or interest or any other amounts payable hereunder by
Borrower or otherwise with respect to the transactions contemplated hereby
(except for taxes on the overall net income of Bank imposed by the United States
of America or any political subdivision thereof);
(b) imposes, modifies or deems applicable any
deposit insurance, reserve, special deposit or similar requirement against
assets held by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with
respect to its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans made hereunder, Bank shall notify Borrower thereof. Borrower agrees to
pay to Bank the amount of such increase in cost, reduction in income or
additional expense
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as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall constitute
prima facie evidence of such amount provided, however, that Borrower shall not
be liable for any such amount attributable to any period prior to the date of
hundred eight (180) days prior to the date of such certificate.
2.7 Term.
Except as otherwise set forth herein, this Agreement
shall become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect for a term ending on the Maturity Date.
Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Credit Extensions under this Agreement immediately and
without notice upon the occurrence and during the continuance of an Event of
Default. Notwithstanding termination of this Agreement, Bank's lien on the
Collateral shall remain in effect for so long as any Obligations (excluding
Obligations under Section 2.6 and 12.2 to the extent they remain inchoate at the
time outstanding payment obligations are paid in full) are outstanding.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Advance.
The obligation of Bank to make the initial Advance is
subject to the condition precedent that Bank shall have received, in form and
substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower
with respect to articles, bylaws, incumbency and resolutions authorizing the
execution and delivery of this Agreement;
(c) a negative pledge agreement substantially in
the same form as Exhibit E hereto;
(d) financing statement (Form UCC-1);
(e) insurance certificate;
(f) Collateral audit;
(g) payment of the fees and Bank Expenses then
due specified in Section 2.5 hereof; and
(g) such other documents, and completion of such
other matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Advances .
The obligation of Bank to make each Advance,
including the initial Advance, is further subject to the following conditions:
(a) timely receipt by Bank of the Loan
Payment/Advance Telephone Request Form as provided in Section 2.1; and
(b) the representations and warranties contained
in Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Telephone Request Form and on the effective date of
each Advance as though made at and as of each such date, and no Event of Default
shall have occurred and be continuing, or would result from such Advance. The
making of each Advance shall be deemed
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to be a representation and warranty by Borrower on the date of such Advance as
to the accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest.
Borrower grants and pledges to Bank a continuing
security interest in all presently existing and hereafter acquired or arising
Collateral in order to secure prompt payment of any and all Obligations and in
order to secure prompt performance by Borrower of each of its covenants and
duties under the Loan Documents. Except as set forth in the Schedule, such
security interest constitutes a valid, first priority security interest in the
presently existing Collateral, and will constitute a valid, first priority
security interest in Collateral acquired after the date hereof. Borrower
acknowledges that Bank may place a "hold" on any Deposit Account pledged as
Collateral to secure the Obligations, in each case, to the extent that a
security interest in such Collateral can be perfected by the filing of a
financing statement or, in the case of Collateral consisting of instruments,
documents, chattel paper or certificated securities, to the extent that Bank
takes possession or control of such Collateral. Bank agrees to execute and
deliver to Borrower from time to time such subordination agreements as Borrower
may request and as are necessary to give to other lenders which finance
Equipment for Borrower a first priority security interest in the Equipment
financed so long as the Liens and the Indebtedness incurred with respect to such
Equipment financing are permitted under this Agreement. Notwithstanding
termination of this Agreement, Bank's Lien on the Collateral shall remain in
effect for so long as any Obligations are outstanding.
4.2 Delivery of Additional Documentation Required.
Borrower shall from time to time execute and deliver
to Bank, at the request of Bank, all Negotiable Collateral, all financing
statements and other documents that Bank may reasonably request, in form
satisfactory to Bank, to perfect and to continue Bank's security interests in
the Collateral and in order to fully consummate all of the transactions
contemplated under the Loan Documents.
4.3 Right to Inspect.
Bank (through any of its officers, employees, or
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral; provided, that unless an Event of Default
has occurred and is continuing, such inspection and appraisals shall occur no
more frequently than once every six calendar months.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification.
Borrower and each Subsidiary is a corporation duly
existing and in good standing under the laws of its state of incorporation and
qualified and licensed to do business in, and is in good standing in, any state
in which the conduct of its business or its ownership of property requires that
it be so qualified, except for states as to which any failure to so qualify
would not have a Material Adverse Effect.
5.2 Due Authorization; No Conflict.
The execution, delivery, and performance of the Loan
Documents are within Borrower's powers, have been duly authorized, and are not
in conflict with nor constitute a breach of any provision contained in
Borrower's Articles/Certificate of Incorporation or Bylaws, nor will they
constitute an
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event of default under any material agreement to which Borrower is a party or by
which Borrower is bound except to the extent that certain intellectual property
agreements prohibit the assignment of the rights thereunder to a third party
without the Borrower's or other party's consent. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default would reasonably be expected to have a Material Adverse Effect.
5.3 No Prior Encumbrances.
Borrower has good and indefeasible title to the
Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts.
The Eligible Accounts are bona fide existing
obligations. The service or property giving rise to such Eligible Accounts has
been performed or delivered to the account debtor or to the account debtor's
agent for immediate shipment to and unconditional acceptance by the account
debtor. Borrower has not received notice of actual or imminent Insolvency
Proceeding of any account debtor whose accounts are included in any Borrowing
Base Certificate as an Eligible Account.
5.5 Merchantable Inventory.
All Inventory is in all material respects of good and
marketable quality, free from all material defects.
5.6 Intellectual Property.
Borrower is the sole owner of or owns the right to
use the Intellectual Property Collateral, except for non-exclusive licenses
granted by Borrower to its customers in the ordinary course of business. Each of
the Patents is valid and enforceable, and no part of the Intellectual Property
Collateral has been judged invalid or unenforceable, in whole or in part, and no
claim has been made that any part of the Intellectual Property Collateral
violates the rights of any third party. Except for and upon the filing with the
United States Patent and Trademark Office with respect to the Patents and
Trademarks and the Register of Copyrights with respect to the Copyrights
necessary to perfect the security interests created hereunder, and except as has
been already made or obtained, no authorization, approval or other action by,
and no notice to or filing with, any United States governmental authority or
United States regulatory body is required either (i) for the grant by Borrower
of the security interest granted hereby or for the execution, delivery or
performance of Loan Documents by Borrower in the United States or (ii) for the
perfection in the United States or the exercise by Bank of its rights and
remedies hereunder.
5.7 Name; Location of Chief Executive Office.
Except as disclosed in the Schedule, Borrower has not
done business and will not, without at least thirty (30) days written notice to
Bank, do business under any name other than that specified on the signature page
hereof. The chief executive office of Borrower is located at the address
indicated in Section 10 hereof.
5.8 Litigation.
Except as set forth in the Schedule, there are no
actions or proceedings pending or, to Borrower's knowledge, threatened by or
against Borrower or any Subsidiary before any court or administrative agency in
which an adverse decision would reasonably be expected to have a Material
Adverse Effect or a material adverse effect on Borrower's interest or Bank's
security interest in the Collateral.
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5.9 No Material Adverse Change in Financial Statements.
All consolidated financial statements related to
Borrower and any Subsidiary that have been delivered by Borrower to Bank fairly
present in all material respects Borrower's consolidated financial condition as
of the date thereof and Borrower's consolidated results of operations for the
period then ended. There has not been a material adverse change in the
consolidated financial condition of Borrower since the date of the most recent
of such financial statements submitted to Bank on or about the Closing Date.
5.10 Solvency.
The fair saleable value of Borrower's assets
(including goodwill minus disposition costs) exceeds the fair value of its
liabilities; the Borrower is not left with unreasonably small capital after the
transactions contemplated by this Agreement; and Borrower is generally able to
pay its debts (including trade debts) as they mature.
5.11 Regulatory Compliance.
Borrower and each Subsidiary has met the minimum
funding requirements of ERISA with respect to any employee benefit plans subject
to ERISA. No event has occurred resulting from Borrower's failure to comply with
ERISA that is reasonably likely to result in Borrower's incurring any liability
that would reasonably be expected to have a Material Adverse Effect. Borrower is
not an "investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940, as amended. Borrower
is not engaged principally, or as one of its important activities, in the
business of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulations G, T and U of the Board of Governors of
the Federal Reserve System). Borrower has complied with all the provisions of
the Federal Fair Labor Standards Act. Borrower has not violated any statutes,
laws, ordinances or rules applicable to it, violation of which would have a
Material Adverse Effect.
5.12 Environmental Condition.
None of Borrower's or any Subsidiary's properties or
assets has ever been used by Borrower or any Subsidiary or, to the best of
Borrower's knowledge, by previous owners or operators, in the disposal of, or to
produce, store, handle, treat, release, or transport, any hazardous waste or
hazardous substance other than in accordance with applicable law; to the best of
Borrower's knowledge, none of Borrower's properties or assets has ever been
designated or identified in any manner pursuant to any environmental protection
statute as a hazardous waste or hazardous substance disposal site, or a
candidate for closure pursuant to any environmental protection statute to
Borrower's knowledge; no lien arising under any environmental protection statute
has attached to any revenues or to any real or personal property owned by
Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received
a summons, citation, notice, or directive from the Environmental Protection
Agency or any other federal, state or other governmental agency concerning any
action or omission by Borrower or any Subsidiary resulting in the release or
other disposition of hazardous waste or hazardous substances into the
environment.
5.13 Taxes.
Borrower and each Subsidiary has filed or caused to
be filed all tax returns required to be filed on a timely basis, and has paid,
or has made adequate provision for the payment of, all undisputed taxes
reflected therein, except those being contested in good faith by proper
proceedings with adequate reserves under GAAP.
5.14 Subsidiaries.
Borrower does not own any stock, partnership interest
or other equity securities of any Person, except for Permitted Investments.
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5.15 Government Consents.
Borrower and each Subsidiary have obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted except
where the failure to obtain any such consent, approval or authorization, to make
any such declaration or filing, or to be given any such notice would not
reasonably be expected to have a Material Adverse Effect.
5.16 Full Disclosure.
No representation, warranty or other statement made
by Borrower in any certificate or written statement furnished to Bank contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained in such certificates or
statements not misleading (it being recognized by Bank that the projections and
forecasts provided by Borrower are not to be viewed as facts and that actual
results during the period or period covered by any such projections and
forecasts may differ from the projected or forecasted results).
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of
all outstanding Obligations, and for so long as Bank may have any commitment to
make a Credit Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing.
Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify would reasonably be expected to have a Material Adverse
Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to
maintain, to the extent consistent with prudent management of Borrower's
business, in force all licenses, approvals and agreements, the loss of which
would reasonably be expect to have a Material Adverse Effect.
6.2 Government Compliance.
Borrower shall meet, and shall cause each Subsidiary
to meet, the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. Borrower shall comply, and shall cause each
Subsidiary to comply, with all statutes, laws, ordinances and government rules
and regulations to which it is subject, noncompliance with which could
reasonably be expected to have a Material Adverse Effect or a material adverse
effect on the Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates.
Borrower shall deliver to Bank: (a) as soon as
available, but in any event within thirty (30) days after the end of each month,
a company prepared consolidated balance sheet and income statement covering
Borrower's consolidated operations during such period, in a form reasonably
acceptable to Bank and certified by a Responsible Officer of Borrower; (b)
within ten (10) days of filing, copies of all statements, reports and notices
sent or made available generally by Borrower to its security holders or to any
holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed
with the Securities and Exchange Commission; (c) promptly upon receipt of notice
thereof, a report of any legal actions pending or threatened against Borrower or
any Subsidiary that would be likely to result in damages or costs to Borrower or
any Subsidiary of One Hundred Thousand Dollars ($100,000) or more in any single
action; (d) prompt notice of any material change in the composition of the
Intellectual Property Collateral, including, but not limited to, any subsequent
ownership right of Borrower in or to any Copyright, Patent or Trademark not
specified in any intellectual property security agreement between Borrower and
Bank or knowledge of an event that materially
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adversely affects the value of the Intellectual Property Collateral; and (e)
such budgets, sales projections, operating plans or other financial information
as Bank may reasonably request from time to time.
Beginning after the initial Collateral audit by Bank,
within twenty (20) days after the last day of each month, Borrower shall deliver
to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto, together with aged listings of
accounts receivable and accounts payable and sell through reports.
Borrower shall deliver to Bank with the monthly
financial statements a Compliance Certificate signed by a Responsible Officer in
substantially the form of Exhibit D hereto.
Bank shall have a right from time to time hereafter
to audit Borrower's Accounts at Borrower's expense, provided that such audits
will be conducted no more often than every six (6) months unless an Event of
Default has occurred and is continuing.
6.4 Inventory; Returns.
Borrower shall keep all Inventory in good and
marketable condition, free from all material defects. Returns and allowances, if
any, as between Borrower and its account debtors shall be on the same basis and
in accordance with the usual customary practices of Borrower, as they exist at
the time of the execution and delivery of this Agreement. Borrower shall
promptly notify Bank of all returns and recoveries and of all disputes and
claims, where any return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 Taxes.
Borrower shall make, and shall cause each Subsidiary
to make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, upon reasonable request, appropriate certificates
attesting to the payment or deposit thereof; and Borrower will make, and will
cause each Subsidiary to make, timely payment or deposit of all material tax
payments and withholding taxes required of it by applicable laws, including, but
not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and
local, state, and federal income taxes, and will, upon reasonable request,
furnish Bank with proof satisfactory to Bank indicating that Borrower or a
Subsidiary has made such payments or deposits; provided that Borrower or a
Subsidiary need not make any payment required hereunder if the amount or
validity of such payment is (i)contested in good faith by appropriate
proceedings, (ii) is reserved against (to the extent required by GAAP) by
Borrower and (iii) no lien other than a Permitted Lien results.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion, sprinklers,
and all other hazards and risks, and in such amounts, as ordinarily insured
against by other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's ownership and use of the Collateral in
amounts and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in
such form, with such companies, and in such amounts as are reasonably
satisfactory to Bank. All such policies of property insurance shall contain a
lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank
as an additional loss payee thereof and all liability insurance policies shall
show the Bank as an additional insured, and shall specify that the insurer must
give at least twenty (20) days notice to Bank before canceling its policy for
any reason. At Bank's request, Borrower shall deliver to Bank certified copies
of such policies of insurance and evidence of the payments of all premiums
therefor. So long as no Event of Default has occurred and is continuing,
Borrower shall have the option of applying the proceeds of any casualty policy
to the replacement or repair of destroyed or damaged property; provided, that
after the occurrence and during the continuance of an Event of Default, all
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proceeds payable under any such policy shall, at the option of Bank, be payable
to Bank to be applied on account of the Obligations.
6.7 Principal Depository.
Borrower shall maintain its principal depository and
operating accounts with Bank.
6.8 Quick Ratio.
Borrower shall maintain, as of the last day of each
fiscal quarter, a ratio of Quick Assets to Current Liabilities of at least 1.00
to 1.00.
6.9 Total Liabilities/Tangible Net Worth.
Borrower shall maintain, as of the last day of each
fiscal quarter, a ratio of Total Liabilities to Tangible Net Worth of at least
2.50:1.
6.10 Minimum Liquidity/Debt Service Coverage.
Borrower shall maintain, as of the last day of each
calendar month the sum of cash and cash equivalents, minus the aggregate
principal balance drawn on the Committed Revolving Line of at least two (2.0)
times the outstanding principal amount of the Equipment Advance. Notwithstanding
the foregoing, from and after the time Borrower achieves for two consecutive
quarters, a Debt Service Coverage of at least 1.5 to 1.0, Borrower shall not be
subject to the minimum liquidity requirement set forth above, but instead shall
maintain, as of the last day of each fiscal quarter, a Debt Service Coverage of
at least 1.5 to 1.0. Debt Service Coverage means, as of any date of
determination, with respect to Borrower and its Subsidiaries on a consolidated
basis, a ratio of (a) the sum of (i) earnings after tax plus (ii) interest and
non-cash (i.e. depreciation and amortization) expense to (b) the sum of (i)
current portion of long term debt and capitalized leases plus (ii) interest
expense.
6.11 Net Losses.
Borrower may incur net losses in the quarters ending
on the following dates in amounts not to exceed the following for such
respective quarters: March 31, 1998 in the amount of Three Million Dollars
($3,000,000); June 30, 1998 in the amount of Three Million Three Hundred
Thousand Dollars ($3,300,000); September 30, 1998 in the amount of Two Million
Six Hundred Thousand Dollars ($2,600,000); December 31, 1998 in the amount of
One Million Nine Hundred Thousand Dollars ($1,900,000).
6.12 Further Assurances.
At any time and from time to time Borrower shall
execute and deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any Credit
Extension hereunder shall be outstanding and until payment in full of the
outstanding Obligations or for so long as Bank may have any commitment to make
any Advances, Borrower will not do any of the following:
7.1 Dispositions.
Convey, sell, lease, transfer or otherwise dispose of
(collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than Transfers (i) of inventory
in the ordinary course of business, (ii) of non-exclusive licenses and similar
arrangements for the use of the property of Borrower or its Subsidiaries in the
ordinary course of business, (iii) of worn-out or obsolete
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Equipment or Equipment financed by other vendors,
(iv) which constitute liquidation of Investments permitted under Section 7.7,
and (v) not otherwise permitted by this Section 7.1 not exceeding One Hundred
Thousand Dollars ($100,000) in the aggregate in any fiscal year.
7.2 Changes in Business, Ownership, Management or
Business Locations.
Engage in any business, or permit any of its
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto), or suffer a material change in Borrower's ownership.
Borrower will not, without at least thirty (30) days written notification to
Bank, relocate its chief executive office or add any new offices or business
locations.
7.3 Mergers or Acquisitions.
Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person, provided
that this Section 7.3 shall not apply to (i) the purchase of inventory,
equipment or intellectual property rights in any single transaction valued at
less than One Hundred Thousand Dollars ($100,000) in the ordinary course of
business or (ii) transactions among Subsidiaries or among Borrower and its
Subsidiaries in which Borrower is the surviving entity.
7.4 Indebtedness.
Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances.
Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions.
Pay any dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock, provided, that (i) Borrower may declare and make any dividend payment or
other distribution payable in its equity securities, (ii) Borrower may convert
any of its convertible securities into other securities pursuant to the terms of
such convertible securities or otherwise in exchange therefor and (iii) for so
long as an Event of Default has not occurred and is continuing, Borrower may
repurchase stock from former employees of Borrower in accordance with the terms
of repurchase or similar agreements between Borrower and such employees.
7.7 Investments.
Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates.
Directly or indirectly enter into or permit to exist
any material transaction with any Affiliate of Borrower except for transactions
that are in the ordinary course of Borrower's business, upon fair and reasonable
terms that are no less favorable to Borrower than would be obtained in an arm's
length transaction with a non-affiliated Person and except for transactions with
a Subsidiary that are upon fair and reasonable terms and transactions
constituting Permitted Investments.
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7.9 Subordinated Debt.
Make any payment in respect of any Subordinated Debt,
or permit any of its Subsidiaries to make any such payment, except in compliance
with the terms of such Subordinated Debt, or amend any material provision
contained in any documentation relating to the Subordinated Debt without Bank's
prior written consent.
7.10 Inventory.
Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of any warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as disclosed in the Schedule or as
Bank may approve in writing, Borrower shall keep the Inventory only at the
location set forth in Section 10 hereof and such other locations of which
Borrower gives Bank prior written notice and as to which Borrower signs and
files a financing statement where needed to perfect Bank's security interest.
7.11 Compliance.
Become an "investment company" or a company
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, as amended, or become principally engaged in, or undertake
as one of its important activities, the business of extending credit for the
purpose of purchasing or carrying margin stock, or use the proceeds of any
Advance for such purpose; fail to meet the minimum funding requirements of
ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA,
to occur; fail to comply with the Federal Fair Labor Standards Act or violate
any other law or regulation, which violation could have a Material Adverse
Effect or a material adverse effect on the Collateral or the priority of Bank's
Lien on the Collateral, or permit any of its Subsidiaries to do any of the
foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:
8.1 Payment Default.
If Borrower fails to pay the principal of, or any
interest on, any Advances when due and payable; or fails to pay any portion of
any other Obligations not constituting such principal or interest, including
without limitation Bank Expenses, within thirty (30) days of receipt by Borrower
of an invoice for such other Obligations.
8.2 Covenant Default.
If Borrower fails to perform any obligation under
Sections 6.3, 6.6, 6.7, 6.8, 6.9, 6.10 or 6.11 or violates any of the covenants
contained in Article 7 of this Agreement, or if Borrower fails or neglects to
perform, keep, or observe any other material term, provision, condition,
covenant, or agreement contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and Bank
and as to any default under such other term, provision, condition, covenant or
agreement that can be cured, has failed to cure such default within ten (10)
days after the occurrence thereof; provided, however, that if the default cannot
by its nature be cured within the ten (10) day period or cannot after diligent
attempts by Borrower be cured within such ten (10) day period, and such default
is likely to be cured within a reasonable time, then Borrower shall have an
additional reasonable period (which shall not in any case exceed thirty (30)
days) to attempt to cure such default, and within such reasonable time period
the failure to have cured such default shall not be deemed an Event of Default
(provided that no Advances will be required to be made during such cure period);
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8.3 Material Adverse Change.
If there (i) occurs a material adverse change in the
business, operations, or condition (financial or otherwise) of Borrower or (ii)
is a material impairment of the prospect of repayment of any portion of the
Obligations or (iii) is a material impairment of the value or priority of Bank's
security interests in the Collateral;
8.4 Attachment.
If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period);
8.5 Insolvency.
If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within thirty (30) days
(provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 Other Agreements.
If there is a default in any agreement to which
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity of
any Indebtedness in an amount in excess of One Hundred Thousand Dollars
($100,000) or that would reasonably be expected to have a Material Adverse
Effect;
8.7 Subordinated Debt.
If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under the terms
of such Subordinated Debt or any subordination agreement entered into with Bank;
8.8 Judgments.
If a judgment or judgments for the payment of money
in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of thirty (30) days (provided that no
Credit Extensions will be made prior to the satisfaction or stay of such
judgment); or
8.9 Misrepresentations.
If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate or writing delivered to Bank by Borrower or any
Person acting on Borrower's behalf pursuant to this Agreement or to induce Bank
to enter into this Agreement or any other Loan Document.
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9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies.
Upon the occurrence and during the continuance of an
Event of Default, Bank may, at its election, without demand, do any one or more
of the following, all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced
by this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any action by Bank);
(b) Cease advancing money or extending credit to
or for the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;
(c) Settle or adjust disputes and claims
directly with account debtors for amounts, upon terms and in whatever order that
Bank reasonably considers advisable;
(d) Without notice to or demand upon Borrower,
make such payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may reasonably designate. Borrower authorizes Bank to enter the premises
where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or lien which in Bank's determination appears to be prior
or superior to its security interest and to pay all expenses incurred in
connection therewith. With respect to any of Borrower's premises, Borrower
hereby grants Bank a license to enter such premises and to occupy the same,
without charge, in order to exercise any of Bank's rights or remedies provided
herein, at law, in equity, or otherwise;
(e) Without notice to Borrower set off and apply
to the Obligations any and all (i) balances and deposits of Borrower held by
Bank, or (ii) indebtedness at any time owing to or for the credit or the account
of Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish,
maintain, repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein and pursuant to applicable law) the Collateral. Bank is
hereby granted a non-exclusive, royalty-free license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, mask works, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising matter,
or any property of a similar nature, as it pertains to the Collateral, in
completing production of, advertising for sale, and selling any Collateral and,
in connection with Bank's exercise of its rights under this Section 9.1,
Borrower's rights under all licenses and all franchise agreements shall inure to
Bank's benefit;
(g) Sell the Collateral at either a public or
private sale, or both, by way of one or more contracts or transactions, for cash
or on terms, in such manner and at such places (including Borrower's premises)
as Bank determines is commercially reasonable, and apply the proceeds thereof to
the Obligations in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any
public sale, or at any private sale as permitted by law.
Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
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9.2 Power of Attorney.
Effective only upon the occurrence and during the
continuance of an Event of Default, Borrower hereby irrevocably appoints Bank
(and any of Bank's designated officers, or employees) as Borrower's true and
lawful attorney with full power of substitution to: (a) send requests for
verification of Accounts or notify account debtors of Bank's security interest
in the Accounts; (b) endorse Borrower's name on any checks or other forms of
payment or security that may come into Bank's possession; (c) sign Borrower's
name on any invoice or bill of lading relating to any Account, drafts against
account debtors, schedules and assignments of Accounts, verifications of
Accounts, and notices to account debtors; (d) make, settle, and adjust all
claims under and decisions with respect to Borrower's policies of insurance; (e)
settle and adjust disputes and claims respecting the Accounts directly with
account debtors, for amounts and upon terms which Bank determines to be
reasonable; (f) modify, in its sole discretion, any intellectual property
security agreement entered into between Borrower and Bank without first
obtaining Borrower's approval of or signature to such modification by amending
Exhibit A, Exhibit B, Exhibit C and Exhibit D, thereof, as appropriate, to
include reference to any right, title or interest in any Copyrights, Patents or
Trademarks acquired by Borrower after the execution hereof or to delete any
reference to any right, title or interest in any Copyrights, Patents or
Trademarks in which Borrower no longer has or claims any right, title or
interest; (g) file, in its sole discretion, one or more financing or
continuation statements and amendments thereto, relative to any of the
Collateral without the signature of Borrower where permitted by law; and (h)
dispose of the Collateral into the name of Bank or a third party to the extent
permitted under the Code, provided Bank may exercise such power of attorney to
sign the name of Borrower on any of the documents described in Section 4.2
regardless of whether an Event of Default has occurred. The appointment of Bank
as Borrower's attorney in fact, and each and every one of Bank's rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Bank's obligation to
provide advances hereunder is terminated.
9.3 Accounts Collection.
At any time after the occurrence and during the
continuance of an Event of Default, Bank may notify any Person owing funds to
Borrower of Bank's security interest in such funds and verify the amount of such
Account. Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank's trustee, and, if requested or required by Bank,
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses.
If Borrower fails to pay any amounts when due (after
taking into account any applicable grace period) or furnish any required proof
of payment due to third persons or entities, as required under the terms of this
Agreement, then Bank may do any or all of the following: (a) make payment of the
same or any part thereof; (b) set up such reserves under the Committed Revolving
Line as Bank deems necessary to protect Bank from the exposure created by such
failure; or (c) obtain and maintain insurance policies of the type discussed in
Section 6.6 of this Agreement, and take any action with respect to such policies
as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute
Bank Expenses, shall be immediately due and payable, and shall bear interest at
the then applicable rate hereinabove provided, and shall be secured by the
Collateral. Any payments made by Bank shall not constitute an agreement by Bank
to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.
9.5 Bank's Liability for Collateral.
So long as Bank complies with its obligations under
Section 9207 of the Code, and only so long as any Obligations remain outstanding
and unpaid under the Loan Documents, Bank shall not in any way or manner be
liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss
or damage thereto occurring or arising in any manner or fashion from any cause;
(c) any diminution in the value thereof; or (d) any act or default of any
carrier, warehouseman, bailee, forwarding agency, or other person whomsoever.
All risk of loss, damage or destruction of the Collateral shall be borne by
Borrower.
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9.6 Remedies Cumulative.
Bank's rights and remedies under this Agreement, the
Loan Documents, and all other agreements shall be cumulative. Bank shall have
all other rights and remedies not expressly set forth herein as provided under
the Code, by law, or in equity. No exercise by Bank of one right or remedy shall
be deemed an election, and no waiver by Bank of any Event of Default on
Borrower's part shall be deemed a continuing waiver. No delay by Bank shall
constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be
effective unless made in a written document signed on behalf of Bank and then
shall be effective only in the specific instance and for the specific purpose
for which it was given.
9.7 Demand; Protest.
Borrower waives demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:
If to Borrower: VidaMed, Inc.
46107 Landing Parkway
Fremont, CA 94538
Attn: Rick Brounstein
FAX: (510) _________
If to Bank: Silicon Valley Bank
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Attn: Gary Reagan
FAX: (415) 812-0640
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE
The Loan Documents shall be governed by, and construed in
accordance with, the internal laws of the State of California, without regard to
principles of conflicts of law. Each of Borrower and Bank hereby submits to the
exclusive jurisdiction of the state and federal courts located in the County of
Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND
24
<PAGE>
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns.
(a) This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participations in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder, subject to the provisions of this
Section 12.1 and Section 12.8.
(b) Bank may sell, negotiate or grant
participations to other financial institutions in all or part of the obligations
of the Borrower outstanding under the Loan Documents, without notice to or the
approval of Borrower; provided that any such sale, negotiation or participation
shall be in compliance with the applicable federal and state securities laws and
the other requirements of this Section 12.1 and Section 12.8. Any sale,
negotiation or grant by the Bank may not materially alter, to the detriment of
the Borrower, the obligations of the Borrower under this Agreement.
Notwithstanding the sale, negotiation or grant of participations, Bank shall
remain solely responsible for the performance of its obligations under this
Agreement, and Borrower shall continue to deal solely and directly with Bank in
connection with this Agreement and the other Loan Documents.
(c) The grant of a participation interest shall
be on such terms as Bank determines are appropriate, provided only that (1) the
holder of such a participation interest shall not have any of the rights of Bank
under this Agreement except, if the participation agreement so provides, rights
to demand the payment of costs of the type described in Section 2.6, provided
that the aggregate amount that the Borrower shall be required to pay under
Section 2.6 with respect to any ratable share of the Committed Revolving Line or
any Advance (including amounts paid to participants) shall not exceed the amount
that Borrower would have had to pay if no participation agreements had been
entered into, and (2) the consent of the holder of such a participation interest
shall not be required for amendments or waivers of provisions of the Loan
Agreement other than those which (i) increase the amount of the Committed
Revolving Line, (ii) extend the term of this Agreement, (iii) decrease the rate
of interest or the amount of any fee or any other amount payable to Bank under
this Agreement, (iv) reduce the principal amount payable under this Agreement,
or (v) extend the date fixed for the payment of principal or interest or any
other amount payable under this Agreement.
(d) Bank may assign, from time to time, all or
any portion of the Committed Revolving Line to an Affiliate of Bank or to The
Federal Reserve Bank or, subject to the prior written approval of Borrower
(which approval will not be unreasonably withheld), to any other financial
institution; provided, that (i) the principal amount of the Committed Revolving
Line being assigned pursuant to each such assignment shall in no event be less
than Five Hundred Thousand Dollars ($500,000) and shall be in an integral
multiple of One Hundred Thousand Dollars ($100,000) in excess thereof and (ii)
the parties to each such assignment shall execute and deliver to Borrower an
assignment agreement in a form reasonably acceptable to each. Upon such
execution and delivery, from and after the effective date specified in such
assignment agreement (x) the assignee thereunder shall be a party hereto and, to
the extent that rights and obligations hereunder have been assigned to it
pursuant to such assignment agreement, have the rights and obligations of Bank
hereunder and (y) Bank shall, to the extent that rights and obligations
hereunder have been assigned by it pursuant to such assignment agreement,
relinquish its rights and be released from its obligations under this Agreement
(other than pursuant to this Section 12.1(d)), and, in the case of an assignment
agreement covering all or the remaining portion of Bank's rights and obligations
under this Agreement, Bank shall cease to be a party hereto. In the event of an
assignment hereunder, the parties agree to amend this Agreement to the extent
necessary to reflect the mechanical changes which are necessary to document such
assignment. Each party shall bear its own expenses (including without limitation
attorneys' fees and costs) with respect to such an amendment.
25
<PAGE>
12.2 Indemnification.
Borrower shall indemnify, defend, protect and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under the Loan Documents, or
otherwise (including without limitation reasonable attorneys' fees and
expenses), except for losses caused by Bank's gross negligence or willful
misconduct.
12.3 Time of Essence.
Time is of the essence for the performance of all
obligations set forth in this Agreement.
12.4 Severability of Provisions.
Each provision of this Agreement shall be severable
from every other provision of this Agreement for the purpose of determining the
legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration.
This Agreement cannot be amended or terminated except
by a writing signed by Borrower and Bank. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 Counterparts.
This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival.
All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations (excluding Obligations under Section 2.6 and 12.2 to the extent they
remain inchoate at the time the outstanding payment Obligations are paid in
full) remain outstanding. The obligations of Borrower to indemnify Bank with
respect to the expenses, damages, losses, costs and liabilities described in
Section 12.2 shall survive until all applicable statute of limitations periods
with respect to actions that may be brought against Bank have run, provided that
so long as the obligations referred to in the first sentence of this Section
12.7 have been satisfied, and Bank has no commitment to make any Credit
Extensions or to make any other loans to Borrower, Bank shall release all
security interests granted hereunder and redeliver all Collateral held by it in
accordance with applicable law.
12.8 Confidentiality.
In handling any confidential information, Bank shall
exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement,
except that disclosure of such information may be made (i) to the Subsidiaries
or Affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Credit Extensions, provided that they have entered into a
comparable confidentiality agreement in favor of Borrower and have delivered a
copy to Borrower, (iii) as required by law, regulations, rule or order,
subpoena, judicial order or similar order, (iv) as may be required in connection
with the examination, audit or similar
26
<PAGE>
investigation of Bank and (v) as Bank may deem appropriate in connection with
the exercise of any remedies hereunder. Confidential information hereunder shall
not include information that either: (a) is in the public domain or in the
knowledge or possession of Bank when disclosed to Bank, or becomes part of the
public domain after disclosure to Bank through no fault of Bank; or (b) is
disclosed to Bank by a third party, provided Bank does not have actual knowledge
that such third party is prohibited from disclosing such information.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
VIDAMED, INC.
By: /s/ RICHARD D. BROUNSTEIN
-------------------------------------------
Title: Vice President, Chief Financial Officer
----------------------------------------
By:
-------------------------------------------
Title:
----------------------------------------
SILICON VALLEY BANK
By: /s/ GARY REAGAN
-------------------------------------------
Title: Vice President
----------------------------------------
27
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, leases, license agreements,
franchise agreements, blueprints, drawings, purchase orders, customer lists,
route lists, claims, literature, reports, catalogs, income tax refunds, payments
of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, securities
entitlements, securities accounts, letters of credit, certificates of deposit,
instruments and chattel paper now owned or hereafter acquired and Borrower's
Books relating to the foregoing; and
(f) Any and all claims, rights and interests in any of the above and
all substitutions for, additions and accessions to and proceeds thereof.
Notwithstanding the foregoing, the Collateral shall not be deemed to
include any copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; any patents,
trademarks, servicemarks and applications therefor; any trade secret rights,
including any rights to unpatented inventions, know-how, operating manuals,
license rights and agreements and confidential information, now owned or
hereafter acquired; or any claims for damages by way of any past, present and
future infringement of any of the foregoing; provided Collateral shall include
the proceeds of any disposition of any of the foregoing.
Subject to the next sentence, the Collateral shall not include
Equipment that Borrower leases from Dominion Ventures Inc. and Linc Capital
Management Services, Ltd. or Equipment that is financed by Dominion Ventures
Inc. and Linc Capital Management Services, Ltd. to the extent that contracts
evidencing such lease or financing prohibit the granting of a security interest
therein to Bank. The term "Collateral" shall not include any general intangibles
or contract rights of Borrower (whether now owned or held as licensee or lessee,
or otherwise) to the extent that (i) such general intangibles or contract rights
are not assignable or capable of being encumbered as a matter of law or under
the terms of the license, lease or other agreement applicable thereto (but
solely to the extent that such restriction shall be enforceable under applicable
law) without the consent of the licensor or lessor thereof or other applicable
party thereto and (ii) such consent has not been obtained: provided, however,
that "Collateral" shall include, (A) any general intangible or contract right
which is an Account or a proceed of, or otherwise related to the enforcement or
collection of, any Account or goods which are the subject of any Account, and
(B) any and all proceeds of any general intangibles or contract rights which are
otherwise excluded to the extent that the assignment or encumbrance of such
proceeds is not so
A-1
<PAGE>
restricted, and (C) upon obtaining the consent of any such licensor, lessor, or
other applicable party with respect to any such otherwise excluded general
intangibles, contract rights and Equipment or upon Borrower's payoff of all
amounts owed to Dominion Ventures Inc. and Linc Capital Management Services,
Ltd. on Equipment that Borrower leases from Dominion Ventures Inc. and Linc
Capital Management Services, Ltd. or Equipment that is financed by Dominion
Ventures Inc. and Linc Capital Management Services, Ltd., such general
intangibles, contract rights and Equipment as well as any and all proceeds
thereof that might theretofore have been excluded from the term "Collateral".
A-2
<PAGE>
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
-------------------------------
FAX#: (408) 496-2426 TIME:
-------------------------------
================================================================================
FROM:
---------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
-------------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
-----------------------------------------------------------
AUTHORIZED SIGNATURE:
-----------------------------------------------------------
PHONE NUMBER:
-------------------------------------------------------------------
FROM ACCOUNT # TO ACCOUNT #
--------------------------- ------------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $
--------------------------------
PRINCIPAL PAYMENT (ONLY) $
--------------------------------
INTEREST PAYMENT (ONLY) $
--------------------------------
PRINCIPAL AND INTEREST (PAYMENT) $
--------------------------------
OTHER INSTRUCTIONS:
-------------------------------------------------------------
- --------------------------------------------------------------------------------
All representations and warranties of VidaMed, Inc. ("Borrower") stated in the
Loan and Security Agreement dated as of January 13, 1998, between Borrower and
Silicon Valley Bank are true, correct and complete in all material respects as
of the date of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
================================================================================
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- ------------------------------------- -------------------------------------
Authorized Requester Phone #
- ------------------------------------- -------------------------------------
Received By (Bank) Phone #
-----------------------------------
Authorized Signature (Bank)
================================================================================
B-1
<PAGE>
<TABLE>
EXHIBIT C
BORROWING BASE CERTIFICATE
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Borrower: VidaMed, Inc. Lender: Silicon Valley Bank
Commitment Amount: $3,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of $_____________
2. Additions (please explain on reverse) $_____________
3. TOTAL ACCOUNTS RECEIVABLE $_____________
_____________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due (exclusive of credit balances) $_____________
5. Balance of 50% over 90 day accounts $_____________
6. Concentration Limits $_____________
7. Foreign Accounts $_____________
8. Governmental Accounts $_____________
9. Contra Accounts $_____________
10. Promotion or Demo Accounts $_____________
11. Intercompany/Employee Accounts $_____________
12. Other (please explain on reverse) $_____________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_____________
14. Eligible Accounts (#3 minus #13) $_____________
15. LOAN VALUE OF ACCOUNTS (75% of #14)* $_____________
BALANCES
16. Maximum Loan Amount $_____________
17. Total Funds Available [Lesser of #16 or #15] $_____________
18. Present balance owing on Line of Credit $_____________
19. Letters of Credit $_____________
20. RESERVE POSITION (#17 minus #18 minus #19) $_____________
<FN>
* Bank reserves the right to change the advance rate of the Borrowing Base based
upon the results of any audit by Bank of Borrower's Accounts.
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement dated as of January 13, 1998 between the undersigned and
Silicon Valley Bank.
</FN>
</TABLE>
COMMENTS:
=======================================
BANK USE ONLY
Rec'd By:
------------------------------
Auth. Signer
Date:
----------------------------------
VidaMed, Inc.
Verified:
------------------------------
Auth. Signer
By: Date:
------------------------- ----------------------------------
Authorized Signer ---------------------------------------
=======================================
C-1
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: VidaMed, Inc.
<TABLE>
The undersigned authorized officer of VidaMed, Inc. hereby certifies
that in accordance with the terms and conditions of the Loan and Security
Agreement dated as of January 13, 1998 between Borrower and Bank (the
"Agreement"), (i) Borrower is in complete compliance for the period ending
_______________ with all required covenants except as noted below and (ii) all
representations and warranties of Borrower stated in the Agreement are true and
correct in all material respects as of the date hereof. Attached herewith are
the required documents supporting the above certification. The Officer further
certifies that these are prepared in accordance with Generally Accepted
Accounting Principles (GAAP) and are consistently applied from one period to the
next except as explained in an accompanying letter or footnotes. The Officer
expressly acknowledges that no borrowings may be requested by Borrower at any
time or date of determination that Borrower is not in compliance with any of the
terms of the Agreement, and that such compliance is determined not just at the
date this certificate is delivered.
<CAPTION>
Please indicate compliance status by circling Yes/No under "Complies" column.
<S> <C> <C>
Reporting Covenant Required Complies
- ------------------ -------- --------
Monthly financial statements Monthly within 30 days Yes No
SEC filings 10 days after filing Yes No
A/R & A/P Agings* Monthly within 20 days Yes No
A/R Audit Initial and Semi-Annual Yes No
Financial Covenant Required Actual Complies
- ------------------ -------- ------ --------
Maintain on a Quarterly Basis:
Minimum Quick Ratio 1:0:1.0 _____:1.0 Yes No
Total Liabilities/Tangible Net Worth 2.5:1.0 _____:1.0 Yes No
Liquidity 2.0:1.0 _____:1.0 Yes No
Debt Service Coverage** 1.5:1.0 _____:1.0 Yes No
Profitability: Quarterly*** $________ Yes No
<FN>
* After initial Collateral audit by Bank.
** After 2 consecutive quarters of 1.5 to 1.0, the Liquidity ratio is no longer in effect.
*** 03/31/98 net loss less than$3,000,000; 06/30/98 net loss less than$3,300,000; 09/30/98
net loss less than $2,600,000; 12/31/98 net loss less thab $1,900,000.
</FN>
</TABLE>
Comments Regarding Exceptions: See Attached.
Sincerely,
VidaMed, Inc.
SIGNATURE
- -----------------------------------------------------
TITLE
- -----------------------------------------------------
DATE
D-1
<PAGE>
EXHIBIT E
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of January 13, 1998, by and
between VidaMed, Inc. ("Borrower") and SILICON VALLEY BANK ("Bank").
In connection with the Loan and Security Agreement being concurrently
executed between Borrower and Bank, Borrower agrees as follows:
1. Except as permitted in the Loan and Security Agreement, Borrower
shall not sell, transfer, assign, mortgage, pledge, lease, grant a security
interest in, or encumber any of Borrower's intellectual property, including,
without limitation, the following:
a. Any and all copyright rights, copyright applications,
copyright registrations and like protection in each work or authorship and
derivative work thereof, whether published or unpublished and whether or not the
same also constitutes a trade secret, now or hereafter existing, created,
acquired or held (collectively, the "Copyrights");
b. Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
c. Any and all design rights which may be available to
Borrower now or hereafter existing, created, acquired or held;
d. All patents, patent applications and like protections,
including, without limitation, improvements, divisions, continuations, renewals,
reissues, extensions and continuations-in-part of the same, including, without
limitation, the patents and patent applications (collectively, the "Patents");
e. Any trademark and servicemark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower connected with
and symbolized by such trademarks (collectively, the "Trademarks");
f. Any and all claims for damages by way of past, present and
future infringements of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
g. All licenses or other rights to use any of the Copyrights,
Patents or Trademarks and all license fees and royalties arising from such use
to the extent permitted by such license or rights;
h. All amendments, extensions, renewals and extensions of any
of the Copyrights, Patents or Trademarks; and
i. All proceeds and products of the foregoing, including,
without limitation, all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
The foregoing not withstanding, Borrower shall be able to grant
security interests or licenses of its intellectual property in connection with
corporate partnering arrangements entered into in the ordinary course of
business.
2. It shall be an Event of Default under the Loan Documents between
Borrower and Bank if there is a breach of any term of this Negative Pledge
Agreement.
3. Capitalized items used herein without definition shall have the same
meanings as set forth in the Loan and Security Agreement of even date herewith.
VIDAMED, INC. SILICON VALLEY BANK
By: By:
----------------------------- -----------------------------
D-2
<PAGE>
Title: Title:
--------------------------- --------------------------
D-3
<PAGE>
SCHEDULE OF EXCEPTIONS TO LOAN AND SECURITY AGREEMENT
-----------------------------------------------------
Existing Litigation
- -------------------
VidaMed, Inc. v. ProSurg, Inc.
Case No. CC-97 20459 RMW EAI
On May 20, 1997, VidaMed filed a complaint against ProSurg, Inc., in
the U.S. District Court for the Northern District of California, San Jose
Division. The complaint charges ProSurg, Inc. with infringing three VidaMed
patents, U.S. Patent Nos. 5,531,677; 5,531,676; and 5,536,240. In its Second
Amended Answer, ProSurg, Inc. denies any infringement and counterclaims that the
VidaMed patents are invalid. No other claims are made against VidaMed. With
regard to the status of the litigation, Initial Disclosures have been exchanged
by the parties and discovery is slowly getting underway. The factual discovery
cut-off is June 1, 1998.
Permitted Investments -- Notes Receivable from Stockholders.
- ------------------------------------------------------------
VidaMed has lent an aggregate of approximately $206,000 to several of
its stockholders. Interest on the notes receivable from such stockholders
accrues at a rate of 6.73% per annum. Principal and interest payments are due at
various times after December 2000.
VidaMed intends to fund its subsidiaries up to an aggregate amount of
$1,500,000 through the Maturity Date, and any such funding is to be considered a
"Permitted Investment" for purposes of the Loan and Security Agreement.
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: VidaMed, Inc. Bank: Silicon Valley Bank
================================================================================
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal
amount up to $3,000,000 and a Variable Rate Equipment Line of up to $1,500,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is working capital and
equipment finance.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
Revolving Line Equipment Line
-------------- --------------
Amount paid to Borrower directly: $ __________ $ __________
Undisbursed Funds $ __________ $ __________
Principal 3,000,000 $ 1,500,000
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Charges Paid in Cash:
$30,000 Loan Fee (less $5,000 previously paid to Bank)
$______ Accounts Receivables Audit
$100 UCC Search Fees
$100 UCC Filing Fees
$______ Intellectual Property Filing Fees
$__________ Outside Counsel Fees and Expenses (Estimate)
Total Charges Paid in Cash $ __________
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from
Borrower's account numbered __________ the amount of any loan payment. If the
funds in the account are insufficient to cover any payment, Bank shall not be
obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION
AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENTS PROVIDED TO BANK.
THIS AUTHORIZATION IS DATED AS OF JANUARY 13, 1998.
BORROWER:
VidaMed, Inc.
_________________________
Authorized Officer
_________________________
Authorized Officer
================================================================================
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
Grantor: VidaMed, Inc. Bank: Silicon Valley Bank
================================================================================
INSURANCE REQUIREMENTS. VidaMed, Inc. ("Grantor") understands that
insurance coverage is required in connection with the extending of a loan or the
providing of other financial accommodations to Grantor by Bank. These
requirements are set forth in the Loan Documents (as defined in the Loan
Agreement (defined below)). The following minimum insurance coverages must be
provided on the following described collateral (the "Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation
that coverage will not be canceled or
diminished without a minimum of twenty (20)
days' prior written notice to Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance
company Grantor may choose that is reasonably acceptable to Bank. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of January 13, 1998, or earlier. Grantor acknowledges and agrees
that if Grantor fails to provide any required insurance or fails to continue
such insurance in force, Bank may do so at Grantor's expense as provided in the
Loan and Security Agreement dated as of January 16, 1998 between Grantor and
Bank (the "Loan Agreement"). The cost of such insurance, at the option of Bank,
shall be payable on demand or shall be added to the indebtedness as provided in
the Loan Agreement. GRANTOR ACKNOWLEDGES THAT IF BANK SO PURCHASES ANY SUCH
INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE
TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN
THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE
ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE
REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT
TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED EFFECTIVE
JANUARY 13, 1998.
GRANTOR:
VidaMed, Inc.
x /s/ RICHARD D. BROUNSTEIN
--------------------------
Authorized Officer
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FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE:
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PHONE:
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AGENT'S NAME:
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INSURANCE COMPANY:
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POLICY NUMBER:
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EFFECTIVE DATES:
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COMMENTS:
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<PAGE>
CORPORATE RESOLUTIONS TO BORROW
- --------------------------------------------------------------------------------
Borrower: VidaMed, Inc.
- --------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of VidaMed, Inc.
(the "Corporation"), HEREBY CERTIFY that the Corporation is organized and
existing under and by virtue of the laws of the State of its incorporation.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true
and complete copies of the Certificate of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that by Unanimous Written Consent of the Directors,
the following resolutions were adopted (whether directly or indirectly) by the
Board of Directors of the Corporation:
BE IT RESOLVED, that any one (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
James A. Heisch President & CEO /s/ JAMES HEISCH
- -------------------------- ------------------------ --------------------------
Richard D. Brounstein VP & CFO /s/ RICHARD D. BROUNSTEIN
- -------------------------- ------------------------ --------------------------
- -------------------------- ------------------------ --------------------------
- -------------------------- ------------------------ --------------------------
- -------------------------- ------------------------ --------------------------
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
Borrow Money. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers, employees,
or agents and Bank, such sum or sums of money as in their judgment should be
borrowed, without limitation, including such sums as are specified in that
certain Loan and Security Agreement dated effective as of January 13, 1998 (the
"Loan Agreement").
Execute Notes. To execute and deliver to Bank the promissory note or
notes of the Corporation, on Lender's forms, at such rates of interest and on
such terms as may be agreed upon, evidencing the sums of money so borrowed or
any indebtedness of the Corporation to Bank, and also to execute and deliver to
Lender one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the notes, or any portion of
the notes.
Grant Security. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
Negotiate Items. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable,
provided, however, that any one of the above listed officers may sign on behalf
of the corporation for any actions listed in this section, "Negotiate Items,"
that arise in the ordinary course of business.
2
<PAGE>
Letters of Credit; Foreign Exchange. To execute letters of credit
applications, foreign exchange agreements and other related documents pertaining
to Bank's issuance of letters of credit and foreign exchange contracts.
Further Acts. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances thereunder, and
in all cases, to do and perform such other acts and things, to pay any and all
fees and costs, and to execute and deliver such other documents and agreements
as they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full force
and effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the case
may be, and occupy the positions set forth opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Corporation;
and that the Resolutions are in full force and effect and have not been modified
or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on January 13, 1998 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X /s/ CHRISTOPHER D. MITCHELL
---------------------------
Christopher D. Mitchell
Assistant Secretary
3
<PAGE>
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of January 13, 1998, by and
between VidaMed, Inc. ("Borrower") and SILICON VALLEY BANK ("Bank").
In connection with the Loan and Security Agreement being concurrently
executed between Borrower and Bank, Borrower agrees as follows:
1. Except as permitted in the Loan and Security Agreement, Borrower
shall not sell, transfer, assign, mortgage, pledge, lease, grant a security
interest in, or encumber any of Borrower's intellectual property, including,
without limitation, the following:
a. Any and all copyright rights, copyright applications,
copyright registrations and like protection in each work or authorship and
derivative work thereof, whether published or unpublished and whether or not the
same also constitutes a trade secret, now or hereafter existing, created,
acquired or held (collectively, the "Copyrights");
b. Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
c. Any and all design rights which may be available to
Borrower now or hereafter existing, created, acquired or held;
d. All patents, patent applications and like protections,
including, without limitation, improvements, divisions, continuations, renewals,
reissues, extensions and continuations-in-part of the same, including, without
limitation, the patents and patent applications (collectively, the "Patents");
e. Any trademark and servicemark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower connected with
and symbolized by such trademarks (collectively, the "Trademarks");
f. Any and all claims for damages by way of past, present and
future infringements of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
g. All licenses or other rights to use any of the Copyrights,
Patents or Trademarks and all license fees and royalties arising from such use
to the extent permitted by such license or rights;
h. All amendments, extensions, renewals and extensions of any
of the Copyrights, Patents or Trademarks; and
i. All proceeds and products of the foregoing, including,
without limitation, all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
The foregoing not withstanding, Borrower shall be able to grant
security interests or licenses of its intellectual property in connection with
corporate partnering arrangements entered into in the ordinary course of
business.
<PAGE>
2. It shall be an Event of Default under the Loan Documents between
Borrower and Bank if there is a breach of any term of this Negative Pledge
Agreement.
3. Capitalized items used herein without definition shall have the same
meanings as set forth in the Loan and Security Agreement of even date herewith.
VIDAMED, INC. SILICON VALLEY BANK
By: /s/ RICHARD D. BROUNSTEIN By: /s/ GARY REAGAN
---------------------------- -----------------------------------
Title: Vice President, Chief Financial Title: Vice President
Officer ---------------------------------
---------------------------------
<PAGE>
BORROWER: VIDAMED, INC.
SECURED PARTY: SILICON VALLEY BANK
EXHIBIT A
---------
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, leases, license agreements,
franchise agreements, blueprints, drawings, purchase orders, customer lists,
route lists, claims, literature, reports, catalogs, income tax refunds, payments
of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, securities
entitlements, securities accounts, letters of credit, certificates of deposit,
instruments and chattel paper now owned or hereafter acquired and Borrower's
Books relating to the foregoing; and
(f) Any and all claims, rights and interests in any of the above and
all substitutions for, additions and accessions to and proceeds thereof.
Notwithstanding the foregoing, the Collateral shall not be deemed to
include any copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; any patents,
trademarks, servicemarks and applications therefor; any trade secret rights,
including any rights to unpatented inventions, know-how, operating manuals,
license rights and agreements and confidential information, now owned or
hereafter acquired; or any claims for damages by way of any past, present and
future infringement of any of the foregoing; provided Collateral shall include
the proceeds of any disposition of any of the foregoing.
Subject to the next sentence, the Collateral shall not include
Equipment that Borrower leases from Dominion Ventures Inc. and Linc Capital
Management Services, Ltd. or Equipment that is financed by Dominion Ventures
Inc. and Linc Capital Management Services, Ltd. to the extent that contracts
evidencing such lease or financing prohibit the granting of a security interest
therein to Bank. The term "Collateral" shall not include any general intangibles
or contract rights of Borrower (whether now owned or held as licensee or lessee,
or otherwise) to the extent that (i) such general intangibles or contract rights
are not assignable or capable of being encumbered as a matter of law or under
the terms of the license, lease or other agreement applicable thereto (but
solely to the extent that such restriction shall be enforceable under applicable
law) without the consent of the licensor or lessor thereof or other applicable
party thereto and (ii) such consent has not been obtained: provided, however,
that "Collateral" shall include, (A) any general intangible or contract right
which is an Account or a proceed of, or otherwise related to the enforcement or
collection of, any Account or goods
<PAGE>
which are the subject of any Account, and (B) any and all proceeds of any
general intangibles or contract rights which are otherwise excluded to the
extent that the assignment or encumbrance of such proceeds is not so restricted,
and (C) upon obtaining the consent of any such licensor, lessor, or other
applicable party with respect to any such otherwise excluded general
intangibles, contract rights and Equipment or upon Borrower's payoff of all
amounts owed to Dominion Ventures Inc. and Linc Capital Management Services,
Ltd. on Equipment that Borrower leases from Dominion Ventures Inc. and Linc
Capital Management Services, Ltd. or Equipment that is financed by Dominion
Ventures Inc. and Linc Capital Management Services, Ltd., such general
intangibles, contract rights and Equipment as well as any and all proceeds
thereof that might theretofore have been excluded from the term "Collateral".
Exhibit 13.1
Annual Report to Stockholders
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
VidaMed, Inc. ("VidaMed" or the "Company") should be read in conjunction with
the Consolidated Financial Statements and the related Notes thereto included
herein. This report contains forward-looking statements within the meaning of
Section 27a of the Securities Act of 1933 and Section 21 e of the Securities and
Exchange Act of 1934. The Company's future results of operations could vary
significantly from those anticipated by such statements as a result of factors
described in the Management's Discussion and Analysis of Financial Condition and
Results of Operations and under "Factors Affecting Results of Operations."
OVERVIEW
Since its inception in July 1992, VidaMed has been engaged in the design,
development, clinical testing and manufacture of the VidaMed TUNA System(R) for
the treatment of symptoms associated with BPH. The Company commenced
international sales of the VidaMed TUNA System in late 1993 and United States
sales in October 1996. As of December 31, 1997 there have been over 225 RF
generators sold in the United States and over 4,000 TUNA procedures performed by
U.S. urologists. Revenues for the years ended December 31, 1997 and 1996 include
license fees for distribution rights in Japan.
VidaMed anticipates that a substantial amount of its revenues from product sales
in the future will be from sales in the United States. The Company received FDA
clearance to market this system for the treatment of symptoms associated with
BPH in the United States on October 8, 1996. The Company applied to the American
Medical Association for a CPT code covering the TUNA Procedure. CPT code number
53852 relating to the TUNA Procedure has been published in the Federal Register
and is part of the Medicare Physician Fee Schedule for calendar 1998. VidaMed
sells its products in the U.S. to individual and group urology practices,
surgery centers and hospitals. The Company markets the VidaMed TUNA System
through a network of five VidaMed sales managers, supported by both sales
representatives and independent dealers in the U.S. Primarily a network of
distributors, supported by VidaMed staff, cover other countries in Europe, Asia
and South America.
The Company does not have a backlog of orders for its products in countries
where the VidaMed TUNA System is sold and anticipates that it will continue to
manufacture and ship orders after their receipt. Accordingly, the Company does
not anticipate that it will develop a significant backlog in the future.
RESULTS OF OPERATIONS
Revenues were $9.8 million in 1997, an increase of $6.0 million or 157% from
$3.8 million in 1996. Revenues in 1996 increased 46% from $2.6 million in 1995.
The increase in net revenues and product sales between 1997 and 1996 was the
result of United States sales of the VidaMed TUNA System (VTS) Generator and
Hand Piece and a one-time license fee from VidaMed's Japanese distributor. This
license fee was paid after the Japanese Ministry of Health and Welfare approved
the product for sale in Japan. Of the $9.8 million in 1997 revenues, $8.0
million was attributable to U.S. product sales. Of the $3.8 million in 1996
revenues, $2.7 million was attributed to U.S. product sales, primarily in the
fourth quarter following FDA clearance.
Cost of product sold increased to $7.3 million in 1997 from $3.7 million in 1996
and $3.5 million in 1995. Cost of product sold for 1997 includes a one-time
charge of $2.1 million related to the closure of VidaMed's manufacturing
facility in the United Kingdom. Excluding the $2.1 million charge, the cost of
product sales increased 87% in 1997 and 4% in 1996 when compared to the prior
year. The increase is due primarily to an increase in product sales. Gross
margin was positive in 1997 and 1996 as a result of higher product sales. In
1995, cost of sales exceeded net sales primarily as a result of costs associated
with excess manufacturing capacity at the Company's U.K. facility.
<PAGE>
Research and development expenses (R&D), which include expenditures for
regulatory compliance and clinical trials, increased 5% to $6.0 million in 1997
from $5.7 million in 1996, and decreased 12% in 1996 from $6.5 million in 1995.
The 1997 increase is primarily due to the completion in the second quarter ended
June 30, 1997 of the development efforts on the VTS RF generator and the VTS
Hand Piece as well as continuing product development efforts. The decrease in
1996 when compared to 1995 was primarily due to lower clinical trial expenses,
which was partially offset by an increase in product development material costs.
Clinical trial costs consist largely of payments to clinical investigators,
product for clinical trials, and costs associated with initiating and monitoring
clinical trials. The United States patient enrollment to support the clinical
trials, was completed in 1995 with costs associated with follow-up visits for
these clinical trials continuing through 1997 and beyond.
Selling, general and administrative (SG&A) expenses increased 65% to $13.0
million in 1997 from $7.9 million in 1996 and 11% from $7.1 million in 1995. The
increase in 1997 as well as 1996 is primarily due to increased sales and
marketing expense incurred in the continuing product introduction of the VidaMed
TUNA System in the U.S. Significant sales and marketing expenses included
commissions, advertising expenses, trade shows and physician workshops. Interest
and other income also increased in 1997 when compared to 1996 and 1995, as a
result of increased investment balances resulting from proceeds from private
placements in 1997 and 1996 and VidaMed's initial public offering in 1995.
Interest and other expense decreased in 1997 due to lower interest expense as a
result of lower notes payable and capital lease balances. In 1996 the decrease
was primarily due to the repayment of $2.7 million of notes payable in early
1996 and continuing payments of notes payable and capital lease obligations.
VidaMed's results of operations have fluctuated in the past and may fluctuate in
the future from year to year as well as from quarter to quarter. Revenues may
fluctuate as a result of several factors, including actions relating to
regulatory and reimbursement matters, results of clinical trials, the extent to
which the TUNA System gains market acceptance, varying pricing promotions,
volume discounts to customers, introduction of new products and the competitive
introduction of alternative therapies for BPH. Operating expenses may fluctuate
as a result of several factors, including the timing of expansion of sales and
marketing activities, costs of clinical activities, R&D and SG&A expenses
associated with the potential growth of VidaMed's organization. As a result of
these factors there can be no assurance as to when or whether the Company will
achieve profitability. If profitability is achieved, there can be no assurance
such profitability will continue in the future.
LIQUIDITY AND CAPITAL RESOURCES
VidaMed has financed its operations primarily through the public and private
sale of equity securities and, to a lesser extent, through borrowings, equipment
lease financing, product sales, distribution rights fees, government grants and
other product sales. During each of the years ended December 31, 1997, 1996 and
1995, VidaMed consumed cash in operations of $15.7 million, $13.3 million and
$13.0 million, respectively. The cash used in operations was due primarily to
the expenses associated with the marketing and sale of the VidaMed TUNA System,
R&D activities including clinical trials and increased SG&A expenses to support
increased operations.
At December 31, 1997 the Company's cash and cash equivalents and short-term
investments were $8.0 million, compared to $5.9 million at December 31, 1996.
The increase is due primarily to private placements in 1997 totaling
approximately $22.0 million offset by operating expenses. In February 1997, the
Company entered into an equity financing agreement with a European investment
bank pursuant to which the Company, at its option, sold such investment bank
$10.0 million of VidaMed common stock and warrants to purchase common stock
during 1997. In September 1997, the Company issued approximately 2.6 million
shares of VidaMed common stock resulting in approximately $11.7 million in net
proceeds to the Company.
In April 1995, the Company obtained a $3.0 million credit facility with Venture
Lending and Leasing Inc. To date, the Company has borrowed $3.0 million under
this facility. Borrowings bear interest at the prime rate plus 3% per annum plus
additional lump-sum interest of 15% of each borrowing, payable at maturity.
Repayment of principal and interest is based on a three-year amortization
schedule.
<PAGE>
The Company moved in July 1997 to a 35,000 square foot facility in Fremont,
California. Subsequent to the year ended December 31, 1997, in January 1998, the
Company entered into a financing agreement with Silicon Valley Bank, including a
$1.5 million 42-month term loan to cover the cost of establishing the
manufacturing facility in California and a $3.0 million working capital bank
line.
Future capital requirements will depend on many factors including the level of
operating expenses, capital equipment expenditures and accounts receivable and
inventory levels required supporting VidaMed's operations. Although VidaMed
believes that the funds available through the Company's existing bank credit
facilities, its existing cash reserves and cash generated from the future sale
of products will be sufficient to meet the Company's operating and capital
requirements through the next twelve months, there can be no assurance that the
Company will not require additional financing within this time frame. There can
be no assurance that additional financing, if required, will be available on
satisfactory terms or at all. In any event, VidaMed anticipates in the future
that it may seek to raise additional funds through bank facilities, debt or
equity offerings or other sources of capital. VidaMed's future liquidity and
capital requirements will depend on numerous other factors, including progress
of clinical trials, actions related to regulatory and reimbursement affairs and
the extent to which the VidaMed TUNA System gains market acceptance.
IMPACT OF YEAR 2000
The Company is currently in the process of assessing and modifying internal
software systems in order to function properly in the Year 2000 and thereafter.
The Company believes that with limited modifications to existing software, the
Year 2000 issue will not pose significant operational problems for its computer
systems. There can be no assurance that these modifications will completely
eliminate problems resulting from the Year 2000 issue. An evaluation of
significant suppliers and large customers systems to determine the extent to
which the Company's interface with these systems is vulnerable to the Year 2000
issue is currently in process. The Year 2000 issue is being considered for all
future software purchases.
RESTRUCTURING ACCRUAL
In September 1997, VidaMed announced a restructuring program designed to reduce
costs and improve operating efficiencies by closing the company's U.K.
manufacturing facility. The company expects to incur approximately $1.7 million
in aggregate cash outlays which includes $405,000 related to a grant obligation
and $ 1,305,000 related to the shut down of the facility over a six month
period. See also Footnote 10 to the financial statements.
FACTORS AFFECTING RESULTS OF OPERATIONS
Limited Operating History; History of Losses and Expectation of Future Losses;
Fluctuations in Operating Results. The Company has a limited history of
operations. Since its inception in July 1992, the Company has been primarily
engaged in research and development of the VidaMed TUNA System. The Company has
experienced significant operating losses since inception and, as of December 31,
1997, had an accumulated deficit of $68.3 million.
The development and commercialization by the Company of the TUNA System and
other new products, if any, will require substantial product development,
clinical, regulatory, marketing and other expenditures. The Company expects its
operating losses to continue for at least the next 9 to 18 months as it
continues to expend substantial resources in expanding marketing and sales
activities, funding clinical trials in support of regulatory and reimbursement
approvals and research and development. There can be no assurance that the TUNA
System will be successfully commercialized or that the Company will achieve
significant revenues from either international or domestic sales. In addition,
there can be no assurance that the Company will achieve or sustain profitability
in the future. Results of operations may fluctuate significantly from quarter to
quarter and will depend upon numerous factors, including actions relating to
regulatory and reimbursement matters, progress of clinical trials, the extent to
which the TUNA System gains market acceptance, varying pricing promotions and
volume discounts to distributors, introduction of alternative therapies for BPH
and competition.
<PAGE>
Uncertainty of Market Acceptance. VidaMed's TUNA Procedure represents a new
therapy for BPH, and there can be no assurance that the TUNA System will gain
any significant degree of market acceptance among physicians, patients and
health care payors, even if necessary international and United States
reimbursement approvals are obtained. Physicians will not recommend the TUNA
Procedure unless they conclude, based on clinical data and other factors, that
it is an attractive alternative to other methods of BPH treatment, including
more established methods such as TURP and drug therapy. In particular,
physicians may elect not to recommend the TUNA Procedure until such time, if
any, as the duration of the relief provided by the procedure has been
established. Broad use of the TUNA System will require the training of numerous
physicians, and the time required to complete such training could result in a
delay or dampening of market acceptance. Even with the clinical efficacy of the
TUNA Procedure established, physicians may elect not to recommend the procedure
unless acceptable reimbursement from health care payors is available. Health
care payor acceptance of the TUNA Procedure will require evidence of the cost
effectiveness of TUNA as compared to other BPH therapies, which will depend in
large part on the duration of the relief provided by the TUNA Procedure. A
thorough analysis of multi-year patient follow-up data will be necessary to
assess the durability of the relief provided by TUNA therapy. Patient acceptance
of the procedure will depend in part on physician recommendations as well as
other factors, including the degree of invasiveness and rate and severity of
complications associated with the procedure as compared to other therapies.
Uncertainty Relating to Third Party Reimbursement. The Company's success will be
dependent upon, among other things, its ability to obtain satisfactory
reimbursement from health care payors for the TUNA Procedure. In the United
States and in international markets, third party reimbursement is generally
available for existing therapies used for treatment of BPH. In the United
States, third party reimbursement for the TUNA Procedure will be dependent upon
decisions by the local Medicare Medical Directors to provide coverage for the
TUNA Procedure based on the new CPT codes effective January 1, 1998, as well as
by individual health maintenance organizations, private insurers and other
payors.
Reimbursement systems in international markets vary significantly by country.
Many international markets have governmentally managed health care systems that
govern reimbursement for new devices and procedures. In most markets, there are
private insurance systems as well as governmentally managed systems. The Company
has recently received approvals by the Ministry of Health and Welfare in Japan,
and by the British Provident Association Ltd. ("BUPA"), the largest private
health care insurer in the United Kingdom.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the VidaMed TUNA System will be required to obtain
reimbursement. Availability of reimbursement will depend not only on the
clinical efficacy and direct cost of the TUNA Procedure, but also on the
duration of the relief provided by the procedure. In the United States, TUNA
Procedures are currently being reimbursed by certain private payors. However,
due to the age of the typical BPH patient, Medicare reimbursement is
particularly critical for widespread market acceptance of the TUNA Procedure in
the United States. CPT code number 53852, covering the physician fee component
of the TUNA Procedure, was included in the 1998 edition of CPT codes, which
became effective January 1, 1998. If adopted by local Medicare Medical
Directors, this code should enhance the reimbursement process for physicians
performing the VidaMed TUNA Procedure in an outpatient hospital environment. The
CPT code is active in over 30 states, although to date only a small number of
the states have a formal written policy guideline regarding coverage and
reimbursement of the VidaMed TUNA Procedure. Further, national Medicare
reimbursement of TUNA Procedure costs in an office setting at an adequate level
will require completion by the Health Care Financing Administration ("HCFA") of
a review of the cost and efficiency of the TUNA Procedure. Such cost and
efficiency review may involve an assessment of clinical data with up to
five-year patient follow-up. Accordingly, there can be no assurance that
office-based reimbursement for the Company's products will be available in the
United States or in international markets under either governmental or private
reimbursement systems at adequate levels, or that physicians will support
reimbursement for the VidaMed TUNA Procedure. Furthermore, the Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors. Failure by physicians, hospitals and other users of
the Company's products to obtain sufficient reimbursement from health care
payors, including in particular outpatient hospital Medicare reimbursement in
the United States, or adverse changes in governmental and private third party
payors' policies toward reimbursement for procedures employing the Company's
products would have a material adverse effect on the Company's business,
financial condition and results of operations.
<PAGE>
Competition and Technological Advances. Competition in the market for treatment
of BPH comes from invasive therapies, such as TURP, and noninvasive courses of
action, such as drug therapy and watchful waiting. Competition in the market for
minimally invasive devices to treat BPH has increased significantly recently and
is expected to continue to be intense. Johnson and Johnson has recently received
FDA clearance for United States commercial sales of an interstitial laser system
for BPH treatment and Boston Scientific Corporation holds international
distribution rights for a microwave system for BPH treatment manufactured by
Urologix. Most of the Company's competitors have significantly greater
financial, technical, research, marketing, sales, distribution and other
resources than the Company. There can be no assurance that the Company's
competitors will not succeed in developing or marketing technologies and
products that are more effective or commercially attractive than any which are
being developed by the Company. Such developments could have a material adverse
effect on the Company's business, financial condition and results of operations.
Any product developed by the Company that gains regulatory approval would have
to compete for market acceptance and market share. An important factor in such
competition may be the timing of market introduction of competitive products.
Accordingly, the relative speed with which the Company can develop products,
complete clinical testing and regulatory approval processes, gain reimbursement
acceptance and supply commercial quantities of the product to the market are
expected to be important competitive factors. The Company expects that
competition in the BPH field will also be based, among other things, on the
ability of the therapy to provide safe, effective and lasting treatment, cost
effectiveness of the therapy, physician, health care payor and patient
acceptance of the procedure, patent position, marketing and sales capability,
and third party reimbursement policies.
Government Regulation. The FDA under the Federal Food, Drug, and Cosmetic Act
("FDC Act") regulates the Company's TUNA System in the United States as a
medical device. Pursuant to the FDC Act, the FDA regulates the manufacture,
distribution and production of medical devices in the United States.
Noncompliance with applicable requirements can result in fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant approval for devices, and
criminal prosecution. Medical devices are classified into one of three classes,
class I, II or III, on the basis of the controls necessary to reasonably ensure
their safety and effectiveness. The safety and effectiveness can be assured for
class I devices through general controls (e.g., labeling, premarket notification
and adherence to GMPs) and for class II devices through the use of special
controls (e.g., performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, class III devices are those which
must receive premarket approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable devices,
or new devices which have not been found substantially equivalent to legally
marketed devices).
Before a new device can be introduced into the market, the manufacturer must
generally obtain FDA clearance through either a 510(k) notification or a
premarket approval ("PMA"). A 510(k) clearance will be granted if the submitted
data establishes that the proposed device is "substantially equivalent" to a
legally marketed class I or II medical device, or to a class III medical device
for which the FDA has not called for a PMA. The FDA may determine that the
proposed device is not substantially equivalent, or that additional data is
needed before a substantial equivalence determination can be made. A "not
substantially equivalent" determination, or a request for additional data, could
delay the market introduction of new products that fall into this category and
could have a materially adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will obtain 510(k) clearance within the above time frames, if at all, for any
device for which it files a future 510(k) notification. Furthermore, there can
be no assurance that the Company will not be required to submit a PMA
application for any device, which it may develop in the future. For any of the
Company's products that are cleared through the 510(k) process, including the
Company's TUNA System, modifications or enhancements that could significantly
affect safety or efficacy will require new 510(k) submissions.
<PAGE>
Sales of medical devices outside the United States are subject to regulatory
requirements that vary widely from country to country. The time required to
obtain approval for sale in a foreign country may be longer or shorter than that
required for FDA approval and the requirements may differ. VidaMed has received
regulatory approvals where required for commercial sale of the TUNA System in
all major international markets. The Company has received certifications that
allow the Company to affix the CE mark to the VidaMed TUNA System, permitting
the Company to commercially market and sell the TUNA System in all countries of
the European Economic Area. However, the Company is consolidating manufacturing
in Fremont and is currently in the process of qualifying this facility under FDA
good manufacturing practice regulations and under ISO 9000 standards. Inability
to obtain FDA good manufacturing practice and ISO 9000 qualification for the
Fremont facility, or problems associated with the consolidation of manufacturing
at such facility, could have a material adverse effect on the Company's
business. Further, in order to maintain these approvals, the Company is subject
to periodic inspections. Additional product approvals from foreign regulatory
authorities may be required for international sale of the Company's general
electrosurgical device for which a FDA 510(k) notification has been filed.
Failure to comply with applicable regulatory requirements can result in loss of
previously received approvals and other sanctions and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's distributor in Japan, Century Medical, Inc., is responsible for
management of clinical trials and obtaining regulatory and reimbursement
approval for the TUNA System. Such regulatory approval was received from the
Japanese Ministry of Health and Welfare in July 1997. However, failure to obtain
market acceptance for the TUNA Procedure in Japan could preclude the commercial
viability of the Company's products in Japan and could have a material adverse
effect on the Company's business, financial condition and results of operations.
Limited Manufacturing Experience; Scale-Up Risk; Product Recall Risk. VidaMed
purchases components used in the TUNA System from various suppliers and relies
on single sources for several components. Delays associated with any future
component shortages, particularly as the Company scales up its manufacturing
activities in support of commercial sales, could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company's United Kingdom manufacturing of the VidaMed TUNA hand piece had
been only in limited quantities. The Company has limited experience in
manufacturing its products in commercial quantities. Manufacturers often
encounter difficulties in scaling up production of new products, including
problems involving production yields, quality control and assurance, component
supply and lack of qualified personnel. Difficulties encountered by VidaMed in
manufacturing scale-up could lead to future manufacturing difficulties or
product recalls, either of which could have a material adverse effect on its
business, financial condition and results of operations.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
FDA including record keeping requirements and reporting of adverse experience
with the use of the device. The Company's manufacturing facilities are subject
to periodic inspection by FDA, certain state agencies and foreign regulatory
agencies. Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business. There can be no assurance that the
Company will not be required to incur significant costs to comply with laws and
regulations in the future or that laws or regulations will not have a material
adverse effect upon the Company's business.
Uncertainty Regarding Patents and Protection of Proprietary Technology. The
Company has been issued 34 United States patents and 34 foreign patents covering
a method of prostate ablation using the VidaMed TUNA System and the design of
the TUNA System. The Company currently has 21 patent applications pending in the
United States and 56 corresponding patent applications pending in various
foreign countries. In addition, the Company holds licenses to certain technology
used in the TUNA System. There can be no assurance that the Company's issued
United States patents,or any patents which may be issued as a result of the
Company's applications, will offer any degree of protection. There can be no
assurance that any of the Company's patents or patent applications will be
challenged, invalidated or circumvented in the future. In addition, there can be
no assurance that competitors, many
<PAGE>
of which have substantial resources and have made substantial investments in
competing technologies, will not seek to apply for and obtain patents that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the United States or in international markets.
Intellectual Property Litigation Risks. The medical device industry has been
characterized by extensive litigation regarding patents and other intellectual
property rights, and companies in the medical device industry have employed
intellectual property litigation to gain a competitive advantage. The Company is
aware of patents held by other participants in the BPH market, and there can be
no assurance that the Company will not in the future become subject to patent
infringement claims and litigation or United States Patent and Trademark Office
("USPTO") interference proceedings. The defense and prosecution of intellectual
property suits, USPTO interference proceedings and related legal and
administrative proceedings are both costly and time consuming. Litigation may be
necessary to enforce patents issued to the Company, to protect trade secrets or
know-how owned by the Company or to determine the enforceability, scope and
validity of the proprietary rights of others.
Any litigation or interference proceedings could result in substantial expense
to the Company and significant diversion of effort by the Company's technical
and management personnel. An adverse determination in litigation or interference
proceedings to which the Company may become a party could subject the Company to
significant liabilities to third parties or require the Company to seek licenses
from third parties. Although patent and intellectual property disputes in the
medical device area have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses would be available to the Company on satisfactory terms or at
all. Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition to patents, the Company relies on trade secrets and proprietary
know-how, which it seeks to protect, in part, through proprietary information
agreements with employees, consultants and other parties. The Company's
proprietary information agreements with its employees and consultants contain
industry standard provisions requiring such individuals to assign to the Company
without additional consideration any inventions conceived or reduced to practice
by them while employed or retained by the Company, subject to customary
exceptions. There can be no assurance that proprietary information agreements
with employees, consultants and others will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known to or independently developed by competitors.
Rights to Founder's Inventions Limited to Urology. The proprietary information
agreement between the Company and Stuart D. Edwards, one of the Company's
founders, obligates Mr. Edwards to assign to the Company his inventions and
related intellectual property only in the field of urology. Mr. Edwards has
assigned to Rita Medical Systems, Inc. ("RITA") his inventions in the cancer
field. Mr. Edwards has conceived of, and may continue to conceive of, various
medical device product concepts for other fields outside of urology, including
certain product concepts for the treatment of snoring and sleep apnea that have
been assigned to an unrelated third party and certain product concepts in the
gynecology field that have been licensed to another unrelated third party. Such
party also has an option to purchase all future technology developed by Mr.
Edwards in the gynecology field. Product concepts outside of urology developed
by Mr. Edwards will not be owned by or commercialized through VidaMed, and
VidaMed will have no rights or ownership interests with respect thereto.
Risks Relating to RITA. The Company has entered into a cross license agreement
with RITA, formerly ZoMed International, Inc. Under the cross license, RITA has
the right to use VidaMed technology in the cancer field and VidaMed has the
right to use RITA technology in the treatment of Urological diseases and
disorders. The cross license between VidaMed and RITA allows both companies to
develop products for treatment of prostate cancer and cancers of the lower
urinary tract, and VidaMed and RITA may therefore become competitors in this
field.
<PAGE>
Product Liability Risk; Limited Insurance Coverage. The business of the Company
entails the risk of product liability claims. Although the Company has not
experienced any product liability claims to date, any such claims could have an
adverse impact on the Company. The Company maintains product liability insurance
and evaluates its insurance requirements on an ongoing basis. There can be no
assurance that product liability claims will not exceed such insurance coverage
limits or that such insurance will be available on commercially reasonable terms
or at all.
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated financial Statements and Notes to Consolidated Financial
Statements appearing on pages 17 through 28, and the Report of Ernst & Young
LLP, Independent Auditors, appearing on page 28 of the Company's 1997 Annual
Report to Stockholders are incorporated herein by reference.
<TABLE>
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net revenues $ 9,828 $ 3,824 $ 2,621 $ 1,387 $ 208
Net loss (16,470) (13,543) (14,858) (15,895) (7,066)
Basic and diluted net loss per share * (1.29) (1.30) (2.68) (13.13) (6.70)
Shares used in computing basic
and diluted net loss per share * 12,786 10,382 5,545 1,211 1,055
Total assets 16,965 12,847 18,816 5,926 5,239
Long-term debt and capital lease obligations,
less current portion 22 1,305 2,757 1,820 846
Accumulated deficit (68,346) (51,876) (38,333) (23,475) (7,580)
Stockholders' equity (Net capital deficiency) 9,227 3,701 6,755 (1,048) 2,392
<FN>
* Amounts have been calculated and, where necessary, restated in accordance with Statement of financial Accounting
Standards No. 128 "Earnings per Share" and SEC Staff Accounting Bulletin No. 98.
</FN>
</TABLE>
<PAGE>
VIDAMED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts
Years Ended December 31,
1997 1996 1995
Revenues:
Product sales, net $ 9,065 $ 3,510 $ 2,185
License fees, grant and other revenue 763 314 436
--------------------------------
Net revenues 9,828 3,824 2,621
Cost of products sold 7,261 3,679 3,545
--------------------------------
Gross profit (loss) 2,567 145 (924)
Operating expenses:
Research and development 6,003 5,742 6,542
Selling, general and administrative 13,020 7,890 7,085
--------------------------------
Total operating expenses 19,023 13,632 13,627
--------------------------------
Loss from operations (16,456) (13,487) (14,551)
Interest and other income 345 659 543
Interest and other expense (359) (715) (850)
--------------------------------
Net loss $(16,470) $(13,543) $(14,858)
--------------------------------
Basic and diluted net loss per share $ (1.29) $ (1.30) $ (2.68)
Shares used in computing basic and
diluted net loss per share 12,786 10,382 5,545
See accompanying notes.
<PAGE>
VIDAMED, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
December 31,
1997 1996
Assets
Current assets
Cash and cash equivalents $ 8,026 $ 3,879
Short-term investments - 1,976
Accounts receivable, net of allowance
(1997-$ 1,059, 1996-$ 168) 3,644 2,413
Inventory 1,512 1,447
Other current assets 930 665
-----------------------
Total current assets 14,112 10,380
Property and equipment, net 2,647 2,259
Other assets, net 206 208
-----------------------
Total assets $ 16,965 $ 12,847
-----------------------
See accompanying notes.
<PAGE>
December 31,
1997 1996
Liabilities and stockholders' equity
Current liabilities:
Notes payable, current portion $ 480 $1,064
Accounts payable 1,536 1,246
Accrued professional fees 559 498
Accrued clinical trial costs 372 982
Accrued and other liabilities 2,620 2,777
Accrued interest payable 422 279
Restructuring accrual 1,000 --
Current portion of long-term debt 34 58
Current portion of obligations under capital leases 82 470
Deferred revenue 611 467
-----------------------
Total current liabilities 7,716 7,841
Notes payable, noncurrent -- 480
Other long-term liabilities 22 825
Commitments
Stockholders' equity:
Preferred stock, $ .001 par value;
issuable in series, 5,000,000 shares
authorized; none outstanding at
December 31, 1997 and 1996
Common stock, $ .001 par value, 30,000,000
shares authorized; 15,203,401 and
10,928,442 shares issued and outstanding
at December 31, 1997 and 1996, respectively 15 11
Additional paid-in-capital 77,789 55,895
Notes receivable from stockholders (205) (205)
Deferred compensation (26) (123)
Accumulated deficit (68,346) (51,877)
-----------------------
Total stockholders' equity 9,227 3,701
-----------------------
Total liabilities and stockholders' equity $16,965 $12,847
-----------------------
See accompanying notes.
<PAGE>
<TABLE>
VIDAMED, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (Net Capital Deficiency)
For the Years Ended December 31, 1997, 1996 and 1995
(In thousands except share amounts)
<CAPTION>
Total
Notes Stockholders'
Additional Common Receivable Equity
Preferred Common Paid-In Stock From Deferred Accumulated (Net Capital
Stock Stock Capital Warrant Stockholders Compensation Deficit Deficiency)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 $ 4 $ 1 $ 21,651 $ 1,138 $ (39) $ (328) $ (23,475) $ (1,048)
Exercise of options to
purchase 181,677 shares
of common stock - - 293 - (72) - - 221
Exercise of common stock warrant - - 1,150 (1,138) - - - 12
Issuance of 10,222 shares of
common stock in exchange
for consulting services - - 3 - - - - 3
Issuance of 193,622 shares of
Series D preferred stock due
to antidilution provisions - - - - - - - -
Conversion of preferred stock
into common stock (4) 4 - - - - - -
Conversion of convertible notes
into common stock - - 1,518 - - - - 1,518
Issuance of 3,565,000 shares of
common stock, net of issuance
costs of $ 2,411 - 4 20,758 - - - - 20,762
Payments on notes receivable - - - - 26 - - 26
Amortization of deferred
compensation - - - - - 109 - 109
Unrealized investment gain (loss) - - - - - - 10 10
Net loss - - - - - - (14,858) (14,858
--------------------------------------------------------------------------------------------
Balances at December 31, 1995 - 9 45,373 - (85) (219) (38,323) 6,755
<FN>
See accompanying notes
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Notes Stockholders'
Additional Common Receivable Equity
Preferred Common Paid-In Stock From Deferred Accumulated (Net Capital
Stock Stock Capital Warrant Stockholders Compensation Deficit Deficiency)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ - $ 9 $ 45,373 $ - $ (85) $ (219) $ (38,323) $ 6,755
Exercise of options to purchase
236,013 shares of common stock - - 491 - (120) - - 371
Issuance of 59,716 shares of
common stock under the
employee stock purchase plan - - 355 - - - - 355
Conversion of convertible notes into
common stock - 2 9,676 - - - - 9,678
Amortization of deferred
compensation - - - - - 96 - 96
Unrealized investment gain (loss) - - - - - - (11) (11)
Net loss - - - - - - (13,543) (13,543)
------------------------------------------------------------------------------------------------
Balances at December 31, 1996 - 11 55,895 - (205) (123) (51,877) 3,701
Exercise of options to purchase
96,106 shares of common stock - - 251 - - - - 251
Issuance of 4,157,814 shares of
common stock for financing,
net of $ 773 in offering costs - 4 21,552 - - - - 21,556
Issuance of 21,039 shares of
common stock under the
employee stock purchase plan - - 91 - - - - 91
Amortization of deferred
compensation - - - - - 97 - 97
Unrealized investment gain (loss) - - - - - - 1 1
Net loss - - - - - - (16,470) (16,470)
------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $ - $ 15 $ 77,789 $ - $ (205) $ (26) $ (68,346) $ 9,227
------------------------------------------------------------------------------------------------
<FN>
See accompanying notes
</FN>
</TABLE>
<PAGE>
<TABLE>
VIDAMED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash fiows from operating activities:
Net loss $ (16,470) $ (13,543) $ (14,858)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,369 1,444 1,209
Other - 26 (8)
Changes in assets and liabilities:
Accounts receivable (1,231) (2,285) 84
Inventory (65) (102) (58)
Other current assets (265) (156) 201
Other assets 2 27 (11)
Accounts payable 290 759 (638)
Accrued professional fees 61 161 (580)
Accrued clinical trial costs (610) 4 596
Accrued interest payable 143 150 150
Accrued restructuring cost 1,000 - -
Accrued and other liabilities (157) 551 1,293
Deferred revenue 241 (312) (425)
---------------------------------------
Net cash used in operating activities (15,692) (13,276) (13,045)
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Net cash used in operating activities $ (15,692) $ (13,276) $ (13,045)
Cash fiows from investing activities:
Expenditures for property and equipment (1,757) (693) (721)
Purchases of short-term investments - (11,788) (7,994)
Proceeds from maturities of short-term investments 1,977 17,810 -
-----------------------------------------
Net cash provided by (used in) investing activities 220 5,329 (8,715)
Cash fiows from financing activities:
Principal payments under capital leases (474) (693) (648)
Principal payments of long-term debt (741) (22) (12)
Principal payments of notes payable (1,064) (3,650) (507)
Net proceeds from issuance of long-term debt - 100 -
Net proceeds from issuance of notes payable and convertible notes - 9,678 7,219
Net cash proceeds from issuance of common stock 21,898 726 20,998
Proceeds from payments on notes receivable from stockholders - - 25
-----------------------------------------
Net cash provided by financing activities 19,619 6,139 27,075
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 4,147 (1,808) 5,315
Cash and cash equivalents at the beginning of the period 3,879 5,687 372
-----------------------------------------
Cash and cash equivalents at the end of the period $ 8,026 $ 3,879 $ 5,687
-----------------------------------------
Supplemental schedule of noncash investing and financing activities:
Equipment purchased under capital leases $ - $ - $ 167
Issuance of common stock for notes receivable - 120 72
Supplemental disclosure of cash fiows information:
Cash paid for interest $ 654 $ 711 $ 431
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
VIDAMED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
VidaMed, Inc. (the "Company" or "VidaMed") was founded as a California
corporation on July 9, 1992 and reincorporated in Delaware in June 1995. The
Company designs, develops, manufactures and markets technologically and
clinically advanced, cost effective devices for urology applications. The
Company's initial focus is the treatment of BPH. The Company commenced
manufacturing production and product sales in 1993. In the United States, the
Company sells its products to urologists, surgery centers and hospitals. Outside
of the United States, the Company sells its products primarily to international
distributors who resell to physicians and hospitals.
LIQUIDITY
In the course of its operations, the Company has sustained continuing operating
losses and expects such losses to continue over at least the next nine to
eighteen months. The Company plans to continue to finance its working capital
needs through a combination of stock sales, issuance of convertible notes,
product sales, short-term loans, and financing of equipment the Company
currently owns. Should the plans contemplated by management not be consummated,
the Company may have to seek alternative sources of capital or reevaluate its
operating plans.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
VidaMed and its wholly owned subsidiaries after elimination of inter-company
balances and transactions.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
Generally, revenue from product sales is recognized at the time of shipment, net
of allowances for discounts and estimated returns which is also provided for at
the time of shipment. Deferred revenue for warranty contracts are recognized
over the contract period.
Revenue derived from the granting of distribution rights is recognized on a
straight-line basis over the term of the distribution agreements. At December
31, 1997, 1996 and 1995, the Company had deferred a total of $ 267,000, $467,000
and $ 667,000, respectively, of revenue from the granting of such distribution
rights.
By policy, the Company limits similar types of investments and diversifies
investing activities utilizing several investment agencies.
The Company currently sells its products to urologists, surgery centers and
hospitals in the United States and to distributors in Canada, Europe and the
Pacific Rim. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. In the summer and fall of 1997, the
Company developed a program to extend payment terms to urologists prior to the
publication of the CPT code number 53852 for the VidaMed TUNA Procedure which
became effective on January 1, 1998. The Company considered the collection risk
associated with this program in determining the allowance for doubtful accounts
at December 31, 1997. Actual losses have been immaterial in all periods to date.
For the years ended December 31, 1997 and 1996, no customer represented more
than 10% of the Company's net revenues. For the year ended December 31, 1995,
one customer represented 17% of the Company's net revenues.
<PAGE>
GRANT REVENUE
In July 1993, the Company entered into an agreement with the Department of Trade
and Industry of the United Kingdom, pursuant to which the Company's U.K.
subsidiary was entitled to a grant not exceeding (pound) 750,000 for the
establishment of a facility to develop and manufacture medical devices in
Plymouth, England. As part of the U.K. facility shutdown, the grant is being
repaid at a value of (pound) 225,000. See also Note 10.
WARRANTY COSTS
The Company provides at the time of sale for the estimated cost of replacing and
repairing products under warranty. The warranty period ranges from 90 days to
one year depending upon the component. Because of the length of the warranty
period, adjustments to the originally recorded provisions may be necessary from
time to time.
INVENTORIES
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market value.
December 31,
1997 1996
Inventories consist of the following (in thousands):
Raw materials $ 261 $ 600
Work in process 90 174
Finished goods 1,161 673
------------------
$ 1,512 $ 1,447
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the respective assets
which range from three to five years, except for buildings which are depreciated
over 20 years. Leasehold improvements are amortized on a straight-line basis
over the shorter of the estimated useful life or the remaining life of the
lease.
December 31,
1997 1996
Property and equipment consists of the
following (in thousands):
Land and building $ - $ 924
Furniture and fixtures 457 642
Machinery and equipment 3,445 2,108
Computer equipment and software 901 1,258
Leasehold improvements 972 112
5,775 5,044
Less accumulated depreciation and amortization (3,128) (2,785)
$ 2,647 $ 2,259
Property and equipment includes approximately $ 1,895,000 and $ 2,268,000
recorded under capital leases at December 31, 1997 and 1996, respectively.
Accumulated amortization relating to leased assets totaled approximately
$1,813,000 and $ 1,799,000 at December 31, 1997, and 1996, respectively.
<PAGE>
STOCK BASED COMPENSATION
In October 1995, the financial Accounting Standards Board issued "Accounting for
Stock-Based Compensation" (Statement 123). Statement 123 is effective for fiscal
years beginning after December 15, 1997. Under Statement 123, stock-based
compensation expense to employees is measured using either the intrinsic-value
method as prescribed by Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees", or the fair-value method described
in Statement 123. In accordance with Statement 123, the Company has chosen the
intrinsic-value method as prescribed by APB 25 and will disclose the pro forma
impact of the fair-value method on net income and earnings per share. See Note 7
for additional information on stock based compensation. There is no effect of
adopting the standard on VidaMed's financial position or results of operations.
FOREIGN CURRENCY TRANSLATION
The functional currency for foreign subsidiaries is the United States dollar.
Monetary assets and liabilities denominated in foreign currencies are translated
at the year-end exchange rate. Inventory, property and equipment and
non-monetary assets and liabilities denominated in foreign currencies are
translated at historical rates. Adjustments resulting from these translations
are included in the results of operations and have been immaterial. The Company
does not enter into foreign currency forward exchange contracts.
NET LOSS PER SHARE
Except as noted below, net loss per share is computed using the weighted average
number of shares of common stock outstanding during the periods presented.
Common equivalent shares are excluded from the computation, as their effect is
anti-dilutive. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" (Statement No. 128). Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share exclude any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share are very similar to the
previously named fully diluted earnings per share. As the Company incurred loses
from operations in each of the three years in the period ended December 31,
1997, there is no difference between basic and diluted loss per share amounts
for these years.
In addition, in 1998, the Security and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 98 (SAB 98) which eliminates the inclusion in the
calculation of net loss per share of common and common equivalent shares (stock
options, warrants, convertible notes and preferred stock) issued during the 12
month period prior to an initial public offering at prices below the public
offering price as if they were outstanding for all periods presented. All loss
per share amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement 128 and SAB 98 requirements.
The pro forma calculation of net loss per share below has been computed as
described above but also gives retroactive effect from the date of issuance to
the conversion of the convertible preferred stock which automatically converted
to common shares upon the closing of the Company's initial public offering. As
of December 31, 1995 the pro forma loss per share was $2.03 based on a pro
forma number of shares outstanding of 7,325,000.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
<PAGE>
2. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The Company considers all highly liquid investments with maturities of 90 days
or less from the date of purchase to be cash equivalents. The Company invests
its excess cash in deposits with major banks. Short-term investments consist of
corporate paper and government securities with remaining maturities at the date
of purchase of greater than 90 days and less than one year.
The Company accounts for marketable investments under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," (Statement 115). Under Statement 115, management determines
the appropriate classification of debt securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. To date, all
marketable securities have been classified as available-for-sale and are carried
at fair value at quoted market prices. Unrealized gains and losses are reported
as a separate component of stockholders' equity. The amortized cost of debt
securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. The cost of securities sold is based on the specific identification
method. Interest earned on securities classified as available-for-sale is
included in interest income.
As of December 31, 1997 the Company had U.S. Corporate securities available for
sale at a fair market value of approximately $7,273,000 and no gross unrealized
gains or losses. As of December 31, 1996 the Company had U.S. Corporate
securities available for sale at an amortized cost of $ 3,972,000, a gross
unrealized loss of $2,000 and an estimated fair market value of $3,970,000. U.S.
Corporate securities at December 31, 1997 and 1996 include $7,273,000 and
$1,994,000, respectively, of cash equivalents due to the maturity date at
purchase being less than 90 days. All available-for-sale securities are recorded
as short-term investment or cash equivalents as the maturities of the
investments do not exceed one year. For the years ended December 31, 1997, 1996
and 1995, gross realized gains and losses on sales were immaterial.
The fair market value of the long-term debt approximates its carrying value
based on an assessment of maturity, the variable interest rates and the
incremental borrowing rate for similar debt.
3. RELATED PARTY TRANSACTIONS
In August 1992, two different stockholders entered into agreements to provide
the Company engineering and design services used in the development and
production of the Company's disposable medical devices. The Company recognized
research and development expenses of $0, $18,000 and $155,000 under these
arrangements for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company has cross licensed technology with RITA Medical Systems (RITA),
formerly known as ZoMed International, Inc., a privately-held development stage
company founded by certain of the Company's founders and initially financed by
certain of the Company's current investors. The cross license grants RITA the
exclusive right to use VidaMed technology in the cancer field and grants the
Company the right to use RITA technology in the treatments of urological
disorders other than cancer, and allows both companies to participate in the
field of prostate and lower urinary tract cancer treatment. As consideration for
the cross license, RITA issued the Company 1.8 million shares of RITA common
stock which represented a 10% ownership in RITA immediately following its
private placement. The current percentage of ownership has dropped well below
the original 10%. This investment is carried at the historical cost basis of the
technology of $0. RITA will also pay royalties to the Company based on a
percentage of net sales of products incorporating VidaMed technology, subject to
an aggregate maximum of $500,000.
<PAGE>
4. LONG TERM DEBT AND NOTES PAYABLE
In April 1993, the Company entered into a loan agreement borrowing (pound)
450,000 for the purchase of land and a building in the United Kingdom. The term
of the loan was 20 years at an interest rate of 8.5% per annum and the loan was
secured by the land and building. In December of 1997, VidaMed, Inc. sold the
U.K. facility to MedLogic, Corp. at which time the debt related to the loan
agreement was assumed by MedLogic. See also Note 11.
In January 1995, the Company entered into an agreement with a corporate investor
to issue notes payable in the amount of $2,700,000. These notes were unsecured,
and carried interest at the prime rate publicly announced by Chase Manhattan
Bank in New York (8.5% at December 31, 1995). These notes and interest were paid
in full in two installments in January and February 1996.
In April 1995, the Company obtained a $3,000,000 secured credit facility and
subsequently borrowed the full amount. Borrowings under this facility bear
interest at the prime rate plus 3% per annum (Periodic Interest) plus additional
lump-sum interest of 15% of each borrowing, payable at maturity. Borrowings are
required to be repaid in 36 equal monthly installments of principal and Periodic
Interest, with lump-sum interest payable with the last installment, and are
secured by a pledge of specific Company assets. In connection with this
agreement, the Company issued the lender a warrant to purchase 71,490 shares of
common stock at $4.55 per share.
Aggregate future principal payments for long-term debt and notes payable at
December 31, 1997 is $480,000 for 1998 with no additional payments after 1998.
5. CAPITAL AND OPERATING LEASES
In April 1993 and as amended in November 1993, the Company entered into a master
lease line of credit to finance up to $1,100,000 of equipment purchases. The
availability of the lease line expired on December 15, 1994 at which time the
Company had fully borrowed this line of credit. Pursuant to this agreement, the
Company issued the lessor a warrant to purchase 17,286 shares of its series B
preferred stock at an exercise price of $3.00 per share. In connection with the
November 1993 amendment to the lease line, the Company issued the lessor a
warrant to purchase 8,334 shares of its common stock at an exercise price of
$6.00 per share. The warrants expire in 2002. As of December 31, 1997, no shares
had been purchased under the terms of these warrants.
In June 1994, the Company entered into an additional master lease line of credit
to finance up to $1,900,000 of equipment purchases. The availability of this
lease line expired July 1, 1995 at which time the Company had utilized
$1,064,624 under this lease line of credit. Pursuant to this agreement, the
Company issued the lessor a warrant to purchase 21,689 shares of common stock at
an exercise price of $12.83 per share. The warrant expires in 2004. As of
December 31, 1997, no shares had been purchased under the terms of the warrant.
The Company moved in July 1997 to a 35,000 square foot facility in Fremont,
California. The Company leases its office and research facilities under
operating lease agreements.
<PAGE>
Operating Capital
Leases Leases
Future minimum lease payments at December 31,
1997 under capital leases
and future obligations under
noncancellable operating leases
are as follows (in thousands):
1998 $395 $85
1999 408 -
2000 421 -
2001 433 -
2002 183 -
-----------------------
Total minimum payments required $1,840 85
Less amount representing interest (3)
-----
Present value of minimum lease payment 82
Less amount due within one year (82)
-----
Amount due after one year $ -
Rent expense for the years ended December 31, 1997, 1996 and 1995 were $433,000,
$346,000 and $395,000, respectively.
6. CONVERTIBLE SUBORDINATED NOTES PAYABLE
In March 1996, the Company completed the sale of $10.1 million in 5% convertible
subordinated notes (the Notes). The Notes were convertible into common stock of
VidaMed based upon a percentage (ranging from 80% to 85%) of the average closing
bid price over a period of five trading days prior to conversion. As of December
31, 1996 all of the $10.1 million in principal and accrued interest on the Notes
had been converted into an aggregate of 1,375,676 shares of common stock.
7. STOCKHOLDER'S EQUITY COMMON STOCK
On June 21, 1995 the Company issued 3,100,000 of common stock at $6.50 per share
in an initial public offering. At the offering date the 3,424,481 shares of
outstanding preferred stock converted into 3,618,103 shares of common stock.
Additionally, convertible notes of $1,518,805 were converted into 333,800 shares
of common stock based on a conversion price of $4.55 per share of common stock.
In February 1997, the Company entered into an equity financing agreement with a
European investment bank which provided the Company with the option to sell to
such investment bank up to $10,000,000 of VidaMed common stock in increments of
up to $2,500,000. Under this arrangement, the common stock was priced at a 10%
discount to the current market price at the time of sale, subject to adjustment.
As of December 31, 1997 the Company had issued 1,570,463 shares of common stock
under the arrangement, resulting in approximately $10,000,000 of proceeds.
Concurrent with each common stock issuance under this arrangement, the Company
issued to the investment bank a warrant to purchase one share of common stock
for each 10 shares of common stock purchased under the arrangement. The exercise
prices of the warrants range from $6.25 to $10.91 with the total shares subject
to warrants equal to 166,682. Each warrant has a term of three years from the
date of issuance.
<PAGE>
In September 1997, the Company completed a private placement with certain
investors. In this transaction, the Company issued 2,600,000 shares of common
stock at a purchase price of $4.75 per share resulting in net proceeds of
$11,700,000 to the Company. In connection with this financing, the Company
issued warrants to purchase an aggregate of 629,000 shares of common stock at an
exercise price of $6.33 per share.
As of December 31, 1997, the Company has reserved a total of 914,481 shares of
common stock for issuance upon the conversion of outstanding warrants.
NOTES RECEIVABLE FROM STOCKHOLDERS
Interest on notes receivable from stockholders accrues at a rate of 6.73% per
annum. Principal and interest payments are due at various times after December
2000.
STOCK OPTIONS
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options and employee stock purchase plan
because, as discussed below, the alternative fair value accounting provided for
under Statement 123 requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
In July 1992, the board of directors adopted the 1992 Stock Plan (the "Plan").
As amended, the Company has reserved 3,100,000 shares of common stock for
issuance upon exercise of options granted under the Plan.
In the year ended December 31, 1997 the Board of Directors voted on and approved
two stock option repricings. The Company repriced options as an incentive plan
in order to retain key employees. All employees were offered the repriced value
for options in exchange for a six to twelve month lock up of option exercising
rights. The first repricing occurred in May 1997 and revalued the option price
at $6.875 for all current employees excluding outside board members. The second
repricing occurred in September 1997 and revalued the option price at $4.813 for
all current employees excluding outside board members.
The Plan provides for both incentive and nonqualified stock options to be
granted to employees and consultants. The Plan provides that incentive stock
options will be granted at no less than the fair value of the Company's common
stock (no less than 85% of the fair value for nonqualified stock options) as
determined by the board of directors at the date of the grant. If, at the time
the Company grants an option, the optionee owns more than 10% of the total
combined voting power of all the classes of stock of the Company, the option
price shall be at least 110% of the fair value and the option shall not be
exercisable for more than five years after the date of grant. The options become
exercisable over periods determined by the board of directors, which is
currently four years. Except as noted above, options expire no more than ten
years after the date of grant, or earlier if employment terminates.
In April 1995, the stockholders approved the 1995 Director Option Plan (Director
Plan). A total of 200,000 shares of common stock have been authorized for
issuance. Each non-employee director automatically is granted a non-statutory
option to purchase 13,334 shares of common stock upon election to the board, and
annual non-statutory option for 3,334 shares of common stock.
<PAGE>
<TABLE>
Activity under the Plans is summarized below:
<CAPTION>
Shares Weighted Avg.
Available Options Outstanding Fair Value of Number of
for Grant Number of Weighted Avg. Options Granted Options
of Options Shares Exercise Price During Year Exercisable
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 12,143 847,464 $1.76 194,648
Shares authorized 722,222
Options granted (483,446) 483,446 6.19 $4.52
Options exercised (181,677) 1.63
Options canceled 84,005 (84,005) 2.50
--------------------------
Balance at December 31, 1995 334,924 1,065,228 3.54 299,651
Shares authorized 1,000,000
Options granted (855,281) 855,281 9.71 $7.14
Options exercised (236,013) 1.91
Options canceled 217,949 (217,949) 6.66
--------------------------
Balance at December 31, 1996 697,592 1,466,547 7.02 376,570
Shares authorized 366,666
Options granted (1,674,883) 1,674,883 5.08 $3.93
Options exercised (94,994) 2.61
Options canceled 1,165,276 (1,165,276) 8.78
--------------------------
Balance at December 31, 1997 554,651 1,881,160 $4.42 328,535
</TABLE>
<TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$0.1875 to $13.125 based on the following price ranges. The weighted average
remaining contractual life of those options is 8.51 years.
<CAPTION>
Number Number Weighted Average
Range of Outstanding Weighted Average Exercisable Contractual
Exercise Prices as of 12/31/97 Exercise Price as of 12/31/97 Life
<S> <C> <C> <C> <C>
$0.188 - 4.00 408,101 $ 2.63 285,173 7.01
4.50 - 4.53 394,150 4.51 - 9.96
4.81 - 4.81 963,881 4.81 - 8.56
5.00 - 10.25 103,764 6.70 42,343 8.39
13.13 - 13.13 10,002 13.13 1,019 8.01
</TABLE>
In April 1995, the stockholders approved the 1995 Employee Stock Purchase Plan
(Purchase Plan). A total of 200,000 shares of common stock have been authorized
for issuance. 80,781 shares have been issued under the Purchase Plan at December
31, 1997. Under the Purchase Plan participating employees
<PAGE>
may contribute up to 15% of their salary to purchase shares of the Company's
common stock. The purchase price is equal to 85% of the fair market value of the
common stock based on the lower of the first day of the offering period or last
day of the purchase period.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options granted subsequent to December 31, 1994 under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1997, 1996 and 1995, respectively:
risk-free interest rates of 6.00%, 5.88% and 6.26%; dividend yields of 0.0%;
volatility factors of the expected market price of the Company's common stock of
0.897, 0.924 and 0.924; and a weighted-average expected life of the option of
4.90 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
<TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
The Company's pro forma information follows
(in thousands except for loss per share amounts):
Pro forma net loss $(19,950) $(14,785) $(15,149)
Pro forma loss per share (1.56) (1.42) (2.07)
</TABLE>
Statement 123 is applicable only to options granted subsequent to December 31,
1994 and its proforma effect will not be fully refiected until 1999.
The Company recorded deferred compensation for the difference between the grant
price and the deemed fair value of the Company's common stock, as determined by
the board of directors, for certain options granted in the twelve-month period
prior to the Company's initial public offering. This deferred compensation
totaled $436,000, is being amortized over the vesting period of the options.
Amortization of deferred compensation of $96,000, $96,000 and $109,000 was
recorded in the years ended December 31, 1997, 1996 and 1995, respectively.
<PAGE>
8. INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
As of December 31, 1997, the Company had federal and California net operation
loss carry forwards of approximately $43,400,000 and $15,000,000, respectively.
Additionally, the Company had foreign net operating loss carry forwards of
approximately $19,000,000. The federal net operating loss carry forwards will
expire at various dates beginning in 2007 through 2012 if not utilized. The
California net operating losses will expire at various dates beginning in 1998
through 2002 if not utilized.
<TABLE>
Utilization of the net operating losses may be subject to an annual limitation
due to the ownership change rules provided by the Internal Revenue Code of 1986
and similar state provisions. The annual limitation may result in the expiration
of the net operating losses before utilization.
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Significant components of the Company's deferred tax assets (in thousands):
Deferred tax assets:
Net operating loss carry forwards $22,000 $16,200
Research credit (expires in 2007 through 2012) 900 700
Deferred revenue 200 500
Capitalized research and development for California purposes 1,200 900
Other 400 200
-----------------------------
Total deferred tax assets 24,700 18,500
Valuation allowance for deferred tax assets (24,700) (18,500)
-----------------------------
Net deferred tax assets $- $-
</TABLE>
During the years ended December 31, 1997 and 1996, the valuation allowance for
deferred tax assets increased by $6,200,000 and $5,000,000, respectively, due to
the Company's continuing operating losses.
<PAGE>
9. GEOGRAPHIC SEGMENT DATA
<TABLE>
The Company's domestic operations primarily consist of product development,
sales and marketing. The domestic revenue balance for 1997 includes $848,000 in
sales related to shipments to Japan. The Company's foreign operations consist of
subsidiaries in the United Kingdom and Australia. The Company's subsidiary in
the U.K. was established in 1993 and was engaged in product development,
manufacturing, sales and marketing and product distribution worldwide. The
shutdown of the U.K. facility in November 1997 has left the U.K. with operations
related only to sales and clinical studies. The Australian subsidiary has had
immaterial operations since its inception in 1994 and as such is combined with
the United Kingdom in the following table.
<CAPTION>
Geographic Area
Domestic Foreign Eliminations Total
<S> <C> <C> <C> <C>
Information regarding geographic areas is as follows (in thousands):
Year ended December 31, 1995:
Revenue from unaffiliated customers $ 947 $ 1,674 $ -- $ 2,621
Intergeographic transfers 796 152 (949) --
------------------------------------------------------------------
Net revenues 1,743 1,826 (949) 2,621
Net loss (9,547) (5,300) (11) (14,858)
Identifiable net assets 30,878 3,195 (15,257) 18,816
Year ended December 31, 1996:
Revenue from unaffiliated customers 3,054 771 -- 3,825
Intergeographic transfers 81 735 (817) --
------------------------------------------------------------------
Net revenues 3,135 1,506 (817) 3,825
Net loss (9,169) (5,552) 1,179 (13,543)
Identifiable net assets 29,143 2,131 (18,427) 12,847
Year ended December 31, 1997:
Revenue from unaffiliated customers 8,737 1,091 -- 9,828
Intergeographic transfers 473 1,412 (1,885) --
------------------------------------------------------------------
Net revenues 9,210 2,503 (1,885) 9,828
Net loss (11,957) (4,609) 96 (16,470)
Identifiable net assets 38,426 1,617 (23,077) 16,965
</TABLE>
10. RESTRUCTURING ACCRUAL
<TABLE>
In September 1997, VidaMed announced a restructuring program designed to reduce
costs and improve operating efficiencies by closing the company's U.K.
manufacturing facility. The Company anticipates that following a short
transition period, all future manufacturing of the VTS Hand Piece will occur in
the U.S. In this regard, the Company moved into its new headquarter facilities
in Fremont, California in July, 1997. The facility is approximately 35,000
square feet and provides the necessary capacity to manufacture the VTS Hand
Piece. The company is currently qualifying the facility as a FDA, GMP and
ISO9001 site. A $2,100,000 charge is included in the year ended December 31,
1997 in the cost of goods sold in the Statements of Operations. The charge
refiects $390,000 for the estimated loss on the abandonment of fixed assets, a $
1,305,000 charge for the Company's short term obligation related to the shut
down of the facility and a $405,000 obligation related to a grant.
<PAGE>
<CAPTION>
Total Asset Cash Outlays
Charges Write-down Completed Future
<S> <C> <C> <C> <C>
The elements of the total charge as of December 31, 1997
are as follows (in thousands):
Fixed assets $390 $390 $- $-
Facility shut down 1,305 - 710 595
Grant 405 - - 405
------------------------------------------------------
Total special charges $2,100 $390 $710 $1,000
</TABLE>
11. SUBSEQUENT EVENTS
In January 1998, the Company entered into a financing agreement with Silicon
Valley Bank, and funded a $1,500,000 42-month term loan. In addition, the
Company established a $3,000,000 working capital line with this bank.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
VidaMed, Inc.
We have audited the accompanying consolidated balance sheets of VidaMed, Inc. as
of December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity (net capital deficiency) and cash fiows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly and in
all material respects, the consolidated financial position of VidaMed, Inc. at
December 31, 1997 and 1996, and the consolidated result of its operations and
its cash fiows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
January 16, 1998
<PAGE>
MARKET FOR REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock has been traded on the NASDAQ national market (ticker
symbol VIDA) since June 1995. The number of record holders of the Company' s
common stock at December 31, 1997, was approximately 270. The Company has not
paid any dividends since its inception and does not intend to pay any dividends
in the foreseeable future.
1997 1996
Quarter ended High Low High Low
March 31 14 6 3/4 13 7 1/2
June 30 9 1/2 4 3/4 16 8
September 30 7 1/4 2 15/16 14 1/8 8
December 31 7 11/16 3 13/16 14 5/8 8 3/8
ANNUAL MEETING
The annual meeting of the stockholders will be held on May 7, 1998, at 10:00 am
at Hotel Sofitel, Redwood City, California
Design: The Focal Group
Photography: Achille Bigliardi
Printing: Lithographix
jhsrpsrdlapgmprb.10k
CORPORATE INFORMATION
BOARD OF DIRECTORS
* David J. Illingworth Chairman of the Board
David L. Douglass Chairman of the Board
Franklin D. Brown Director
Stuart D. Edwards Director
Robert J. Erra Director
James A. Heisch President and Chief Executive Officer
Wayne I. Roe Director
Michael H. Spindler Director
CORPORATE OFFICERS
* David J. Illingworth President and Chief Executive Officer
James A. Heisch President and Chief Executive Officer
Richard D. Brounstein Vice President, Finance and Chief Financial Officer
Robin L. Bush Vice President, Regulatory Affairs and Clinical Affairs
Carol A. Chludzinski Senior Vice President, North American Sales
Patricia S. Garfield Vice President, Worlwide Marketing
John N. Hendrick Vice President and Chief Operating Officer
* Effective April 6, 1998
TRANSFER AGENT AND REGISTRAR
American Securities Transfer Incorporated
1825 Lawrence Street, Suite 444
Denver, CO 80202
CORPORATE COUNSEL
Wilson, Sonsini, Goodrich and Rosati, PC
Palo Alto, California
INDEPENDENT AUDITORS
Ernst & Young LLP
Palo Alto, California
SEC FORM 10-K
A copy of the Companys Form 10-k is available without charge. Please contact:
Investor Relations at our Corporate Headquarters or call 1-800-965-2929 and ask
for VIDA
<PAGE>
<TABLE>
[VIDAMED LOGO]
<CAPTION>
<S> <C> <C>
VidaMed International Ltd. VidaMed, Inc. VidaMed Australia Pty Ltd.
Teignbridge Business Centre Corporate Headquarters Suite 3, Level 2, NorthTower
Cavalier Road, Heathfield 46107 Landing Parkway 1-5 Railway Street
Newton Abbot TQ12 6TZ Fremont, CA 94538 Chatswood, NSW 2067
Devon, U.K. Tel: 510.492.4900 Australia
Tel: 44.1626.835222 Fax: 510.492.4999 Tel: 61.2.9415.3166
Tel: 800.328.8781
www.vidamed.com
</TABLE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8, No. 33-80619) pertaining to the 1992 Stock Plan, the 1992 Consultant Stock
Plan, the 1995 Director Option Plan and the 1995 Employee Stock Purchase Plan of
VidaMed, Inc. and in the Registration Statement (Form S-3) filed February 9,
1998 pertaining to the registration of 8,000,000 of its common stock and
2,629,413 warrants to purchase shares of common stock, of our report dated
January 16, 1998, with respect to the consolidated financial statements
incorporated by reference and schedule of VidaMed, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 1997.
Our audits also included the financial statement schedule of VidaMed, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Palo Alto, California
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 8,026 3,879 5,686
<SECURITIES> 0 1,976 8,003
<RECEIVABLES> 4,703 2,581 171
<ALLOWANCES> 1,059 168 43
<INVENTORY> 1,512 1,447 1,345
<CURRENT-ASSETS> 14,112 10,380 15,672
<PP&E> 5,775 5,045 4,532
<DEPRECIATION> 3,128 2,786 1,623
<TOTAL-ASSETS> 16,965 12,847 18,816
<CURRENT-LIABILITIES> 7,716 7,841 9,304
<BONDS> 22 1,218 2,757
0 0 0
0 0 0
<COMMON> 15 11 9
<OTHER-SE> 9,212 3,690 6,746
<TOTAL-LIABILITY-AND-EQUITY> 16,965 12,847 18,816
<SALES> 9,065 3,510 2,185
<TOTAL-REVENUES> 9,828 3,824 2,621
<CGS> 7,261 3,679 3,545
<TOTAL-COSTS> 19,023 13,632 13,627
<OTHER-EXPENSES> 0 35 0
<LOSS-PROVISION> 1,059 133 43
<INTEREST-EXPENSE> (359) (32) (306)
<INCOME-PRETAX> (16,456) (13,494) (14,858)
<INCOME-TAX> 14 49 0
<INCOME-CONTINUING> (16,470) (13,543) (14,858)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (16,470) (13,543) (14,858)
<EPS-PRIMARY> (1.29) (1.30) (2.68)
<EPS-DILUTED> 0 0 0
</TABLE>
