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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
MARK ONE:
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER: 333-4772-LA
MASIMO CORPORATION
(Name of small business issuer in its charter)
DELAWARE 33-0368882
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2852 KELVIN AVENUE, IRVINE, CA 92614
(Address of principal executive offices) (zip code)
ISSUER'S TELEPHONE NUMBER: (714) 250-9688
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
SERIES D PREFERRED STOCK, PAR VALUE $.001
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Revenues for the year ended March 31, 1997 were $367,065.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: N/A
The number of shares outstanding of Common Stock as of June 16, 1997 was
2,833,098.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I
ITEM 1. BUSINESS
GENERAL
Masimo Corporation ("Masimo" or the "Company") designs, develops and licenses
advanced medical signal processing and sensor technology for the noninvasive
monitoring of important physiological parameters. The Company was incorporated
in California in May 1989 and reincorporated in Delaware in June 1996. The
Company's first products, based on its proprietary signal processing and sensor
technology, are designed to improve the effectiveness of pulse oximetry by
overcoming the inability of current monitors to precisely measure levels of
arterial blood oxygen saturation during patient movement and other interference
(noise artifact) and low arterial blood flow (low perfusion). The Company and
certain of its OEM licensees are also seeking to incorporate Masimo's
proprietary Signal Extraction Technology (Masimo SET) into patient monitors used
for a variety of other applications, including peripheral venous oximetry, fetal
oximetry and noninvasive measurement of blood glucose. The Company's strategy is
to license its technology to patient monitoring companies with established sales
and distribution channels.
PATIENT MONITORING AND PULSE OXIMETRY
Patient monitoring systems are widely used in operating rooms and other critical
care settings to provide clinicians with early warnings of patient distress and
allow the initiation of treatment or the intensification of therapy, when
necessary. The four most common parameters measured are electrocardiography
(ECG), blood pressure, body temperature and arterial blood oxygen saturation
(pulse oximetry). Monitoring of these critical physiological parameters has
become widespread not only due to their clinical utility but also in adherence
to established standard of care practices. While most patient monitors were
originally configured as stand-alone units, due in part to increasing pressures
to reduce healthcare costs, demand is increasing for multiparameter monitors
which incorporate modules to measure more than one patient parameter.
Pulse oximetry is the noninvasive measurement of the saturation levels of oxygen
in arterial blood. The lack of sufficient arterial blood oxygen saturation
(hypoxemia) can lead to a deficiency of oxygen reaching the tissues of the body
(hypoxia). Early detection of hypoxemia is critical because hypoxia can result
in brain damage and death in a matter of minutes. In addition to providing
continuous monitoring of arterial blood oxygen saturation, pulse oximetry is
also used to detect and report the pulse rate of the patient. Since its
introduction in the early 1980s, pulse oximetry has gained wide clinical
acceptance as a monitoring technology because it gives early warning of
hypoxemia or a loss of pulse, is noninvasive and requires little or no special
training.
Prior to the development of pulse oximetry, blood oxygen levels were detected
either through visual inspection of a patient's skin color or by laboratory
testing of blood. Neither method, however, provided clinicians with both
accurate and real-time data. Visual inspection of skin color, for example,
relies on a clinician's subjective judgment and lacks precision. Laboratory
testing of blood gases, though more accurate, is time-consuming and cannot
provide real-time data. Conventional pulse oximeters have improved upon
traditional methods of measuring blood oxygen saturation levels by continuously
and non-invasively measuring blood oxygen saturation with the assistance of
finger-tip sensors attached to a microprocessor. These sensors contain light
emitting diodes ("LED") that transmit red and infrared light through the tissue
to a photo-detector. The photo-detector measures the amount of red and infrared
light absorbed by the tissue. A microprocessor then uses mathematical algorithms
to analyze the changes in light-absorption and, from this data, provides a
continuous, real-time measurement of the amount of oxygen in the patient's
blood. Conventional pulse oximeters display real-time data and typically give
audio and visual alerts when the patient's blood oxygen saturation or pulse rate
falls below or rises above certain prescribed levels, thereby allowing the
health care clinician to initiate treatment or to intensify therapy on a
real-time basis to prevent the serious clinical consequences of hypoxia.
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Pulse oximetry is widely accepted and used as a standard patient monitor in
operating rooms ("ORs"), recovery rooms and intensive care units ("ICUs"),
including neonatal intensive care units ("NICUs"). In the over 20 million annual
surgical procedures performed in the United States in which anesthesia is
administered, pulse oximeters are used as part of the standard protocol of
monitoring procedures. Pulse oximeters are regularly used in recovery rooms
after surgical procedures until the effects of anesthesia have worn off. Pulse
oximetry is also widely used in the ICU, permitting a wider range of health care
personnel to monitor continuously and noninvasively the patient's blood oxygen
saturation and pulse. While the use of pulse oximetry in operating rooms and
critical care units is widely accepted, the Company believes there is a
substantial opportunity to extend the use of pulse oximetry to lower cost
intermediate care settings such as stepdown units, subacute centers and the
general ward. As a result of pressure to reduce costs of health care and the
length of hospital stays, an increasing number of patients with a risk of
hypoxia are being admitted to these intermediate care settings. However, due to
the limitations of existing patient monitoring technology, pulse oximetry has
not been widely adopted in these settings.
LIMITATIONS OF CONVENTIONAL PULSE OXIMETERS
The effectiveness of conventional pulse oximeters is limited by a number of
factors including the corruption of physiological readings caused by noise
artifact and low perfusion. Noise artifact is caused by patient movement (such
as shivering, kicking by infants and hand squeezing), ambient light (such as
heating lamps or sunlight) and electromagnetic interference (such as
interference caused by electrocautery instruments). These noise sources can
create interfering signals that corrupt the desired signal being measured by the
pulse oximeter and results in an inaccurate measurement. In cases of low
perfusion, such as experienced by many elderly and critically ill patients, the
physiological signal that the pulse oximeter is attempting to measure may be
weak and inadequate for measurement. This can result in a complete failure by
the pulse oximeter to obtain a measurement of arterial blood oxygen saturation.
Further, the combination of noise artifact with low perfusion exacerbates the
difficulty in measuring arterial blood oxygen saturation because the noise
artifact can "drown out" weak physiological signals. These limitations result in
inaccurate measurement of this important physiological parameter and false
alarms. As a result, pulse oximeters have proven to be ineffective in
intermediate care settings. In addition, the Company believes that conventional
pulse oximeter alarms are deactivated in many ICUs and other critical care
settings.
The clinical community has recognized these limitations and manufacturers of
pulse oximeters are seeking technological solutions to these commonly recognized
problems. Certain devices have been developed which attempt to filter out
unwanted noise. These filters, however, have been largely ineffective in solving
the problems of motion artifact and low perfusion. Other devices have attempted
to minimize the effects of unfiltered noise by "freezing" when noise is detected
and repeating the last measurement until a new clean signal is detected and a
new measurement can be displayed. Still other devices have attempted to average
the signal over a longer period of time (long-averaging) to reduce the effect of
temporary erroneous measurements. These solutions, however, do not provide the
clinician with continuous, real-time information and can be unreliable in
critical medical situations.
THE MASIMO SOLUTION
The Company believes that pulse oximeters which incorporate the Company's
proprietary, Masimo SET technology can offer the following clinical advantages
over conventional pulse oximeters:
* ACCURATE REAL-TIME MEASUREMENT. Masimo SET is designed to deliver
critical, potentially life-saving information to the clinician in
real-time. By utilizing proprietary algorithms and sensor designs,
Masimo SET eliminates the need to utilize techniques such as "freezing"
and "long-averaging" of signals. The Company believes that the ability
to provide accurate and reliable information in critical medical
situations will enhance current applications of pulse oximetry and
expand its use in a variety of other patient care settings.
* MOTION ARTIFACT RESISTANCE. Masimo SET is designed to identify and
eliminate noise caused by patient movement and provide an accurate
measurement of the patient's blood oxygen saturation and pulse rate.
The Company believes that the motion artifact resistance of Masimo SET
will
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enhance the performance of pulse oximeters in NlCUs and pediatric
care units and expand their use in intermediate care units, emergency
care and ambulatory settings, skilled nursing facilities and the home.
* LOW PERFUSION RESISTANCE. Masimo SET is designed to better detect and
measure blood oxygen saturation in patients who suffer from low
perfusion, such as the elderly, neonates and the critically ill. The
Company believes that this enhances the performance of pulse oximeters
in critical medical situations when the need for accurate and reliable
measurement is most needed.
* ELECTROMAGNETIC INTERFERENCE AND AMBIENT LIGHT RESISTANCE. The
proprietary technology contained in Masimo SET MS-1 boards and Low
Noise Optical Probe ("LNOP") sensors is designed to shield or eliminate
noise caused by ambient light, electrocautery instruments and other
electromagnetic interference, thereby permitting pulse oximetry to
function reliably in NlCUs and ORs and during emergency medical
transportation.
The clinical advantages of Masimo SET have already been demonstrated in five
published studies. In a March 1994 study conducted at the University of
California, Irvine, the impact of motion artifact and low perfusion on the
performance of a pulse oximeter incorporating Masimo SET was analyzed and Masimo
SET was shown to have superior performance in comparison to conventional pulse
oximeters. Another study was conducted at Northwestern University in September
1994 on recovery room patients under simulated low perfusion conditions. This
study concluded that monitors incorporating Masimo SET had a significantly
decreased incidence of false alarms compared to monitors incorporating the
leading market technology. In a subsequent study performed at the University of
California, Irvine in January 1995, monitors incorporating Masimo SET were shown
to have superior performance in comparison to a number of other pulse oximeters,
one of which had been specifically designed to cure motion artifact. In October
1995, a comparison of a monitor incorporating Masimo SET with a leading pulse
oximeter was conducted at the University of Michigan on patients in the recovery
room. This study reported that the monitor incorporating Masimo SET showed a
marked decrease in loss of signal, false alarms and false alarm duration when
compared to the performance of the conventional pulse oximeter. Most recently,
the results of a study specifically focused on the Neonatal Intensive Care Unit
(NICU) were presented at the May 1997 American Lung Association Meeting. This
NICU based comparison concluded that there was significant improvement in motion
artifact rejection and low perfusion performance of monitors incorporating
Masimo SET when compared to a leading pulse oximetry product.
In order to enhance wide market acceptance, the Company has designed Masimo SET
to be easily integrated into conventional monitoring systems, thereby providing
patient monitoring companies with the option of retrofitting existing
instruments depending upon their current configuration. In addition, because
Masimo SET provides arterial blood oxygen saturation data in the same format as
conventional pulse oximeters, little or no additional clinical education is
required.
BUSINESS STRATEGY
The Company's objectives are to establish Masimo SET as the standard for pulse
oximetry, extend its use to new patient care settings and develop noninvasive
monitoring of other physiological parameters. The key elements of the Company's
strategy for attaining its objectives are as follows:
ESTABLISH MASIMO SET AS THE STANDARD FOR PULSE OXIMETRY. The Company's goal is
to establish Masimo SET as the standard for pulse oximetry. To promote the
acceptance of Masimo SET, the Company will continue to seek to enhance the
medical profession's perception of Masimo SET by facilitating clinical studies,
enlisting respected scientists to participate in testing and evaluating the
technology and publishing the results of their clinical studies in professional
journals. In addition, the Company believes that its growing number of OEM
licensees is likely to influence others in the industry to adopt Masimo SET.
COMMERCIALIZE TECHNOLOGY THROUGH OEM LICENSE ARRANGEMENTS WITH LEADING PATIENT
MONITORING COMPANIES. The Company licenses its proprietary technology to leading
patient monitoring companies for incorporation into their products. The Company
believes that patient monitoring companies with established sales and
distribution channels will facilitate broad commercialization of its technology
and
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products. Currently, the Company has OEM license agreements with Kontron
Instruments, Ltd. ("Kontron"), Healthdyne Technologies, Inc. ("Healthdyne"),
Ohmeda, Inc., a subsidiary of BOC Health Care, Inc. ("Ohmeda"), Datascope Corp.
("Datascope"), NEC Corporation ("NEC") and Zoll Medical Corporation ("Zoll").
These companies are licensed to use Masimo SET in pulse oximetry products and
the Company has agreed with Healthdyne to jointly develop other products based
on Masimo SET. The Company is engaged currently in discussions with additional
patient monitoring companies.
ESTABLISH MASIMO AS A LEADING SUPPLIER OF SENSORS. The Company intends to
establish itself, through relationships with its OEM licensees, as a leading
supplier of patient monitoring sensors, thereby generating a source of recurring
revenue for the Company. The Company believes that demand for its sensors will
increase because the optimal performance of Masimo SET is attained only when
Masimo SET MS-1 printed circuit boards are used in conjunction with Masimo SET
LNOP sensors. In addition, the Company expects that its OEM licensees will
promote the sale of the Company's sensors because they will receive a
substantial share of the profits derived from sensor sales.
EXPAND MARKET FOR PULSE OXIMETRY. The Company believes that because conventional
pulse oximeters are often ineffective during conditions of patient movement and
low blood perfusion, their widespread adoption beyond ORs, recovery rooms and
ICUs has been limited. The Company believes that Masimo SET will be able to
substantially overcome the problems of noise artifact and low perfusion and
provide significantly improved performance in pulse oximeters, particularly in
less acute care settings. As a result of this improved performance, the Company
expects the demand and market for pulse oximeters to increase.
APPLY MASIMO SET TO OTHER EXISTING NONINVASIVE MONITORING APPLICATIONS. The
Company believes that Masimo SET can be used in other existing noninvasive
monitoring applications, such as blood pressure, electrocardiography and
respiration monitoring. The Company believes that development of such
applications involves adapting the Company's pulse oximetry software algorithms,
sensors and hardware. The Company is currently evaluating applications to focus
future development efforts.
ENABLE NONINVASIVE MONITORING OF INVASIVELY MONITORED PARAMETERS. The Company
believes that with Masimo SET and its expertise in digital signal processing,
spectroscopy and electro-optical design, it can develop products that will
noninvasively monitor physiological parameters which currently can only be
monitored by invasive techniques. The Company is currently exploring the
continuous noninvasive monitoring of blood pressure, total hemoglobin count and
blood glucose. The Company believes the blood glucose monitoring market
represents a large market opportunity, and it intends to devote resources to the
development of a noninvasive blood glucose monitoring technology.
TECHNOLOGY AND PRODUCTS
Masimo SET MS-1 Printed Circuit Boards
Masimo SET MS-1 printed circuit boards are primarily based on new digital signal
processing techniques and a new method for invivo measurement. Conventional
pulse oximeters have unsuccessfully attempted to eliminate noise by utilizing
conventional fixed filters. Conventional fixed filters allow certain frequencies
to pass through the filter while blocking others that are not within the
prescribed range. For example, a conventional bandpass filter operating in a
range of lHz to 10Hz will filter or reject all frequencies below lHz and above
10Hz. However, if noise is introduced within the bandwidth range established by
the filter, such as patient motion which could have a frequency of 2Hz, noise
will be allowed to pass through the filter and be measured by the monitor
together with the desired physiological signal, effectively corrupting the
measurement. To overcome the inherent limitations of conventional fixed filters,
adaptive filters have been used to reject predicted noise from the measurement
by tuning the filter parameters to the noise's predicted frequency
characteristics, known as "noise reference." Adaptive filters have been used
effectively in industries such as telecommunications, defense and aerospace.
These adaptive filters are designed to pass desired signals and reject undesired
signals, such as noise, by relying on either predictable signals or predictable
noise and rejecting the noise. Certain classes of signals, however, are not
predictable. For example, a normal heart rate has considerable beat-to-beat
variability. Many noise artifacts are also unpredictable making it difficult to
establish a noise reference. For example, patient movement can have a frequency
of 2Hz at one moment and 3Hz at the next moment. As a result, adaptive filters
to date have not been effective in the patient monitoring field.
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Masimo SET enables the use of adaptive filters in medical applications by using
proprietary techniques to accurately establish the noise reference in the
physiological signal that is received by the sensor. To create the noise
reference, the Company uses the incoming time series of signals and maps them
into an x-y plot where the x axis is all of the possible oxygen saturation
values (e.g., from 0 to 100%), and the y axis is the probability values for such
oxygen saturation existing in the incoming time series signals (known as
photo-plethysmography in pulse oximetry applications). This represents a new way
of analyzing photo-plethysmographic waveforms for measuring arterial blood
oxygen saturation. Before the introduction of Masimo SET, the pulse oximetry
industry relied on the ratio of incoming signals, the red wavelength intensity
divided by the infrared wavelength intensity, to measure blood oxygen
saturation. During patient movement and low perfusion situations, however, this
measurement method results in erroneous readings because noise may corrupt the
signal or the signal may be too weak to be properly measured. By mapping the
photoplethysmographic signals, the signal and noise contributions are separated.
Once the noise contribution is identified, it can be input into an adaptive
filter (Adaptive Noise Canceller) which eliminates the noise that is in the same
bandwidth as the desired physiological signal, thereby resulting in a
substantially "clean" waveform, enabling the accurate, direct calculation of the
patient's blood oxygen saturation and pulse rate.
Masimo SET LNOP Sensors
The Company has developed a line of disposable and reusable patient sensors for
use with pulse oximeters that utilize Masimo SET MS-1 boards. The Company has
designed different sensors for adults, children, infants and pre-term infants.
The Company's sensors optimize Masimo SET algorithm performance by reducing
noise caused by patient movement, electromagnetic interference, including
electrocautery devices, and ambient light. The Company has accomplished this by
designing a compressible cavity area over the photo-detector contained in the
sensor. During patient movement, this compressible cavity is designed to keep
the patient's soft tissue substantially uncompressed, thereby maintaining the
uniformity of the optical path length. In addition, the cavity is designed to
stabilize the venous blood from accelerating back and forth during patient
movement thereby reducing the noise caused by such acceleration. Further,
because the photo-detector is recessed in the cavity, ambient light is less
likely to hit the photo-detector. The Company's sensors also shield the
photo-detector from noise caused by electrocautery devices and other
electromagnetic interference.
LICENSING AND DEVELOPMENT AGREEMENTS
The Company licenses its technology to companies with installed customer bases,
permitting the Company to leverage the sales and distribution channels of each
OEM licensee without requiring the Company to allocate substantial financial
resources to develop its own sales force. Currently, the Company has agreements
with Kontron, Healthdyne, Ohmeda, Datascope, NEC, and Zoll. The Company intends
to devote substantial efforts to the marketing of Masimo SET to patient
monitoring companies.
In December 1995, the Company entered into a purchasing and licensing agreement
with Kontron pursuant to which Kontron may purchase Masimo SET MS-1 boards and
LNOP sensors for incorporation into products manufactured and distributed by
Kontron. Kontron has recently introduced pulse oximeter products containing
Masimo SET in Europe, the Far East, the Middle East and Australia.
In April 1996, the Company entered into a purchasing and licensing agreement
with Healthdyne. Pursuant to the terms of this agreement, Healthdyne obtained a
nonexclusive license to use Masimo SET for inclusion in pulse oximeter products
manufactured and distributed by Healthdyne and the right to purchase the
Company's Masimo SET MS-1 boards and LNOP sensors. In addition, under the terms
of this agreement, the Company and Healthdyne have agreed that they shall
develop two additional product lines for Healthdyne utilizing Masimo SET. The
first product line consists of fetal oximetry instruments for use in monitoring
the fetus' oxygen saturation and pulse rate during labor and delivery. The
second product line consists of oximetry apnea instruments for use in various
applications, including in-home SIDS monitoring. Pursuant to the terms of this
agreement, the Company has agreed not to license or supply to certain
competitors in the field under certain circumstances (i) fetal oximetry
technology or products for up to eight years, and (ii) oximetry apnea technology
for up to four years. The Company and Healthdyne are currently conducting
studies on a fetal oximetry product and, pending positive outcome of
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the clinical trials, the Company expects Healthdyne to launch the product
outside the United States in late 1997.
In May 1996, the Company entered into a nonexclusive purchasing and licensing
agreement with Ohmeda for the Company's Masimo SET MS-1 boards and LNOP sensors
pursuant to which Ohmeda may purchase Masimo SET MS-1 boards and LNOP sensors
for incorporation into Ohmeda's stand alone pulse oximeter instruments. Under
the terms of the agreement, Ohmeda is obligated to pay Masimo royalties on
shipments of products incorporating Masimo SET.
In June 1996, the Company entered into a nonexclusive purchasing and licensing
agreement with Datascope for the Company's Masimo SET MS-1 boards and LNOP
sensors pursuant to which Datascope may manufacture Masimo SET MS-1 boards and
purchase LNOP sensors for incorporation into products produced by Datascope that
monitor pulse oximetry. Under the terms of the agreement, Datascope is obligated
to pay Masimo royalties on shipments of products incorporating Masimo SET. The
Company does not expect to realize revenues pursuant to its agreement with
Datascope prior to fiscal 1998.
During January 1997, the Company entered into a non-exclusive purchasing and
licensing agreement with NEC for the Company's Masimo SET MS-1 boards and LNOP
sensors for incorporation into NEC's stand alone pulse oximeter instruments. NEC
has recently introduced pulse oximeter products containing Masimo SET in Japan.
During April 1997, the company entered into a purchasing and licensing agreement
with Zoll. Pursuant to the agreement, Zoll obtained a non-exclusive license to
incorporate the Masimo SET MS-1 boards into patient monitoring/defibrillation
products manufactured and distributed by Zoll, and the right to purchase and
distribute the Company's LNOP sensors. Under the terms of the agreement, Zoll
was obligated to pay Masimo a license fee upon signing the agreement as
consideration for the license granted.
The Company will be dependent upon a small number of OEM licensees for
marketing, selling and distributing products that incorporate Masimo SET. These
licensees will generate a significant portion of the Company's future revenues.
The Company's success will depend in part upon whether the Company's OEM
licensees devote a sufficient amount of resources to the promotion of products
which incorporate the Company's technology. Because these products may represent
a relatively small portion of an OEM licensees' business and since certain of
the Company's OEM licensees offer competitive products, there can be no
assurance that the Company's OEM licensees will devote sufficient attention to
the products incorporating Masimo SET. Furthermore, although the Company has
certain contractual rights with each of its OEM licensees, any legal remedies
that the Company may have in the event of breach would be costly to exercise and
may not provide the Company with meaningful relief. The Company has agreed to
indemnify each of its OEM licensees against claims of infringement of
intellectual property rights, and the Company's rights to terminate the
agreements with each of its OEM licensees are limited. The failure of the
Company's OEM licensees to successfully market, sell or distribute products
incorporating the Company's technology, the loss of OEM agreements or the
inability to enter into future OEM licenses would have a material adverse effect
on the Company's business, financial condition and results of operations.
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that ongoing research and development efforts are essential
to its success. The Company's current research and development efforts are
focused on the development of Masimo SET printed circuit boards which utilize
lower power, can be manufactured at a lower cost and have improved performance,
and the development of new sensors. The Company is also investigating the
application of Masimo SET to new or noninvasive parameters, such as fetal
oximetry, peripheral venous oximetry and noninvasive blood glucose measurement.
On certain projects, the Company's research and development activities are
performed internally by its research and development staff and on certain other
projects in cooperation with its OEM licensees. Through March 31, 1997, no
research and development activities had been funded by any of the Company's OEM
licensees. The Company expects its research and development expenditures to
increase in fiscal 1998.
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MANUFACTURING
The Company's Masimo SET MS-1 printed circuit boards and LNOP sensors are
currently manufactured by third party manufacturers. By relying on contract
manufacturers, the Company hopes to enter into and maintain cost effective
manufacturing arrangements, minimize capital investment and focus its energies
on the transition of its pulse oximeter technologies and products from
development to commercial production.
The Company has entered into a contract with Electro Surface Technology
("Electro Surface"), an established medical manufacturer, for the production of
Masimo SET MS-1 boards. The Company has entered into a contract with United
Detectors Technology ("UDT"), an established manufacturer of pulse oximetry
sensors, for the manufacture of its Masimo SET LNOP sensors. The Company
monitors its third party manufacturers and performs inspections and product
tests at various steps in the manufacturing cycle to ensure compliance with the
Company's specifications.
The Company and its contract manufacturers rely on sole source suppliers for
certain components, including LEDs, digital signal processor chips and analog to
digital converter chips. The Company and its contract manufacturers have taken
steps to minimize the impact of a shortage or stoppage of shipments of LEDs,
digital signal processor chips or analog to digital converter chips, including
maintaining excess inventory and designing software that may be easily ported to
another digital signal processor chip. In the event of a delay or disruption in
the supply of single source components, the Company believes that it and its
contract manufacturers will be able to locate additional sources of these single
source components on commercially reasonable terms and without experiencing
material disruption in the Company's business or operations. If, however, due to
a change in circumstances the Company or its contract manufacturers were unable
to locate additional replacement suppliers or third party manufacturers on a
timely basis, such loss of the Company's sole source suppliers or third party
manufacturers would have a material adverse effect on the Company's business,
financial condition and results of operations.
While the Company intends to rely on third parties to manufacture Masimo SET
MS-1 boards, the Company's long-term manufacturing strategy includes the
development of an in-house capability to manufacture Masimo SET LNOP sensors in
commercial quantities. The Company, however, plans to continue to use third
party manufacturers for Masimo SET LNOP sensors as a second source for as long
as practicable. The Company has no experience in manufacturing its Masimo SET
LNOP sensors in commercial quantities. The manufacturing process for sensors is
complex and requires precision in manufacturing and testing finished products.
Manufacturers often encounter difficulties in scaling up production of products,
including problems involving production yields, quality control and assurance,
component supply and shortages of qualified personnel. There can be no assurance
that the Company will be able to develop a manufacturing capability, attract,
train and retain the required personnel, including personnel skilled in
manufacturing processes, obtain regulatory approval to manufacture sensors at
its facility or manufacture sensors at a commercially reasonable cost.
COMPETITION
The medical device industry is characterized by extensive research efforts and
rapid technological change. There are a number of companies which currently
offer, and are in the process of developing, pulse oximeter technologies and
products. The Company also believes that other medical device companies will
compete with the Company with respect to other technologies and products
currently being researched and developed by the Company, such as noise artifact
resistant pulse oximetry, fetal oximetry and non-invasive blood glucose
measurement. The Company expects that competition in the patient monitoring
field will be based primarily on the performance and breadth of the product
provided, physician, health care provider and patient acceptance, price and
effective sales and marketing efforts. Although the Company believes that its
pulse oximetry technology and products are well positioned to compete
successfully, there can be no assurance that the Company will be able to do so.
Many of the Company's competitors and potential competitors have substantially
greater financial, technical and human resources than the Company, and have
substantially greater experience in developing products, obtaining regulatory
approvals and marketing and manufacturing medical devices. In addition,
technologies or products may be developed that are more effective or less costly
than any which have been or are being developed by the Company or that would
render the Company's technology or products obsolete or not competitive. In
addition, the Company believes that a number of manufacturers of pulse oximeters
have signed exclusive purchasing contracts with large hospitals and hospital
networks that could limit the number of potential customers for products
incorporating the Company's technology in the
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hospital market or preclude the Company's OEM licensees from selling to a
substantial portion of the hospital market. The Company believes that there has
been and may continue to be a trend toward consolidation of hospitals and
hospital buying groups and, to the extent that such hospitals or buying groups
have contracts with competitors of the Company's OEM licensees, such
consolidations could prevent the Company's technology from penetrating a
substantial portion of the market for pulse oximeters. Furthermore, as a result
of potential pricing practices in the market for pulse oximeters, the Company's
OEM licensees may be required, among other things, to offer substantial
discounts or extended payment terms on products incorporating Masimo SET which
could have a material adverse effect on the Company's revenue.
Currently, the Company's principal direct competitor in the pulse oximetry
market is Nellcor Puritan Bennett Incorporated ("Nellcor"), which has a dominant
market share in medical sensor sales. In addition, the Company indirectly
competes with companies such as Hewlett-Packard Company and Marquette
Electronics, Inc., which manufacture multi-parameter patient monitoring systems.
Because the Company's strategy is to license Masimo SET to patient monitoring
companies on a nonexclusive basis, a number of the Company's direct and indirect
competitors may in the future become customers. The Company believes that the
principal competitive factors in the pulse oximetry market are performance,
price, product features, market reputation and breadth of sales and distribution
efforts. There can be no assurance that the Company or its OEM licensees will be
able to compete successfully or that competition will not have a material
adverse effect on the Company's businesses, financial condition and results of
operations.
PATENTS AND PROPRIETARY RIGHTS
The Company considers the protection of its technology to be material to its
business. In addition to seeking United States patent protection for its
inventions, patent applications have been filed in selected foreign countries,
including Canada, Japan, Australia and Western European countries, in order to
protect its proprietary rights to inventions. The Company also relies upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position.
The success of the Company will depend, in part, on its ability to obtain
patents and protect trade secrets. Masimo has 7 issued U.S. patents and 15
pending U.S. patent applications relating to its technologies. In addition, the
Company has 4 foreign patents and 25 pending foreign patent applications Patent
applications relating to the Company's Masimo SET LNOP sensors are currently
pending. The medical device and pulse oximetry industries have been
characterized by extensive litigation regarding patents and other intellectual
property rights. There can be no assurance that the Company's issued patents, or
any patents that may issue, will provide proprietary protection or competitive
advantages, or that any of the Company's patents will not be challenged,
invalidated or circumvented, that any claims which are included in pending or
future patent applications will issue, that third parties will not seek to apply
for and obtain patents that will prevent, limit or interfere with the Company's
ability to use or license its technologies and products either in the United
States or in international markets. The commercial success of the Company will
also depend in part upon its ability to avoid infringing upon patents issued or
that may be issued to others. There can be no assurance that patents belonging
to others will not require the Company to alter its technology and products, pay
licensing fees or cease development of its current or future technology and
products. Although patent and intellectual property disputes in the medical
device industry have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
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 subject the Company to significant liability and prevent the
Company from selling or licensing its technologies and products, which would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, any litigation regarding infringement
could result in substantial costs to the Company and be time consuming, could
divert the attention of the Company's key employees from other matters and could
materially adversely affect the Company's business, financial condition and
results of operations, regardless of the outcome of the litigation. In addition,
to determine the priority of inventions, the Company may have to participate in
interference proceedings declared by the PTO or in proceedings before foreign
agencies with respect to any of its existing patents or patent applications or
any future patents or patent applications, any of which could result in
substantial costs to the Company and the diversion of the Company's key
employees. The Company also relies on trade secrets to protect its
8
<PAGE> 10
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire equivalent technology or that the
Company can maintain such technology or trade secrets. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as the laws of the United States. The failure or inability of the
Company to protect its intellectual property rights could have a material
adverse effect on its business, financial condition and results of operations.
The Company has several registered trademarks in the United States including
"Masimo," "SET," "LNOP" and the Company's logo. In addition, the Company has
applied for registration of the following trademarks in the United States:
"Autoprocal," "Procal," "DST" and "FST". There can be no assurance that the
registered or unregistered trademarks of the Company are valid or that such
trademarks do not infringe upon third party rights. If the Company is required
to change its trademarks, it could result in significant expenses and have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company also relies on unpatented trade secrets, proprietary know-how and
continuing technological innovation which it seeks to protect, in part, by
confidentiality agreements with its OEM licensees, collaborators, employees and
consultants. These agreements typically provide that all confidential
information developed or made known to the individual or entity during the
course of the individual's or entity's relationship with the Company is to be
kept confidential and not disclosed to third parties except in specific
circumstances. In the case of employees, the agreements provide that all
inventions related to the Company's business and the employee's job position
that are conceived by the individual shall be the exclusive property of the
Company. There can be no assurance that these agreements will not be breached,
that the Company would have adequate remedies for any breach, or that the
Company's trade secrets or know how will not otherwise become known or be
independently discovered by competitors. Further, there can be no assurance that
the Company will be able to protect its trade secrets or that others will not
independently develop substantially equivalent proprietary information and
techniques.
GOVERNMENT REGULATION
The products to be marketed and manufactured by the Company and the products
into which the Company's technology will be incorporated, are medical devices
under the Federal Food, Drug, and Cosmetics Act, as amended, and the regulations
promulgated thereunder (the "FDC Act"). Accordingly, they are subject to
extensive regulation by the United States Food and Drug Administration (the
"FDA") and, in some instances, by foreign and state governments. Pursuant to the
FDC Act, the FDA regulates the clinical testing, manufacture, labeling, sale,
distribution and promotion of medical devices. Before a new device can be
introduced into the market, the manufacturer must obtain market clearance
through either the 510(k) premarket notification process or the lengthier PMA
application process. Noncompliance with applicable requirements, including
current good manufacturing practices ("CGMP"), can result in, among other
things, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, withdrawal of marketing
approvals, and criminal prosecution. The FDA also has the authority to request
repair, replacement or refund of the cost of any device manufactured or
distributed by the Company. In the United States, medical devices are classified
into one of three classes (Class I, II, or III), on the basis of the controls
deemed necessary by FDA to reasonably assure their safety and effectiveness.
Under FDA regulations, Class I devices are subject to general controls (for
example, labeling, PREMARKET notification, and adherence to CGMP) and Class II
devices are subject to general and special controls (for example, performance
standards, post market 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 (for example, life-sustaining,
life supporting and implantable devices, or new devices which have not been
found substantially equivalent to legally marketed devices).
Before a new medical device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through either a 510(k) notification
or a pre-market approval ("PMA") application. A 510(k) clearance will be granted
if the submitted information 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 a proposed device is not substantially equivalent to a
legally marketed device, or that additional information or data are
9
<PAGE> 11
needed before a substantial equivalence determination can be made. The FDA has
recently been requiring a more rigorous demonstration of substantial equivalence
than in the past. A request for additional data may require that clinical
studies of the device's safety and efficacy be performed. It generally takes
from three to twelve months from the date of submission to obtain a 510(k)
clearance, but it may take longer.
A "not substantially equivalent" determination, or a request for additional
information, could delay the market introduction of new products by the Company
or its OEM licensees and could have a materially adverse effect on the Company's
business, financial condition and results of operations. Modifications or
enhancements to the Company's products, or the products of its OEM licensees
that incorporate the Company's products, that could significantly affect the
safety or efficacy of the device or that constitute a major change to the
intended use of the device, will require new 510(k) submissions.
If a proposed device is found not to be substantially equivalent to a legally
marketed Class I or Class II device, or if it is a Class III device for which
FDA has called for PMAs, a PMA application must be filed. There can be no
assurance that the Company or its OEM licensees will not be required to file a
PMA in respect to the Company's Masimo SET MS-1 boards and LNOP sensors or
applications of the Company's technology. A PMA application must be supported by
valid scientific evidence, which typically includes extensive data, including
human clinical trial data, to demonstrate the safety and effectiveness of the
device. The PMA process typically takes significantly longer than the 510(k)
route to market. FDA review of a PMA application generally takes one to two
years from the date the PMA application is accepted for filing, but it may take
significantly longer, especially if the FDA requires further studies or other
additional information. The PMA process can be expensive, uncertain and
time-consuming, and a number of devices for which FDA approval of a PMA has been
sought by other companies have never been approved for marketing.
If human clinical trials of a device are required in connection with either a
510(k) notification or a PMA, and the device presents a "significant risk," the
sponsor of the trial (usually the manufacturer or the distributor of the device)
is required to file an investigational device exemption ("IDE") application
prior to commencing human clinical trials. The IDE application must be supported
by data, typically including the results of animal and laboratory testing. If
the IDE application is reviewed and approved by the FDA and one or more
appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant
risk" to the patient, a sponsor may begin the clinical trial after obtaining
approval for the study by one or more appropriate IRBs, but not the FDA.
Sponsors of clinical trials are permitted to sell those devices distributed in
the course of the study provided such compensation does not exceed recovery of
the costs of manufacture, research, development and handling and use of the
device is stopped once the required number of clinical subjects is reached. For
significant risk devices an IDE supplement must be submitted to and approved by
the FDA before a sponsor or an investigator may make a change to the
investigational plan that may affect its scientific soundness or the rights,
safety, or welfare of human subjects.
The Company's OEM licensees will be required to obtain 510(k) premarket
clearance from the FDA for products that incorporate Masimo SET MS-1 boards and
LNOP sensors prior to being commercially distributed in the United States. The
Company submitted a 510(k) notice for a pulse oximeter incorporating its Masimo
SET MS-1 board and LNOP sensors in July 1996 to facilitate its OEM licensees in
obtaining 510(k) clearance for their products that incorporate Masimo SET MS-1
boards and LNOP sensors. The company received clearance from the FDA on its
510(k) notice in February 1997. In the future, the Company may submit additional
510(k)s to address additional claims or uses, such as claims regarding motion
artifact and use with low perfusion rates. The Company also could be required to
obtain 510(k) clearance of its Masimo SET MS-1 boards and LNOP sensors if the
Company were in the future to seek to sell or promote its products directly to
end users. Even though the Company has obtained premarket clearance for its
products, there can be no assurance that the Company's OEM licensees that
incorporate Masimo SET MS-1 boards and LNOP sensors into their existing patient
monitoring devices will be successful in obtaining premarket clearance for the
resulting devices in a timely manner, or at all. Modifications or changes to the
Company's products or claims, or those of its OEM licensees, may require the
submission of additional 510(k) notices. Failure on the part of the Company or
its OEM licensees to obtain such 510(k) clearances would have a material adverse
effect on the Company's business, financial condition and results of operations.
10
<PAGE> 12
Products manufactured or distributed by the Company, its contract manufacturers,
and its OEM licensees, pursuant to FDA clearances or approvals will be subject
to continuing and pervasive regulation by the FDA, including record keeping
requirements and reporting of adverse experiences with the use of the device.
Medical device manufacturers are required to register their establishments and
list their devices with the FDA and certain state agencies, and are subject to
periodic inspections by the FDA and certain state agencies, including the
California State Department of Health Services, Food and Drug Branch. The FDC
Act requires devices to be manufactured in accordance with Quality System
regulations which impose certain procedural and documentation requirements upon
the Company with respect to manufacturing and quality assurance activities.
Labeling and promotional activities are subject to scrutiny by the FDA and in
certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for uncleared or unapproved uses.
The Company, its products, and those of its OEM licensees that incorporate the
Company's products, are also subject to a variety of state laws and regulations
in those states or localities where its products are or will be marketed. Any
applicable state or local regulations may hinder the Company's ability to market
its products in those states or localities. Manufacturers are also subject to
numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances. There can
be no assurance that the Company will not be required to incur significant costs
to comply with such laws and regulations now or in the future or that such laws
or regulations will not have a material adverse effect upon the Company's
ability to do business.
The introduction of the Company's products in foreign markets will also subject
the Company and its OEM licensees, to foreign regulatory requirements which may
impose additional substantial costs and burdens. International sales of medical
devices are subject to the regulatory requirements of each country. The
regulatory review process varies from country to country. Many countries also
impose product standards, packaging requirements, labeling requirements and
import restrictions on medical devices. In addition, each country has its own
tariff regulations, duties and tax requirements. The approval by the FDA and
foreign government authorities is unpredictable and uncertain, and no assurance
can be given that the necessary approvals or clearances will be granted to
either the Company or its OEM licensees on a timely basis or at all. Delays in
receipt of, or a failure to receive, such approvals or clearances, or the loss
of any previously received approvals or clearances by the Company or its OEM
licensees, could have a material adverse effect on the business, financial
condition and results of operations of the Company.
The Company's products and those of its OEM licensees are subject to continued
and pervasive regulation by the FDA and other foreign and domestic regulatory
authorities. Changes in existing requirements or adoption of new requirements or
policies could adversely affect the ability of the Company, its contract
manufacturers or its OEM licensees, to comply with regulatory requirements.
Failure on the part of the Company, its contract manufacturers or its OEM
licensees, to comply with regulatory requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.
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, financial condition and results of operations.
PRODUCT LIABILITY INSURANCE
The Company's technology and products have applications related to patient
physiological status and other clinically critical information. Any failure by
the Company's products to provide accurate and timely information could expose
the Company's to risk from product liability claims. The Company currently
maintains product liability insurance, with limits of $5,000,000 per occurrence
and $6,000,000 in the aggregate, per year. There can be no assurance that the
Company's insurance will be adequate to cover future product liability claims,
or that the Company will be successful in maintaining adequate product liability
insurance at acceptable rates, if at all. Any losses that the Company may suffer
from future liability claims, and the effect that any product liability claims
may have upon the reputation and marketability of the Company's technology and
products, together with diversion of the attention of the Company's key
employees, may have a material adverse effect on the Company's business,
financial condition and results of operations. Products as complex as the
Company's sometimes contain errors, particularly in software components, that
remain undetected, despite rigorous testing, until used in a variety of
situations by many customers under varying circumstances. Such errors can result
in expensive
11
<PAGE> 13
product recalls, product liability claims or warranty expenditures.
There can be no assurance that the Company will not be subject to any such
expenses or product liability claims, that such claims will not result in
liability in excess of any applicable insurance coverage or that the Company's
insurance will cover any expenses or claims made.
EMPLOYEES
At March 31, 1997, the Company had 40 full-time employees, 22 of which were
engaged in research and development activities and 18 of which were engaged in
manufacturing, quality assurance and regulatory affairs, sales and marketing,
and general and administrative functions. None of the employees are represented
by a union. The Company believes that its relations with its employees are good.
ITEM 2. PROPERTIES
In April 1997, the Company entered into a lease agreement for 29,162 square feet
of manufacturing, laboratory, and office space in Irvine, California. The term
of the lease is from May 1, 1997 through May 31, 2002. In mid June 1997, the
Company moved to this new facility from its previous locations in Mission Viejo,
California and Denver, Colorado. The lease for the Mission Viejo facility of
approximately 11,000 square feet expires on June 30, 1997. The lease for the
Denver facility of approximately 2,700 square feet was on a month-to-month basis
and was terminated May 31, 1997. The Company believes that the new facility will
be adequate for the Company's space requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's securities have not been registered under the Securities Exchange
Act and, as such, there is no public trading market. There were approximately 73
holders of the Company's common stock on March 31, 1997.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception in 1989, the Company has been engaged in the design,
development and licensing of advanced medical technology for the noninvasive
monitoring of certain physiological parameters. The Company's first products,
based on its proprietary digital signal processing and sensor technology, are
designed to improve the effectiveness of pulse oximetry by overcoming the
inability of current monitors to precisely measure arterial blood oxygen
saturation levels in the presence of certain "noise" interference and low
perfusion. The Company is designing and developing monitoring instruments for a
variety of other applications, including peripheral venous oximetry, fetal
oximetry and noninvasive blood glucose measurement.
Masimo licenses its technology to companies with existing installed customer
bases, permitting the Company to leverage the sales and distribution channels of
each of its OEM licensees without requiring the Company to allocate financial
resources to develop its own sales force. The Company is currently working with
its OEM licensees to incorporate Masimo SET into certain of their products. To
date, two of the Company's OEM licensees are marketing products that incorporate
Masimo SET.
Since its inception, the Company has experienced significant operating losses
and, as of March 31, 1997, had an accumulated deficit of $11.9 million. The
Company expects to incur substantial additional losses due to increased
operating expenses primarily attributable to research and development and the
continued development and expansion of manufacturing activities. The Company
generated a limited amount of revenues in fiscal 1997. Results of operations may
fluctuate significantly from quarter to quarter and will depend upon numerous
factors, including the extent to which the Company's technology and products
gain market acceptance, the timing and volume of sales by the Company's OEM
licensees, introduction of new monitoring technology and products by the
Company's competitors, and pricing of competitive products. Further, the timing
of FDA and other regulatory approvals which must be obtained by the Company's
licensees will affect the Company's ability to generate revenues from its
technology.
RESULTS OF OPERATIONS
Fiscal Years Ended March 31, 1997 and 1996
Revenue was approximately $367,000 in fiscal 1997. Of this amount, $100,000 was
attributable to prepaid, nonrefundable licensing fees received from one of the
Company's OEM licensees. The remaining approximately $267,000 of revenue
recognized in this period was attributable to sales of product to OEM licensees.
There was no revenue recognized in fiscal 1996.
Cost of goods sold were approximately $633,000 in fiscal 1997. These costs were
primarily attributable to the development of manufacturing capabilities and
production of certain products which were shipped during the year. There was no
cost of goods sold recorded in fiscal 1996.
Research and development expenses decreased 5% to approximately $2.1 million in
fiscal 1997 from approximately $2.2 million in fiscal 1996. Although payroll
costs were higher in fiscal 1997, these costs were offset by higher consulting
fees and engineering supplies associated with various projects in fiscal 1996.
13
<PAGE> 15
Selling, general and administrative expenses increased 35% to approximately $1.8
million in fiscal 1997 from approximately $1.3 million in fiscal 1996. The
increase was due to additional staffing, legal fees, insurance and other costs
related to the commercial introduction of the Company's products to its OEM
licensees in fiscal 1997.
Non-recurring income of $1 million in fiscal 1997 was attributable to the
termination of a license agreement with one of the Company's OEM licensees and
subsequent forfeiture by such OEM licensee of non-refundable advance royalties.
Net interest income increased 25% to approximately $327,000 in fiscal 1997 from
approximately $263,000 in fiscal 1996. The increase was due to higher average
cash balances during fiscal 1997 resulting from the sale of Series D Preferred
Stock in August 1996.
Fiscal Years Ended March 31, 1996 and 1995
Research and development costs increased 156% to $2.2 million in fiscal 1996
from $855,000 in fiscal 1995. The increase was due primarily to increased
development efforts on the Company's Masimo SET LNOP family of sensors and
Masimo SET MS-1 printed circuit boards. In addition, in fiscal 1996 the Company
incurred expenses related to the establishment of manufacturing capabilities for
the Company's products.
Selling, general and administrative expenses increased 154% to $1.3 million in
fiscal 1996 from $511,000 in fiscal 1995. The increase was due to additional
staffing, legal fees, insurance and other costs related to preparing for the
commercial introduction of the Company's products to its OEM licensees in fiscal
1997.
Net interest income increased 211% to approximately $263,000 in fiscal 1996 from
approximately $84,000 in fiscal 1995. The increase was due to higher average
cash balances during fiscal 1996 resulting from the sale of Series C Preferred
Stock in January 1995.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through the private
sale of equity securities. From its inception through March 31, 1997, the
Company has raised $18.9 million in net proceeds through private equity
financing and stock option and warrant exercises. During August 1996, the
Company sold 1,500,000 shares of its Series D Preferred Stock for net proceeds
of $9,110,000. From inception through March 31, 1997, the Company has used cash
of $8.8 million to fund operations and $1.2 million for capital equipment
purchases. The proceeds from the sale of Series D Preferred Stock have been, and
will continue to be, used to fund research and development and for working
capital and other general corporate purposes.
During May 1997, the Company entered into a credit facility with Comerica Bank
(the "Bank") pursuant to which it may borrow up to a maximum of $2,285,000. The
credit facility has an equipment line of up to a maximum of $1,750,000. Advances
bear interest at the Bank's Base Rate plus 1.5%. The equipment line expires on
April 30, 1998. The credit facility a working capital line of up to a maximum of
$250,000. Advances bear interest at the Bank's Base Rate plus 1.25%. The working
capital line expires on July 15, 1998. The credit facility also has a letter of
credit facility of up to a maximum of $285,000, of which $265,582 has been
issued but not drawn on as of the date hereof. The letter of credit expires on
April 30, 1998 but has a one year automatic extension unless the Bank elects not
to renew. The final expiration is May 2, 1999. Advances bear interest at the
Bank's Base Rate plus 3%. The credit facility is collateralized by substantially
all of the assets of the Company and requires the Company to maintain certain
financial ratios and covenants. During June 1997, the Company borrowed
approximately $305,000 for capital equipment acquisitions.
14
<PAGE> 16
As of March 31, 1997, the Company did not have any commitments for material
capital equipment acquisitions. The Company anticipates making capital equipment
acquisitions of approximately $2 million in fiscal 1998, primarily for the
development of a commercial manufacturing capability.
During fiscal 1998, the Company plans to increase its level of operations
substantially, and in particular plans to develop a commercial manufacturing
capability and expand its research and development, business development and
marketing activities. Although the Company believes that the remaining proceeds
from the Series D offering, cash generated from the future sale of products, and
funds available under the credit facility will be sufficient to meet the
Company's operating and capital requirements through fiscal 1998, there can be
no assurance that the Company will not require additional financing prior to the
end of fiscal 1998. If the Company's OEM licensees fail to sell sufficient
quantities of either pulse oximeter systems incorporating the Masimo SET MS-1
printed circuit boards or LNOP sensors, the Company may require additional
capital prior to the end of fiscal 1998. In addition, the Company may require
additional capital in the future to fund growth of the Company. Any additional
required financings may not be available on terms satisfactory to the Company,
if at all.
RECENTLY ISSUED ACCOUNTING STANDARDS
During February 1997, SFAS No. 128, "Earnings Per Share," was issued. This
statement will require a change in the calculation of earnings per share for
financial statements issued for periods ending after December 15, 1997. Early
adoption is not permitted.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. These
forward-looking statements include statements regarding (i) future research
plans, expenditures and results, (ii) the potential utility of the Company's
proposed products, and (iii) the need for, and availability of, additional
financing.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's business and
technology, which involve judgments with respect to, among other things, future
scientific, economic and competitive conditions, and future business decisions,
all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that the
assumptions underlying the foward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, actual results may differ
materially from those set forth in the forward-looking statements. In light of
the significant uncertainties inherent in the forward-looking information
included herein, the inclusion of such information should not be regarded as
representation by the Company or any other person that the objectives or plans
of the Company will be achieved.
15
<PAGE> 17
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MASIMO CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants............................... 17
Balance Sheets As Of March 31, 1996 and 1997.................... 18
Statements of Operations For The Years Ended March 31, 1996 and
1997......................................................... 19
Statements of Stockholders' Equity (Deficit) For the Years
Ended March 31, 1996 and 1997................................ 20
Statements of Cash Flows For The Years Ended March 31, 1996 and
1997......................................................... 21
Notes to Financial Statements................................... 22
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
16
<PAGE> 18
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------
The Board of Directors and Stockholders
Masimo Corporation
Irvine, California
We have audited the accompanying balance sheets of Masimo Corporation (the
"Company") as of March 31, 1996 and 1997, and the related statements of
operations, stockholders' equity (deficit) and cash flows for the years then
ended. 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, in
all material respects, the financial position of Masimo Corporation at March 31,
1996 and 1997, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
May 16, 1997
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<PAGE> 19
MASIMO CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
-----------------------------
1996 1997
-----------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,719,152 $ 8,084,925
Accounts receivable 162,179
Inventories 115,088 211,781
Other current assets 28,484 100,237
----------------------------
Total current assets 2,862,724 8,559,122
Fixed assets, net 398,223 745,764
Intangible assets, net 353,269 507,904
Other assets 10,426 9,700
----------------------------
Total assets $ 3,624,642 $ 9,822,490
============================
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 42,119 $ 291,589
Accrued liabilities 298,456 444,267
Current portion of capital lease obligations 6,817
----------------------------
Total current liabilities 347,392 735,856
Deferred revenue 1,046,000
----------------------------
Total liabilities 1,393,392 735,856
----------------------------
Commitments and contingencies
Redeemable preferred stock:
Convertible Redeemable Series B Preferred Stock, 1,125,000 shares issued and
outstanding (liquidation preference of $2,632,347 at March 31, 1997) 2,460,364 2,634,903
Convertible Redeemable Series C Preferred Stock, 1,848,238 shares issued and
outstanding (liquidation preference of $7,218,257 at March 31, 1997) 6,656,738 7,204,202
Convertible Redeemable Series D Preferred Stock, 1,500,000 shares issued and
outstanding (liquidation preference of $11,078,814 at March 31, 1997) 9,921,709
----------------------------
Total redeemable preferred stock 9,117,102 19,760,814
----------------------------
Stockholders' equity (deficit):
Preferred stock; no par value and $0.001 par value at March 31, 1996 and
1997, respectively, 9,000,000 shares authorized:
Convertible Series A Preferred Stock, 805,302 and 966,362 shares issued and
outstanding at March 31, 1996 and 1997, respectively (liquidation preference
of $1,581,210 at March 31, 1997) 1,007,702 966
Common stock; no par value and $0.001 par value at March 31, 1996 and 1997,
respectively, 21,000,000 shares authorized, 2,745,998 and 2,831,998 shares
issued and outstanding at March 31, 1996 and 1997, respectively 772,425 2,832
Additional paid in capital-Series A Preferred Stock 1,393,280
Unearned compensation (249,493) (146,723)
Accumulated deficit (8,416,486) (11,924,535)
----------------------------
Total stockholders' equity (deficit) (6,885,852) (10,674,180)
============================
Total liabilities, redeemable preferred stock, and
stockholders' equity (deficit) $ 3,624,642 $ 9,822,490
============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 20
MASIMO CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Years Ended March 31,
-------------------------------
1996 1997
--------------- ---------------
<S> <C> <C>
Revenue:
Product sales $267,065
License fees 100,000
------------------------------
Total revenue - 367,065
Cost of goods sold 632,791
------------------------------
Gross margin - (265,726)
------------------------------
Operating expenses:
Research and development $2,189,745 2,076,336
Selling, general and administrative 1,300,786 1,749,934
------------------------------
Total operating expenses 3,490,531 3,826,270
------------------------------
Non-recurring income - (1,000,000)
------------------------------
Loss from operations (3,490,531) (3,091,996)
Interest income, net (262,842) (327,326)
------------------------------
Loss before provision for income taxes (3,227,689) (2,764,670)
Provision for income taxes 800 800
------------------------------
Net loss ($3,228,489) ($2,765,470)
==============================
Net loss applicable to common stockholders ($3,950,492) ($4,329,182)
==============================
Net loss per common share ($1.45) ($1.54)
==============================
Weighted average common shares outstanding 2,726,118 2,812,083
==============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 21
MASIMO CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For The Years Ended March 31, 1996 and 1997
<TABLE>
<CAPTION>
Series A Preferred Stock Common Stock Additional Paid in Capital
-----------------------------------------------------------------------------------
Shares Amount Shares Amount Series A Common
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 805,302 $1,007,702 2,717,498 $430,675
Stock options exercised 28,500 28,750
Compensation related to stock options
granted 313,000
Accretion of redemption value on
redeemable preferred stock
Net loss
----------------------------------------------------------------------------------
Balance at March 31, 1996 805,302 1,007,702 2,745,998 772,425
Incorporation in Delaware with par value
stock (1,006,897) (769,679) $1,006,897 $769,679
Stock options exercised 76,000 76 63,724
Warrants exercised 161,060 161 386,383
Compensation related to stock options
granted
Reversal of unearned compensation for stock
options canceled (42,260)
Issuance of common stock for settlement
of accounts payable 10,000 10 29,990
Accretion of redemption value on
redeemable preferred stock (821,133)
Net loss
----------------------------------------------------------------------------------
Balance at March 31, 1997 966,362 $966 2,831,998 $2,832 $1,393,280 -
============= ============= ============ ============== =============== =============
</TABLE>
<TABLE>
<CAPTION>
Unearned Accumulated
Compensation Deficit Total
--------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1995 ($4,465,994) ($3,027,617)
Stock options exercised 28,750
Compensation related to stock options
granted ($249,493) 63,507
Accretion of redemption value on
redeemable preferred stock (722,003) (722,003)
Net loss (3,228,489) (3,228,489)
---------------------------------------------
Balance at March 31, 1996 (249,493) (8,416,486) (6,885,852)
Incorporation in Delaware with par value -
stock
Stock options exercised 63,800
Warrants exercised 386,544
Compensation related to stock options 60,510
granted 60,510
Reversal of unearned compensation for stock
options canceled 42,260 -
Issuance of common stock for settlement
of accounts payable 30,000
Accretion of redemption value on
redeemable preferred stock (742,579) (1,563,712)
Net loss (2,765,470) (2,765,470)
---------------------------------------------
Balance at March 31, 1997 ($146,723) ($11,924,535) ($10,674,180)
=============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 22
MASIMO CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Years Ended March 31,
--------------------------------
1996 1997
--------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($3,228,489) ($2,765,470)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 119,914 175,412
Compensation related to stock options granted 63,507 60,510
Loss on retirement of fixed assets 34,065
Changes in operating assets and liabilities:
Accounts receivable (162,179)
Inventories (115,088) (96,693)
Other assets (16,494) (67,277)
Accounts payable (106,030) 249,470
Accrued liabilities
143,065 99,811
Deferred revenue
500,000 (1,000,000)
-------------------------------
Net cash used by operating activities
(2,605,550) (3,506,416)
-------------------------------
Cash flows from investing activities:
Proceeds from maturity of short-term investments 4,797,200
Purchases of fixed assets (323,830) (507,843)
Increase in intangible assets (127,625) (169,745)
-------------------------------
Net cash provided (used) by investing activities 4,345,745 (677,588)
-------------------------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of offering costs 9,496,544
Proceeds from issuance of common stock
28,750 60,050
Principal payments of capital lease obligations
(4,093) (6,817)
-------------------------------
Net cash provided by financing activities 24,657 9,549,777
-------------------------------
Net increase in cash and cash equivalents 1,764,852 5,365,773
Cash and cash equivalents at beginning of year 954,300 2,719,152
===============================
Cash and cash equivalents at end of year $2,719,152 $8,084,925
===============================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $265 $802
Taxes $800 $800
Noncash investing and financing activities:
Accretion of redemption value of redeemable preferred stock $722,003 $1,563,712
Equipment acquired under capital lease obligations $8,088
Reversal of unearned compensation for stock options canceled $42,260
Stock issued for settlement of accounts payable $30,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 23
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS
-------------------
1. DESCRIPTION OF THE COMPANY:
In May 1989, Masimo Corporation ("Masimo" or the "Company") was incorporated in
California, and reincorporated in Delaware in June 1996, to design, develop and
license advanced medical technology for the noninvasive monitoring of certain
physiological parameters. The Company's first products, based on its proprietary
digital signal processing and sensor technology, are designed to improve the
effectiveness of pulse oximetry by overcoming the inability of current monitors
to precisely measure arterial blood oxygen saturation levels in the presence of
certain "noise" interference and low perfusion. The Company is designing and
developing monitoring instruments for a variety of other applications, including
peripheral venous oximetry, fetal oximetry and noninvasive blood glucose
measurement. Masimo licenses its technology to companies with existing installed
customer bases, permitting the Company to leverage the sales and distribution
channels of each of its customers without requiring the Company to allocate
financial resources to develop its own sales force. The Company is currently
working with its customers to incorporate Masimo's technology into certain of
their products. To date, two of the Company's customers are marketing products
incorporating Masimo's technology in Europe and Japan.
In June 1996, the Company completed a 1-for-2 split of the Company's common and
preferred stock which has been given retroactive effect with respect to all
share and per share amounts presented in the accompanying financial statements.
The Company was considered a development stage enterprise in prior years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash And Cash Equivalents:
For purposes of the balance sheet and statement of cash flows, the Company
considers all highly liquid investments which are readily convertible into known
amounts of cash and have a maturity of three months or less when acquired to be
cash equivalents.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Fixed Assets:
Fixed assets are stated at cost, less accumulated depreciation and amortization.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the related assets, which range from three to
seven years, or over the lesser of the term of the lease or the estimated useful
life of the asset for assets under capital lease. Normal repairs and maintenance
are expensed as incurred whereas significant improvements which materially
increase values or extend useful lives are capitalized and depreciated over the
remaining estimated useful lives of the related assets.
Upon sale or retirement of depreciable assets, the related cost and accumulated
depreciation or amortization are removed from the accounts. Any gain or loss on
the sale or retirement is recognized in current operations.
Intangible Assets:
Intangible assets consist of patents and trademarks. Costs related to acquiring
patents and trademarks are capitalized and amortized over their estimated useful
lives using the straight-line method. Patents and trademarks are amortized over
10 and 17 years, respectively, which commences once final approval of the patent
or trademark has been obtained. Application costs are charged to operations when
it is determined that the patent or trademark will not be obtained.
22
<PAGE> 24
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------
Deferred Revenue:
Deferred revenue consists of license fees and nonrefundable advance royalties
under certain licensing agreements. Nonrefundable advance royalties are
recognized as revenue upon commencement of related product sales based upon the
terms of the agreement. In fiscal 1997, one of the Company's license agreements
was terminated by mutual consent and $1,000,000 of nonrefundable advance
royalties were recognized as non-recurring income. License fees are amortized
over the term of the respective agreement using the straight-line method.
Revenue Recognition:
The company recognizes revenue from product sales at the time of shipment.
Provisions are recorded for estimated sales returns. License fees and royalties
revenue is recognized ratably over the terms of the related agreements.
Software Development Costs:
Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological feasibility
is established, any additional costs are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Cost of Computer Software to Be Sold, Leased or Otherwise Marketed." Because the
Company believes that its current process for developing software is essentially
completed concurrently with the establishment of technological feasibility, no
software development costs have been capitalized during fiscal 1996 or 1997.
Research And Development:
Research and development expense includes personnel costs, materials,
depreciation on equipment and an allocation of facility costs, all of which are
directly related to research and development activities. As of March 31, 1997,
no research and development activities had been funded by third parties.
Income Taxes:
In accordance with SFAS No. 109, "Accounting for Income Taxes", deferred income
taxes are recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting
amounts at each year-end based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Management's Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of expenses during the reporting periods. Actual results
could differ from those estimates.
Accounting For Employee Stock Options:
In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation". In conformity with the
provisions of SFAS No. 123, the Company has determined that it will not change
to the fair value method prescribed by SFAS No. 123 and will continue to follow
Accounting Principle Board Opinion No. 25 for measurement and recognition of
employee stock-based transactions. The disclosure requirements of SFAS No. 123
have been adopted in fiscal 1997.
23
<PAGE> 25
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------
Fair Value Of Financial Instruments:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
management to disclose the estimated fair value of certain assets and
liabilities defined by SFAS No. 107 as financial instruments. Financial
instruments are generally defined by SFAS No. 107 as cash, evidence of ownership
interest in equity, or a contractual obligation that both conveys to one entity
a right to receive cash or other financial instruments from another entity and
imposes on the other entity the obligation to deliver cash or other financial
instruments to the first entity. At March 31, 1997, management believes that the
carrying amount of cash equivalents approximates fair value because of the short
maturity of these financial instruments.
Net Loss Applicable to Common Stockholders:
Net loss applicable to common stockholders is the amount of net loss increased
by additions to the carrying value of redeemable preferred stock during the
respective period.
Net Loss Per Common Share:
Net loss per common share has been computed by dividing the net loss applicable
to common stockholders by the weighted average number of common shares
outstanding during the period. Common equivalent shares and convertible
securities have been excluded from the computation because their effect would be
anti-dilutive.
Reclassifications:
Certain reclassifications have been made to the fiscal 1996 financial statements
to conform to the fiscal 1997 presentation.
Recently Issued Accounting Standards:
During February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement will require a change in the calculation of earnings per share for
financial statements issued for periods ending after December 15, 1997. Early
adoption is not permitted.
3. FIXED ASSETS:
Fixed assets consist of the following as of March 31:
<TABLE>
<CAPTION>
1996 1997
--------------------------
<S> <C> <C>
Furniture and fixtures .......................................... $ 64,190 $ 86,403
Computer and office equipment ................................... 230,970 462,308
Machinery and tools ............................................. 76,168 223,779
Optics and test equipment........................................ 289,581 360,243
Demonstration units ............................................. 15,600
---------------------------
660,909 1,148,333
Less, Accumulated depreciation and amortization ................. (262,686) (422,987)
Add, Construction in progress ................................... 20,418
---------------------------
$398,223 $745,764
===========================
</TABLE>
24
<PAGE> 26
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------
4. INTANGIBLE ASSETS:
<TABLE>
<CAPTION>
1996 1997
----------------------------
<S> <C> <C>
Patents.................................................... $350,482 $508,281
Trademarks................................................. 10,392 22,338
----------------------------
360,874 530,619
Less, Accumulated amortization ............................ (7,605) (22,715)
============================
$353,269 $507,904
============================
</TABLE>
5. PREFERRED STOCK:
Series A
Holders of Series A Preferred Stock are entitled to receive annual noncumulative
preferred cash dividends on each outstanding share at a rate of $.09 per share
if declared by the Board of Directors. At March 31, 1997, no dividends have been
declared. In the event of voluntary or involuntary liquidation, holders of
Series A Preferred Stock will be entitled to receive, prior to any distribution
to common stockholders, an amount equal to $1.10 per Series A Preferred Share
plus an amount equal to 9% per annum, cumulative from the date the first Series
A Preferred Share was issued. Each share of Series A Preferred Stock is
convertible, at the option of the holder or automatically at the closing of an
initial public offering, into common stock at an initial conversion rate of
one-to-one. The conversion rate is subject to adjustment upon the occurrence of
certain equity transactions, as defined.
In fiscal 1997, 161,060 warrants to purchase shares of Series A Preferred Stock
were exercised at $2.40 per share for proceeds of $386,544. As of March 31,
1997, there were no more warrants outstanding.
Series B
Holders of Series B Preferred Stock are entitled to receive annual cumulative
(from November 21, 1992) preferred cash dividends on each outstanding share at a
rate of $.144 per share, increasing to $.156 per share on and after December 21,
1993, upon declaration by the Company's Board of Directors. At March 31, 1997,
no dividends have been declared. Total dividends in arrears at March 31, 1996
and 1997 were $510,597 and $686,097, respectively. In the event of voluntary or
involuntary liquidation of the Company, holders of Series B Preferred Stock will
be entitled to receive, prior to any distribution to common and Series A
Preferred stockholders, an amount equal to $1.73 per Series B Preferred Share
plus all unpaid, accumulated cumulative dividends. The holders of Series A
Preferred Stock and Series B Preferred Stock, voting separately as one class,
are entitled to elect one director. Each share of Series B Preferred Stock is
convertible, at the option of the holder or automatically at the closing of an
initial public offering, into common stock at an initial conversion rate of
one-to-one. The conversion rate is subject to adjustment upon the occurrence of
certain equity transactions, as defined. On December 10, 1999, 2000 and 2001,
the Company will be obligated to redeem one-third, respectively, of any
outstanding Series B Preferred Stock at a redemption price of $1.73 per share,
plus any accrued and unpaid dividends. The Company records the incremental
increase in per share redemption price through periodic additions to Series B
Preferred Stock and charges to common stock-additional paid in capital and, for
amounts in excess of common stock additional paid in capital, to the accumulated
deficit, over the period from issuance to December 10, 1999.
Series C and Series D
In August 1996, the Company sold 1,500,000 shares of Series D Preferred Stock at
a price of $7.00 per share raising proceeds of $9,110,000, net of offering costs
of $1,420,000, of which $30,000 was paid in common stock of the Company.
25
<PAGE> 27
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------
Holders of Series C and Series D Preferred Stock are entitled to receive annual
cumulative preferred cash dividends on each outstanding share at a rate of
$.2934 and $.63 per share, respectively, upon declaration by the Company's Board
of Directors. At March 31, 1997, no dividends have been declared. Total
dividends in arrears on Series C Preferred Stock at March 31, 1996 and 1997 were
$650,728 and $1,193,001, respectively. Total dividends in arrears on Series D
Preferred Stock at March 31, 1997 was $578,814. In the event of voluntary or
involuntary liquidation of the Company, holders of Series C and Series D
Preferred Stock will be entitled to receive, as one class, prior to any
distribution to common, Series A Preferred, and Series B Preferred stockholders,
an amount equal to $3.26 per Series C Preferred Share and $7.00 per Series D
Preferred Share plus all unpaid, accumulated cumulative dividends. The holders
of Series C Preferred Stock, voting as one class, are entitled to elect one
director. On all other matters, all of the shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
will be voted with the shares of common stock as one class. Each share of Series
C and Series D Preferred Stock is convertible, at the option of the holder or
automatically at the closing of an initial public offering, into common stock at
an initial conversion rate of one-to-one. The conversion rate is subject to
adjustment upon the occurrence of certain equity transactions, as defined. On
December 10, 1999, 2000 and 2001, the Company will be obligated to redeem
one-third, respectively, of any outstanding Series C and Series D Preferred
Stock at a redemption price of $3.26 and $7.00 per share, respectively, plus any
accrued and unpaid dividends. The Company records the incremental increase in
per share redemption price through periodic additions to Series C and Series D
Preferred Stock and charges to common stock additional paid in capital and, for
amounts in excess of common stock-additional paid in capital, to the accumulated
deficit, over the period from issuance to December 10, 1999.
6. COMMON STOCK:
Certain stockholders, both common and preferred, have preemptive rights to
purchase any of the Company's capital stock except in the event of an initial
public offering. No cash dividends shall be paid to common stockholders unless
an equal dividend is paid to all preferred stockholders in an amount for each
share of preferred stock equal to the aggregate amount of such dividend for all
common stock into which each such share of preferred stock could then be
converted.
At March 31, 1997, the Company has reserved 5,439,600 shares of common stock for
issuance upon conversion of the Series A, Series B, Series C, and Series D
Preferred Stock.
7. STOCK OPTION PLAN:
The Company's 1989 Incentive Stock Option, Nonqualified Stock Option, and
Restricted Stock Purchase Plan (the "1989 Plan") provides for the issuance of
options to purchase up to 1,000,000 shares of the Company's common stock to
eligible officers, key employees, nonemployee directors and consultants of the
Company at prices not less than the fair market value of the common stock on the
date the option is granted, as determined by the Board of Directors. The options
vest over 5 years, unless otherwise provided, and expire five or ten years from
the date of grant. In May 1996, the Company adopted the 1996 Incentive Stock
Option, Nonqualified Stock Option, and Restricted Stock Purchase Plan (the "1996
Plan"), which provides for the issuance of options to purchase up to 200,000
shares of the Company's common stock, with basically the same terms as the 1989
Plan. No options will be granted under this plan until all authorized shares of
the 1989 plan have been granted, which had not occurred as of March 31, 1997.
The Company may terminate either Plan at any time. If not terminated sooner, the
1989 Plan terminates on September 26, 1999 and the 1996 Plan terminates on May
4, 2006.
26
<PAGE> 28
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------
The number and weighted average exercise price of options issued and outstanding
under the 1989 Plan, at exercise prices of between $.50 and $3.00 per share, are
as follows for the years ended March 31:
<TABLE>
<CAPTION>
AVERAGE AVERAGE
EXERCISE EXERCISE
1996 PRICE 1997 PRICE
------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of
period 190,000 $0.77 366,700 $0.96
Granted 259,500 1.05 434,700 3.00
Canceled (54,300) 0.71 (24,000) 0.60
Exercised (28,500) 1.01 (76,000) 0.84
------------- -------------
Options outstanding, end of
period 366,700 $0.96 701,400 $2.25
============= =============
Options exercisable, end of
period 118,450 $0.81 141,283 $1.39
============= =============
</TABLE>
The difference between the exercise price and the fair market value of the
options at the dates of grant is accounted for as unearned compensation and
amortized to expense over the related vesting period. During fiscal 1996,
$313,000 of unearned compensation was recorded, of which $63,507 was amortized
to expense. During fiscal 1997, $42,260 of unearned compensation was reversed
due to the cancellation of certain unvested options and $60,510 was amortized to
expense.
The schedule below reflects the weighted average exercise price and the weighted
average grant-date fair value for options whose (1) exercise price equaled the
market price of the stock on the grant date and (2) exercise price was less than
the market price of the stock on the grant date for all options granted during
the years ended March 31:
<TABLE>
<CAPTION>
NUMBER AVERAGE AVERAGE AVERAGE UNEARNED
OF EXERCISE FAIR PRICE COMPENSATION
1996 OPTIONS PRICE VALUE DIFFERENCE RECORDED
---- ----------- ----------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Exercise price equal to fair value 49,000 $3.00 $3.00 $0.00 $0
Exercise price less than fair value 210,500 0.60 2.37 1.77 373,000
----------- -----------------
259,500 $1.05 $2.49 $1.44 373,000
===========
Less: Options canceled in 1996 (60,000)
-----------------
$313,000
=================
1997
----
Exercise price equal to fair value 434,700 $3.00 $3.00 $0.00 $0
=========== =================
</TABLE>
The Company has adopted the disclosure only provisions of SFAS No. 123. Had
compensation expense for the Company's stock options plan been determined based
on the fair value at the grant date for awards in fiscal 1996 and 1997
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per common share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1996 1997
---------------- ---------------
<S> <C> <C> <C>
Net loss as reported ($3,228,489) ($2,765,470)
pro forma ($3,234,403) ($2,831,174)
Net loss applicable to common stockholders as reported ($3,950,492) ($4,329,182)
pro forma ($3,956,406) ($4,394,886)
Net loss per common share as reported ($1.45) ($1.54)
pro forma ($1.45) ($1.56)
</TABLE>
27
<PAGE> 29
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------
The fair value of each option is estimated on the date of grant using the
Minimum Value Calculation option-pricing model with the following
weighted-average assumptions used for grants in fiscal 1996 and 1997: Dividend
yield of 0%; expected volatility of 0%; risk-free rate of 6.34%; and expected
lives of 4.37 years.
Because the determination of the fair value of all options granted includes the
factors described in the preceding paragraph and, because additional option
grants are expected to be made each year, the above pro forma disclosures are
not representative of pro forma effects of net income or loss for future years.
The schedule below reflects the number and weighted average exercise price of
outstanding and exercisable options as of March 31, 1997 segregated by exercise
price ranges:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
OF EXERCISE REMAINING OF EXERCISE
EXERCISE PRICE RANGE OPTIONS PRICE LIFE OPTIONS PRICE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.50 to $0.60 218,700 $0.59 2.8 years 94,350 $0.58
$3.00 482,700 3.00 9.3 years 46,933 3.00
---------------- --------------
701,400 $2.25 7.3 years 141,283 $1.39
================ ==============
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
Operating Leases:
The Company rents its facility through an operating lease agreement which
extends through June 1997. Future minimum lease payments under this lease are
$19,000 for the year ended March 31, 1998.
Rent expense related to operating leases was $111,096 and $135,090 for the years
ended March 31, 1996 and 1997, respectively.
Employee Benefit Plan:
In fiscal 1996, the Company adopted a Retirement Savings and Investment Plan
(the "Plan") covering substantially all of the Company's full-time employees who
meet certain eligibility requirements. The Company may contribute to the Plan on
a discretionary basis. As of March 31, 1997, the Company has never contributed
to the Plan.
Employment Agreements:
In May 1996, the Company revised existing employment agreements with two of its
officers. These agreements provide for aggregate annual base salaries of
$295,000, plus other benefits, with annual increases at the discretion of the
Board of Directors or its Compensation Committee. The agreements provide for
annual bonuses based on the Company's attainment of certain operating income.
The agreements have a term of three years, are subject to renewal and may be
terminated by the Company with or without cause as defined in the agreements. If
either of these agreements is terminated by the Company without cause, the
Company's severance liability is two years of base salary. If such termination
occurs on or after June 30, 1998, the Company shall vest all of the individual's
stock options and issue such stock as additional compensation.
28
<PAGE> 30
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------
Concentrations of Risk:
The Company is exposed to credit loss for the amount of cash deposits with
financial institutions in excess of federally-insured limits. The Company
invests its excess cash deposits with a major bank and in government securities.
While the Company and its contract manufacturers rely on sole source suppliers
for certain components, steps have been taken to minimize the impact of a
shortage or stoppage of shipments such as maintaining excess inventory and
designing software that may be easily modified to use a different component.
Two customers represent the majority of accounts receivable at March 31, 1997
and product revenues for the year ended March 31, 1997.
9. INCOME TAXES:
The following table presents the current and deferred provision for income taxes
for the years ended March 31:
<TABLE>
<CAPTION>
1996 1997
----------------------------
<S> <C> <C>
Current:
Federal............................................................
State.............................................................. $800 $800
----------------------------
800 800
Deferred:
Federal............................................................
State..............................................................
----------------------------
$800 $800
============================
</TABLE>
The temporary differences which give rise to the deferred tax provision
(benefit) for the years ended March 31, consist of:
<TABLE>
<CAPTION>
1996 1997
---------------------------------
<S> <C> <C>
Capitalized start-up costs...................................... $ 96,054 $ 95,196
Capitalized research and development costs...................... (881,200) (405,918)
Change in accounting method..................................... 123,923
Accrued liabilities............................................. (37,434) (1,030)
Accrued royalties............................................... (216,500) 452,918
Other........................................................... (7,982) (10,553)
Tax credits..................................................... (170,566) (71,077)
Net operating losses............................................ (507,823) (1,222,959)
Change in valuation allowance................................... 1,601,528 1,163,423
---------------------------------
$ - $ -
=================================
</TABLE>
The provision (benefit) for income taxes differs from the amount that would
result from applying the federal statutory rate for the years ended March 31, as
follows:
<TABLE>
<CAPTION>
1996 1997
------------------ ---------------
<S> <C> <C>
Statutory regular federal income tax rate................ (34.0)% (34.0)%
Change in federal valuation allowance.................... 39.0 35.0
Other.................................................... (5.0) (1.0)
------------------ ---------------
0.0 % 0.0 %
================== ===============
</TABLE>
29
<PAGE> 31
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------
The temporary differences which give rise to the deferred tax asset as of March
31, are as follows:
<TABLE>
<CAPTION>
1996 1997
--------------------------------
<S> <C> <C>
Capitalized start-up costs................................... $ 301,455 $ 206,259
Capitalized research and development costs................... 1,702,089 2,108,007
Tax credits.................................................. 349,771 420,848
Advanced royalties........................................... 452,918
Net operating losses......................................... 566,657 1,789,616
Accrued liabilities.......................................... 37,434 38,464
Other........................................................ 11,812 22,365
--------------------------------
3,422,136 4,585,559
Valuation allowance.......................................... (3,422,136) (4,585,559)
================================
$ - $ -
================================
</TABLE>
As of March 31, 1997, the Company had federal and state research and
experimentation credit carryforwards of approximately $219,000 and $180,000,
respectively. The carryforwards expire beginning in 2006 for federal purposes
and carry forward indefinitely for state purposes. In addition, the Company has
a state manufacturer's investment tax credit carryforward of approximately
$22,000 which expires in 2007.
As of March 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $4,630,000 and $2,314,000, respectively, which
expire beginning in 2010 and 2000, respectively.
The utilization of net operating loss and tax credit carryforwards may be
limited under the provisions of Internal Revenue Code Section 382 and similar
state provisions.
10. SUBSEQUENT EVENTS (UNAUDITED):
In April 1997, the Company entered into a lease agreement for a new 29,162
square foot facility in Irvine, California. The term of the lease is from May 1,
1997 through May 31, 2002 with a monthly base rent of $20,413, subject to an
increase based on the Consumer Price Index beginning December 1, 1999.
During May 1997, the Company entered into a credit facility with Comerica Bank
(the "Bank") pursuant to which it may borrow up to a maximum of $2,285,000. The
credit facility has an equipment line of up to a maximum of $1,750,000. Advances
bear interest at the Bank's Base Rate plus 1.5%. The equipment line expires on
April 30, 1998 at which time any amounts outstanding will be payable over 48
months. The credit facility has a working capital line of up to a maximum of
$250,000. Advances bear interest at the Bank's Base Rate plus 1.25%. The working
capital line expires on July 15, 1998. The credit facility also has a letter of
credit facility of up to a maximum of $285,000, of which $265,582 has been
issued but not drawn on. The letter of credit expires on April 30, 1998 but has
a one year automatic extension unless the Bank elects not to renew. The final
expiration is May 2, 1999. Advances bear interest at the Bank's Base Rate plus
3%. The credit facility is collateralized by substantially all of the assets of
the Company and requires the Company to maintain certain financial ratios and
covenants. In June 1997, the Company borrowed approximately $305,000 under the
credit facility for capital equipment acquisitions. In connection with entering
into the credit facility, the Company issued to the Bank a warrant to purchase
10,000 shares of the Company's common stock at an exercise price of $3.00 per
share for $1.00 of consideration. The warrant is exercisable at any time through
its expiration on May 1, 2004.
30
<PAGE> 32
ITEM 9. EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of the date of this filing
with respect to each person who is an executive officer or a director of the
Company:
<TABLE>
<CAPTION>
Name Age Position
- ----- --- --------
<S> <C> <C>
Joe E. Kiani ..........................32 President, Chief Executive Officer and Chairman of the
Board of Directors
Mohamed Diab ..........................39 Chief Technical Officer and Director
James J. Cronin .......................48 Vice President, Regulatory Affairs and Quality
Assurance
Bradley R. Langdale....................33 Vice President, Finance, Chief Financial Officer and
Secretary
William H. Markle .....................38 Vice President, Business Development and Marketing
Ammar Al-Ali...........................33 Vice President, Engineering
David R. Tobler .......................40 Vice President, Sensor Development and Manufacturing
Robert H. Coleman .....................51 Director
Christopher J. Kilpatrick (2)..........40 Director
Jack W. Lasersohn (1) .................44 Director
H.J.C. Swan, M.D., Ph.D................75 Director
Elizabeth H. Weatherman (2) ...........37 Director
</TABLE>
- -------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Kiani is a founder of the Company and has served as its President and Chief
Executive Officer and Chairman of its Board of Directors since the Company's
inception in 1989. Prior to founding the Company, Mr. Kiani served as the
Engineering Director of Newport Medical and held various managerial and
engineering positions with Anthem Electronics, Bell Industries and Unisys. Mr.
Kiani has a B.S.E.E. degree and an M.S.E.E. degree from San Diego State
University.
Mr. Diab is a founder of the Company and has served as its Chief Technical
Officer and as a Director of the Company since September 1989. Prior to founding
the Company, Mr. Diab served as Chief Engineering Consultant at Newport Medical
and as Senior Design Engineer at Galiso. Mr. Diab has a B.S.E.E. degree from
California State University, Fullerton.
Mr. Cronin has served as the Company's Vice President, Regulatory Affairs and
Quality Assurance since April 1996. Between January 1995 and April 1996, Mr.
Cronin served as the Company's Director, Regulatory Affairs and Quality
Assurance. From August 1991 to July 1993, Mr. Cronin was a product development
manager at O.B. Tech, a medical device manufacturer. Prior to that, Mr. Cronin
held various management positions in regulatory, research and development and
operations at Microgon and Purolator Technologies. Mr. Cronin holds a B.S.
degree from New York University.
Mr. Langdale joined the Company in February 1996 as Vice President, Finance and
Chief Financial Officer. In May 1996 Mr. Langdale was appointed Secretary of the
Company. From July 1993 to November 1995, Mr. Langdale served as Director of
Finance for CareLine, Inc., a publicly held provider of emergency medical
services that was acquired by Laidlaw Inc. in November 1995. From March 1990
until June 1993, Mr. Langdale served as finance manager for Sunrise Company, a
real estate development company. Prior to March 1990, Mr. Langdale was employed
by the public accounting firm of Price Waterhouse & Company LLP. Mr. Langdale is
a Certified Public Accountant and holds a B.S. degree from the University of
California, Los Angeles.
Mr. Markle joined the Company in March 1995 as Vice President, Business
Development and Marketing. Prior to joining the Company, Mr. Markle held various
management positions with the Edwards Critical Care Division of Baxter
Health-Care, including Director of Marketing between January 1992 and November
1994 and most recently Director of Technology Assessment and Business
Development between November 1994 and March 1995. Mr. Markle holds a B.S. degree
from Duke University and an M.B.A. degree from Pepperdine University.
31
<PAGE> 33
Mr. Al-Ali has served as the Company's Vice President, Engineering since
December 1996. Prior to December 1996, Mr. Al-Ali was most recently the Director
of Software Development and held various other engineering positions since
joining the Company in April 1995. From January 1992 to November 1994, Mr.
Al-Ali was the Director of Research and Development, Electronics at Ami-Med
Corporation. Mr. Al-Ali holds a B.S. degree from the University of Arizona.
Mr. Tobler has served as the Company's Vice President, Sensor Development and
Manufacturing since March 1997 and prior to that was the Director of Sensor
Development since joining the Company in February 1995. From October 1991 to
February 1995, Mr. Tobler was the President of Peak One Inc., a medical
technology consulting group. Prior to that, Mr. Tobler held various positions
with Ohmeda Medical, including Vice President of Research and Development,
Director of Advanced Technology, and Business Unit Director and was Vice
President, Research and Development for Biox Inc. Mr. Tobler holds a B.S. degree
from the University of Colorado, and has completed the Executive Program for
Smaller Companies, Stanford University.
Dr Coleman has served as a director of the Company since February 1997. Dr.
Coleman was President and CEO of MediSense, an Abbott Laboratories Company, from
September 1991 to December 1996. Dr. Coleman was a co-founder of Nova Biomedical
Corporation, a manufacturer of clinical laboratory equipment, and served as
President and CEO from 1976 to 1991. Dr. Coleman holds a B.S. degree from
Morehead State University, Kentucky and a Ph.D. degree in Analytical Chemistry
from the University of Tennessee. Dr. Coleman held a faculty appointment as
Associate in Medicine (Biochemistry) at Harvard Medical School for the academic
years 1971 and 1972.
Mr. Kilpatrick has served as a director of the Company since January 1995. Mr.
Kilpatrick is President of Interplay Productions, an interactive multimedia
software developer and publisher, and a member and shareholder of Stradling,
Yocca, Carlson & Rauth, counsel to the Company. Mr. Kilpatrick acted as Vice
President and General Counsel of Interplay Productions from May 1994 to May 1995
and has acted as that company's President since June 1995. Between 1982 and
1989, Mr. Kilpatrick was associated with, and since 1990 Mr. Kilpatrick has been
a member and shareholder of, Stradling, Yocca, Carlson & Rauth. Since 1994, Mr.
Kilpatrick has been on a leave of absence from that firm. Mr. Kilpatrick
currently serves as a director of several privately-held companies. Mr.
Kilpatrick holds a B.A. degree from the University of California, Irvine and a
J.D. degree from the University of California, Los Angeles.
Mr. Lasersohn has served as a director of the Company since January 1995. He has
been a Managing Director of The Vertical Group, Inc., a private venture capital
and investment management firm, since its formation in 1989 by former principals
of F. Eberstadt & Co., Inc. From 1981 to 1989, he was a Vice President and later
a Managing Director of the venture capital division of F. Eberstadt & Co., Inc.
Mr. Lasersohn also serves as a director of CardioThoracic Systems, Inc.,
VitalCom Inc. and a number of privately-held health care companies. He holds
B.S. and M.A. degrees from Tufts University and a J.D. degree from Yale
University.
Dr. Swan has served as a director of the Company since August 1992. Dr. Swan is
a past President and Distinguished Fellow of the American College of Cardiology,
and a Master of the American College of Physicians. He is the 1985 recipient of
the James Herrick Award of the American Heart Association. Dr. Swan is a
Professor of Medicine (Emeritus) at the University of California, Los Angeles
and is the inventor of the Swan-Ganz Catheter. Dr. Swan holds a Ph.D. degree in
Physiology from the University of London and has held academic positions in
London, at the Mayo Clinic and at Cedars-Sinai Hospital in Los Angeles. Dr. Swan
has published over 140 scientific papers in the areas of cardiology and
physiology.
Ms. Weatherman has served as a director of the Company since January 1995. Ms.
Weatherman is a Managing Director of E.M. Warburg, Pincus & Co., Inc., a private
investment firm, and has been with the firm since June 1988. Ms. Weatherman is a
director of Cardiotronics Systems, Inc., VitalCom Inc. and a number of
privately-held health care companies. Ms. Weatherman holds a B.A. degree from
Mount Holyoke College and an M.B.A. degree from Stanford University.
32
<PAGE> 34
All directors hold office until the next annual meeting of stockholders of the
Company and until their successors have been elected and qualified. Ms.
Weatherman was elected as director by the holders of Series C Preferred Stock,
Mr. Coleman was elected as a director by the holders of Series A and Series B
Preferred Stock voting as one class, Mr. Kiani and Mr. Diab were elected as
directors by the holders of Common Stock voting as one class, and the remaining
directors were elected by the holders of preferred stock and common stock voting
as one class. There are no family relationships among the directors or officers
of the Company. The Company's directors do not receive any cash compensation for
service on the Board of Directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at Board and
Committee meetings. Officers are elected by, and serve at the discretion of, the
Board of Directors.
SCIENTIFIC ADVISORY BOARD
The Company has established a Scientific Advisory Board consisting of
internationally prominent scientists and clinicians who the Company believes
will make a contribution to the development of the Company's business. The
Scientific Advisory Board members review the Company's research and development
progress, advise the Company of advances in their fields, and assist in
identifying special product opportunities. Members will receive honorariums for
their services and are reimbursed for reasonable travel expenses. All of the
advisors are employed by employers other than the Company and may have
commitments to, or consulting or advisory agreements with, other entities,
including potential competitors of the Company, that may limit their
availability to the Company. Although these advisors may contribute
significantly to the affairs of the Company, none is expected to devote more
than a small portion of his time to the Company. The members of the Scientific
Advisory Board are as follows:
H.J.C. Swan, M.D., Ph.D., a director of the Company, is the inventor of the
Swan-Ganz Catheter. Dr. Swan is a past President and Distinguished Fellow of the
American College of Cardiology, and a Master of the American College of
Physicians. He is the 1985 recipient of the dames Herrick Award of the American
Heart Association. Dr. Swan is a Professor of Medicine (Emeritus) at the
University of California, Los Angeles and is the inventor of the Swan-Ganz
Catheter. Dr. Swan holds a Ph.D. degree in Physiology from the University of
London and has held academic positions in London, at the Mayo Clinic and at
Cedars-Sinai Hospital in Los Angeles and has published over 140 scientific
papers in the areas of cardiology and physiology.
Professor Fred Harris is a Professor in the Department of Electrical and
Computer Engineering at San Diego State University. Professor Harris has
published over 40 scientific papers in the area of Digital Signal Processing.
Professor Bernard Widrow is a Professor in the Department of Electrical
Engineering at Stanford University. He is associate editor of the journals
Adaptive Control and Signal Processing, Neutral Networks, and Information
Sciences, and is co-author of Adaptive Signal Processing, Adaptive Inverse
Control, and the forthcoming book Quantization Noise. Mr. Widrow is the
recipient of the IEEE Alexander Graham Bell Medal for exceptional contributions
to the advancement of telecommunications, and the IEEE Neural Networks Pioneer
Medal. In 1995, Professor Widrow was inducted into the National Academy of
Engineering.
33
<PAGE> 35
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation paid
or accrued for services rendered to the Company in all capacities during the
fiscal year ended March 31, 1997 by the Company's Chief Executive Officer and
the Company's other executive officers whose salary and bonus for such fiscal
year was in excess of $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) OTHER ($) OPTION (#)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Joe E. Kiani 175,000 40,000 (1) 200,000
President and Chief Executive Officer
William H. Markle 120,000 - 10,000
Vice President, Business Development and Marketing
Mohamed Diab 120,000 - -
Chief Technical Officer
Bradley R. Langdale 100,000 - 15,000
Vice President and Chief Financial Officer
James J. Cronin 100,000 - 10,000
Vice President, Regulatory Affairs and Quality
Assurance
</TABLE>
- -----------------
(1) Payout of approximately 475 hours of accrued vacation
The following table sets forth certain information concerning grants of options
to the Named Executive Officers during the fiscal year ended March 31, 1997:
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES OR BASE
OPTIONS IN FISCAL PRICE EXPIRATION
NAMED EXECUTIVE OFFICER GRANTED (#) YEAR (%) ($/SHARE) DATE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Joe E. Kiani 200,000 48.8 $3.00 (1) 05/03/06
William H. Markle 10,000 2.4 $3.00 02/11/07
Bradley R. Langdale 15,000 3.7 $3.00 02/11/07
James J. Cronin 10,000 2.4 $3.00 02/11/07
</TABLE>
- -----------------
(1) These options were repriced in August 1996 from $9.00 to $3.00 due to a
change in the estimated fair market value of the Company's common stock as
determined by the Board of Directors after the Company's proposed initial public
offering was amended to a private placement of preferred stock.
34
<PAGE> 36
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's capital stock as of May 31, 1997 for (i)
each person (or group of affiliated persons) who is known by the Company to own
beneficially 5% or more of any class of the Company's capital stock (ii) each of
the Named Executive Officers, (iii) each of the Company's directors, and (iv)
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
--------------------- --------------------- ----------------------
SHARES SHARES SHARES
BENEFICIALLY PERCENT OF BENEFICIALLY PERCENT OF BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER (2) OWNED (#) CLASS (%) OWNED (#) CLASS (%) OWNED (#) CLASS (%)
- ----------------------------------------- ----------- ---------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
WARBURG, PINCUS VENTURES, L.P. (3)
466 Lexington Avenue, 10th Floor
New York, NY 10017
MOHAMED DIAB (4) 997,400 35.2
DSV PARTNERS IV (5) 925,000 82.2
620 Newport Center Drive, Suite 1600
Newport Beach, CA 92660
JOE E. KIANI (11) 868,233 30.0
KINGDON CAPITAL MANAGEMENT CORPORATION (7)
152 West 57th Street, 50th Floor
New York, NY 10019
FEIBUSCH & CO. INCORPORATED 398,061 41.2 110,000 9.8
80 E. Sir Frances Drake Blvd., 3D
Larkspur, CA 94939
CAHILL, WARNOCK STRATEGIC PARTNERS L.P. 151,515 15.7
(9)
10 N. Calvert Street, Suite 735
Baltimore, MD 21202
VERTICAL FUND ASSOCIATES, L.P. (6)
100 New Town Lane #2
East Hampton, NY 11937
HAMBRECHT & QUIST CAPITAL MANAGEMENT, INC. (8)
50 Rowes Wharf, Fourth Floor
Boston, MA 02110
MARYAM RIAZI 250,000 8.8
1297 1/2 Devon Avenue
Los Angeles, CA 90024
TAMALPAIS ASSOCIATES 200,000 20.7
80 Sir Francis Drake Blvd #30
Larkspur, CA 94939
MARY K. DAVIA 200,000 7.1
15 Consenza
Laguna Niguel, CA 92677
EOS PARTNERS SBIC GENERAL , L.P. (10)
520 Madison Avenue
New York, NY 10022
WILLIAM H. MARKLE (12) 12,000 *
BRADLEY R. LANGDALE (13) 5,000 *
JAMES J. CRONIN (14) 5,000 *
ELIZABETH H. WEATHERMAN (3)
JACK W. LASERSOHN (6)
H.J.C. SWAN, M.D., PH.D. (15) 54,000 1.9 12,500 1.1
CHRISTOPHER J. KILPATRICK (16) 35,000 1.2
ALL EXECUTIVE OFFICERS AND DIRECTORS AS 1,976,633 67.3 12,500 1.1
A GROUP (17)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SERIES C SERIES D
PREFERRED STOCK PREFERRED STOCK SHARES OF ALL CLASSES(1)
--------------------- --------------------- -------------------------
SHARES SHARES SHARES
BENEFICIALLY PERCENT OF BENEFICIALLY PERCENT OF BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER (2) OWNED (#) CLASS (%) OWNED (#) CLASS (%) OWNED (#) ALL CLASS (%)
- ----------------------------------------- ----------- ---------- ------------ ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
WARBURG, PINCUS VENTURES, L.P. (3) 1,541,490 83.4 1,541,490 18.6
466 Lexington Avenue, 10th Floor
New York, NY 10017
MOHAMED DIAB (4) 997,400 12.1
DSV PARTNERS IV (5) 925,000 11.2
620 Newport Center Drive, Suite 1600
Newport Beach, CA 92660
JOE E. KIANI (11) 868,233 10.4
KINGDON CAPITAL MANAGEMENT CORPORATION 571,430 38.1 571,430 6.9
(7)
152 West 57th Street, 50th Floor
New York, NY 10019
FEIBUSCH & CO. INCORPORATED 508,061 6.1
80 E. Sir Frances Drake Blvd., 3D
Larkspur, CA 94939
CAHILL, WARNOCK STRATEGIC PARTNERS L.P. 285,715 19.0 437,230 5.3
(9)
10 N. Calvert Street, Suite 735
Baltimore, MD 21202
VERTICAL FUND ASSOCIATES, L.P. (6) 306,748 16.6 306,748 3.7
100 New Town Lane #2
East Hampton, NY 11937
HAMBRECHT & QUIST CAPITAL MANAGEMENT, 290,000 19.3 290,000 3.5
INC. (8)
50 Rowes Wharf, Fourth Floor
Boston, MA 02110
MARYAM RIAZI 250,000 3.0
1297 1/2 Devon Avenue
Los Angeles, CA 90024
TAMALPAIS ASSOCIATES 200,000 2.4
80 Sir Francis Drake Blvd #30
Larkspur, CA 94939
MARY K. DAVIA 200,000 2.4
15 Consenza
Laguna Niguel, CA 92677
EOS PARTNERS SBIC GENERAL , L.P. (10) 142,858 9.5 142,858 1.7
520 Madison Avenue
New York, NY 10022
WILLIAM H. MARKLE (12) 12,000 *
BRADLEY R. LANGDALE (13) 5,000 *
JAMES J. CRONIN (14) 5,000 *
ELIZABETH H. WEATHERMAN (3) 1,541,490 83.4 1,541,490 18.6
JACK W. LASERSOHN (6) 306,748 16.6 306,748 3.7
H.J.C. SWAN, M.D., PH.D. (15) 66,500 *
CHRISTOPHER J. KILPATRICK (16) 35,000 *
ALL EXECUTIVE OFFICERS AND DIRECTORS AS 1,848,238 100.0 3,837,371 45.8
A GROUP (17)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 37
NOTES TO SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
* Less than 1%
(1) Calculated as if all outstanding shares of Series A, Series B, Series C and
Series D Preferred Stock have been converted into an equal number of shares
of Common Stock.
(2) Unless otherwise indicated, the address for each of the indicated owners is
2852 Kelvin Avenue, Irvine, California 92614. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect
to securities. Shares of Preferred Stock and Common Stock subject to
options, warrants, and convertible notes currently exercisable or
convertible, or exercisable or convertible within 60 days of the date
hereof, are deemed outstanding for computing the percentage of the person
holding such options but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote, and
subject to community property laws, where applicable, the persons named in
the table have sole voting and investment power with respect to all shares
of Preferred Stock and Common Stock shown as beneficially owned by them.
(3) The sole general partner of WP Ventures is Warburg, Pincus & Co., a New
York general partnership ("WP"). Lionel I. Pincus is the managing partner
of WP and may be deemed to control it. E.M. Warburg, Pincus & Company, a
New York general partnership ( "EM Warburg"), manages WP Ventures. WP has a
15% interest in the profits of WP Ventures and owns 1.2% of the limited
partnership interests in WP Ventures. Elizabeth H. Weatherman, a director
of the Company, is a partner of WP and EM Warburg. All of the shares
indicated as owned by Ms. Weatherman are owned directly by WP Ventures and
are included because of her affiliation with WP Ventures. As such, Ms.
Weatherman may be deemed to have an indirect pecuniary interest in an
indeterminate portion of the shares beneficially owned by WP Ventures and
EM Warburg. Ms. Weatherman disclaims beneficial ownership of these shares
within the meaning of Rule 13d-3 under the Exchange Act.
(4) Includes 2,400 shares of Common Stock subject to options exercisable within
60 days of the date hereof.
(5) James R. Bergman is a General Partner of DSV Management, Ltd., the general
partner of DSV Partners IV. As such Mr. Bergman may be deemed to have an
indirect pecuniary interest in an indeterminate portion of the shares
beneficially owned by DSV Partners IV. Mr. Bergman disclaims beneficial
ownership of these shares within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
(6) Includes 306,748 shares of Series C Preferred Stock held of record by
Vertical Fund Associates, L.P. ("Vertical Fund"). The sole general partner
of Vertical Fund is Vertical Group, L.P. ("Vertical Group"). Jack W.
Lasersohn, a director of the Company, is a General Partner of Vertical
Group. As such, Mr. Lasersohn may be deemed to have an indirect pecuniary
interest in an indeterminate portion of the shares beneficially owned by
Vertical Group. Mr. Lasersohn disclaims beneficial ownership of all but
45,461 of these shares within the meaning of Rule 13d-3 under the Exchange
Act.
(7) Includes 342,858 shares sold to Kingdon Offshore, N.V., 142,857 shares sold
to Kingdon Partners L.P. and 85,715 shares sold to Kingdon Associates, L.P.
The Company has been advised that Mark Kingdon, an officer and shareholder
of Kingdon Capital Management Corporation, the general partner of Kingdon
Offshore, N.V., Kingdon Partners, L.P. and Kingdon Associates, L.P., has
voting and investment power over the securities purchased by Kingdon
Offshore N.V., Kingdon Partners L.P. and Kingdon Associates, L.P. Mark
Kingdon may be deemed to have an indirect pecuniary interest in an
indeterminate portion of the shares to be purchased by Kingdon Offshore,
N.V., Kingdon Partners, L.P., and Kingdon Associates, L.P. The Company has
been advised that Mark Kingdon disclaims beneficial ownership of these
shares within the meaning of Rule 13d-3 under the Exchange Act, except to
the extent of his beneficial interest therein.
(8) Includes 160,000 shares sold to Hambrecht & Quist Healthcare Investors
("HQHI") and 130,000 shares sold to Hambrecht & Quist Life Sciences
Investors ("HQLSI"). The Company has been advised that Alan G. Carr, an
officer of Hambrecht & Quist Capital Management Inc. ("HQCMI"), the general
partner of HQHI and HQLSI, has voting and investment power over the
securities purchased by HQHI and HQLSI. Alan G. Carr may be deemed to have
an indirect pecuniary interest in an indeterminate portion of the shares
beneficially owned by HQCMI. The Company has been advised that Alan G. Carr
disclaims beneficial ownership of these shares within the meaning of Rule
13d-3 under the Exchange Act.
(9) Includes 285,715 shares of Series D Preferred Stock sold to Cahill, Warnock
Strategic Partners Fund L.P. ("CWSPF") and 151,515 shares of Series A
Preferred Stock issued upon exercise of Series A Warrants in October 1996 .
The Company has been advised that Edward L. Cahill. a general partner of
Cahill, Warnock Strategic Partners, L.P. ("CWSP"), the general partner of
CWSPF, has voting and investment power over the securities to be purchased
by CWSPF. Edward L. Cahill may be deemed to have an indirect pecuniary
interest in an indeterminate portion of the shares beneficially owned by
CWSP. The Company has been advised that Edward L. Cahill disclaims
beneficial ownership of these shares within the meaning of Rule 13d-3 under
the Exchange Act, except to the extent of his beneficial interest therein.
(10) Includes 142,858 shares of Series D Preferred Stock sold to Eos Partners
SBIC, L.P. ("Eos SBIC). The Company has been advised that Marc H. Michel, a
general partner of Eos Partners SBIC General, L.P. ("Eos"), has voting and
investment power over the securities purchased by Eos SBIC. Marc H. Michel
may be deemed to have an indirect pecuniary interest in an indeterminate
portion of the shares beneficially owned by Eos. The Company has been
advised that Marc H. Michel disclaims beneficial ownership of these shares
within the meaning of Rule 13d-3 under the Exchange Act, except to the
extent of his beneficial interest therein.
(11) Includes 57,233 shares of Common Stock subject to options exercisable
within 60 days of the date hereof.
(12) Includes 12,000 shares of Common Stock subject to options exercisable
within 60 days of the date hereof.
(13) Includes 5,000 shares of Common Stock subject to options exercisable within
60 days of the date hereof.
(14) Includes 5,000 shares of Common Stock subject to options exercisable within
60 days of the date hereof.
36
<PAGE> 38
(15) Includes 9,000 shares of Common Stock subject to options exercisable within
60 days of the date hereof.
(16) Includes 15,000 shares of Common Stock subject to options exercisable
within 60 days of the date hereof.
(17) Includes directors' and executive officers' shares listed above, including
the 1,541,490 shares of capital stock held of record by WP Ventures and
306,748 shares of capital stock held of record by Vertical Fund.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1997, the Company granted 25,000 options to purchase common stock of
the Company at an exercise price of $3.00 per share to Robert H. Coleman upon
his appointment to the Company's Board of Directors.
The Company has granted options to certain of its directors and executive
officers. See "Item 10. Executive Compensation" and "Item 11. Security Ownership
of Certain Beneficial Owners and Management."
The Company believes that all of the transactions set forth above were made on
terms no less favorable to the Company than could otherwise be obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested outside directors on the Board of
Directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
3.1* Amended and Restated Bylaws of the Registrant.
3.2* Amended and Restated Certificate of Incorporation of the Registrant.
4.1* Form of Series D Preferred Stock Purchase Agreement.
4.2* Specimen Certificate of Series D Convertible Preferred Stock.
10.1* Form of indemnification Agreement for Executive Officers and Directors.
10.2* 1989 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan, and form of stock option agreement
and restricted common stock purchase agreement and Amendment No. 1
thereto.
10.3* 1996 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan and form of stock option agreement
and restricted common stock purchase agreement.
10.4* Employment Agreement between the Registrant and Joe E. Kiani, dated as of May 4, 1996.
10.5* Employment Agreement between the Registrant and Mohamed Diab, dated as of May 4, 1996.
10.6 Intentionally omitted.
10.7* Purchase and Licensing Agreement, dated March 3, 1996, between the Registrant and Kontron
Instruments, Ltd. (Portions omitted pursuant to Rule 406.)
10.8* Purchasing and Licensing Agreement, dated March 3, 1996, between the
Registrant and Healthdyne Technologies, inc. (Portions omitted
pursuant to Rule 406.)
10.9 Office Building Lease between Hoffman Associates No. 5 and the Registrant for the property
located at 2852 Kelvin Avenue, Irvine, California 92614, dated April 25, 1997.
10.10 Revolving Credit Loan & Security Agreement between Comerica Bank and
the Registrant, dated April 16, 1997, and ancillary documents
executed in connection here with.
10.11* Third Amended and Restated Registration Rights Agreement, dated
January 17, 1995, among the Registrant and certain parties thereto.
10.12* Series C Preferred Stock Purchase Agreement, dated as of January 17,
1995, by and among the Registrant, Warburg, Pincus Ventures, L.P.,
The Vertical Fund and Vertical Partners, Ltd.
10.13* Amendment No. 1 to Series C Preferred Stock Purchase Agreement, dated as of June 5, 1996,
between the Registrant, Warburg, Pincus Ventures, L.P., The Vertical Fund and Vertical
Partners, Ltd.
10.14* Purchasing and Licensing Agreement, dated May 9, 1996, between the
Registrant and Ohmeda, Inc. (Portions omitted pursuant to Rule 406.)
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
- ----------------
* Incorporated by reference from the Exhibit included in the Registrant's
Registration Statement on Form SB-2 (Registration No. 333-4772-LA) filed with
the Commission on August 8, 1996.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1997.
37
<PAGE> 39
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MASIMO CORPORATION
By: /S/ Joe E. Kiani
Joe E. Kiani, President and
Chief Executive Officer
Date: June 26, 1997
38
<PAGE> 1
EXHIBIT 10.9
[AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION LOGO]
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes
only April 25, 1997, is made by and between HOFFMAN ASSOCIATES NO. 5, a
California limited partnership ("LESSOR") and MASIMO CORPORATION, a Delaware
corporation ("LESSEE"), (collectively the "PARTIES,") or individually a
"PARTY").
1.2 PREMISES: That certain real property, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
and commonly known as 2852 Kelvin Avenue, Irvine, CA 92614, located in the
County of Orange, State of California, and generally described as (describe
briefly the nature of the property and, if applicable, the "PROJECT", if the
property is located within a Project) 29,162 sq. ft. general purpose office and
warehouse building, located on 77,226 sq. ft. of land more particularly
described on Exhibit A attached hereto ("PREMISES"). (See also Paragraph 2)
1.3 TERM: 5 years and 1 months ("ORIGINAL TERM") commencing May 1,
1997 ("COMMENCEMENT DATE") and ending May 31, 2002 ("EXPIRATION DATE"). (See
also Paragraph 3)
1.4 EARLY POSSESSION: May 1, 1997 through May 31, 1997 ("EARLY
POSSESSION DATE"). (See also Paragraphs 3.2 and 3.3)
1.5 BASE RENT: $20,413.00 per month ("BASE RENT"), payable on the
1st day of each month commencing (See Addendum) (See also Paragraph 4)
[X] If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $20,413.00 as Base Rent for the
period June 1, 1997 through June 30, 1997 (as adjusted per Paragraph 1.5).
1.7 SECURITY DEPOSIT: $20,413.00 ("SECURITY DEPOSIT"). (See also
Paragraph 5)
1.8 AGREED USE: General office, sales, research and development,
production and warehousing of medical equipment within City of Irvine
zoning/code restrictions. (See also Paragraph 6)
1.9 INSURING PARTY. Lessee is the "INSURING PARTY" unless otherwise
stated herein. (See also Paragraph 8) See Addendum
1.10 REAL ESTATE BROKERS: (See also Paragraph 15)
(a) REPRESENTATION: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction (check applicable boxes):
[X] CB COMMERCIAL REAL ESTATE GROUP/Dave Desper and Chip Wright represents
Lessor exclusively ("LESSOR'S BROKER");
[X] GRUBB & ELLIS - Stan Mullin represents Lessee exclusively ("LESSEE'S
BROKER"); or represents both Lessor and Lessee ("DUAL AGENCY").
(b) PAYMENT TO BROKERS: Upon execution and delivery of this
Lease by both Parties, and Lessee occupancy and the start of rental payment by
Lessee, Lessor shall pay to the Broker the fee agreed to in the Listing
agreement (or if there is no such agreement, the sum of 5% of the total Base
Rent for the brokerage services rendered by said Broker).
1.11 GUARANTOR. The obligations of the Lessee under this Lease are
to be guaranteed by Not applicable ("GUARANTOR"). (See also Paragraph 37)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or
Addenda consisting of Paragraphs 1.5 through 53 and Exhibits A (Legal
Description), B (Letter of Credit), C (Lessor's Work), D (Lessee's Work) all
of which constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon all of
the terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may have
been used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom
clean and free of debris on the Commencement Date or the Early Possession Date,
whichever first occurs ("START DATE"), and, so long as the required service
contracts described in Paragraph 7.1(b) below are obtained by Lessee within
thirty (30) days following the Start Date, warrants that the existing
electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading doors, if any, and all other such
elements in the Premises, other than those constructed by Lessee, shall be in
good operating condition on Start Date and that the structural elements of the
roof, 2nd floor, bearing walls and foundation of any buildings on the Premises
(the "BUILDING") shall be free of material defects and shall be in a
water-tight condition. If a non-compliance with said warranty exists as of the
Start Date, Lessor shall, as Lessor's sole obligation with respect to such
matter, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify same at Lessor's expense. If, after the Rent
Commencement Date, Lessee does not give Lessor written notice of any
non-compliance with this warranty within: (i) one year as to the surface of the
roof, (ii) six (6) months as to the HVAC systems, (iii) thirty (30) days as to
the remaining systems and other elements of the Building, correction of such
non-compliance shall be the obligation of Lessee at Lessee's sole cost and
expense.
2.3 COMPLIANCE. Lessor warrants that the improvements on the
Premises comply with all applicable laws, covenants or restrictions of record,
building codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") in
effect on the Start Date. Said warranty does not apply to the use to which
Lessee will put the Premises or to any Alterations or Utility Installations (as
defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is
responsible for determining whether or not the zoning is appropriate for
Lessee's intended use, and acknowledges that past uses of the Premises may no
longer be allowed. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided, promptly after receipt of written notice
from Lessee selling forth with specificity the nature and extent of such
non-compliance, rectify the same at Lessor's expense. If Lessee does not give
Lessor written notice of a noncompliance with this warranty within six (6)
months following the Rent Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense. If the
Applicable Requirements are hereafter changed (as opposed to being in existence
at the Start Date, which is addressed in Paragraph 6.2(e) below) so as to
require during the term of this Lease the construction of an addition to or an
alteration of the Building, the remediation of any Hazardous Substance, or the
reinforcement or other physical modification of the Building ("CAPITAL
EXPENDITURE"), Lessor and Lessee shall allocate the cost of such work as
follows:
<PAGE> 2
(a) Subject to Paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
Premises by Lessee as compared with uses by tenants in general, Lessee shall be
fully responsible for the cost thereof.
(b) Subject to Paragraph 2.3(c) below, if such Capital Expenditure
is not the result of the specific and unique use of the Premises by Lessee (such
as, governmentally mandated seismic modifications), then Lessor and Lessee shall
allocate the obligation to pay for such costs pursuant to the provisions of
Paragraph 7.1(c); provided, however, that if such Capital Expenditure is
required during the last two years of this Lease or if Lessor reasonably
determines that it is not economically feasible to pay its share thereof, Lessor
shall have the option to terminate this Lease upon ninety (90) days prior
written notice to Lessee unless Lessee notifies Lessor, in writing, within ten
(10) days after receipt of Lessor's termination notice that Lessee will pay for
such Capital Expenditure. If Lessor does not elect to terminate, and fails to
tender its share of any such Capital Expenditure, Lessee may advance such funds
and deduct same, with interest, from Rent until Lessor's share of such costs
have been fully paid. If Lessee is unable to finance Lessor's share, or if the
balance of the Rent due and payable for the remainder of this Lease is not
sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the
right to terminate this Lease upon thirty (30) days written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in intensity
of use, or modification to the Premises then, and in that event, Lessee shall be
fully responsible for the cost thereof, and Lessee shall not have any right to
terminate this Lease.
2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been
advised by Lessor and/or Brokers to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical, HVAC
and the fire sprinkler systems, security, environmental aspects, and compliance
with Applicable Requirements), and their suitability for Lessee's intended use,
(b) Lessee has made such investigation as it deems necessary with reference to
such matters and assumes all responsibility therefor as the same relate to its
occupancy of the Premises, and (c) neither Lessor, Lessor's agents, nor any
Broker has made any oral or written representations or warranties with respect
to said matters other than as set forth in this Lease. In addition, Lessor
acknowledges that: (a) Broker has made no representations, promises or
warranties concerning Lessee's ability to honor the Lease or suitability to
occupy the Premises, and (b) it is lessor's sole responsibility to investigate
the financial capability and/or suitability of all proposed tenants.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
lease (including but not limited to the obligations to pay Real Property Taxes
and insurance premiums and to maintain the Premises) shall, however, be in
effect on the Commencement Date. Any such early possession shall not affect the
Expiration Date. See Addendum.
3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor,
nor shall such failure affect the validity of this Lease. Lessee shall not,
however, be obligated to pay Rent until it receives possession of the Premises.
If possession is not delivered within sixty (60) days after the Commencement
Date, Lessee may, at its option, by notice in writing within ten (10) days
after the end of such sixty (60) day period, cancel this Lease, in which event
the Parties shall be discharged from all obligations hereunder. If such notice
is not received by Lessor within said ten (10) day period, Lessee's right to
cancel shall terminate. Except as otherwise provided, if possession is not
tendered by Lessee by the Start Date and Lessee does not terminate this Lease,
as aforesaid, any period of rent abatement that Lessee would otherwise have
enjoyed shall run from the date of delivery of possession and continue for a
period equal to what Lessee would otherwise have enjoyed under the terms
hereof, but minus any days of delay caused by the cast or omissions of Lessee.
If possession of the Premises is not delivered within four (4) months after the
Commencement Date, this Lease shall terminate unless other agreements are
reached between Lessor and Lessee, in writing.
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its obligation
to provide evidence of insurance (Paragraph 8.5). Pending delivery of such
evidence, Lessee shall be required to perform all of its obligations under this
Lease from and after the Start Date, including the payment of Rent,
notwithstanding Lessor's election to withhold possession pending receipt of
such evidence of insurance. Further, if Lessee is required to perform any other
conditions prior to or concurrent with the Start Date, the Start Date shall
occur but Lessor may elect to withhold possession until such conditions are
satisfied.
4. RENT.
4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under
the terms of this Lease including, without limitation, insurance premiums and
real property taxes, (except for the Security Deposit) are deemed to be rent
("RENT").
4.2 PAYMENT. Lessee shall cause payment of Rent to be received by
Lessor in lawful money of the United States, without offset or deduction
(except as specifically permitted in this Lease), on or before the day on which
it is due. Rent for any period during the term hereof which is for less than
one (1) full calendar month shall be prorated based upon the actual number of
days of said month. Payment of Rent shall be made to Lessor as its address
stated herein or to such other persons or place as Lessor may from time to time
designate in writing. Acceptance of a payment which is less than the amount
then due shall not be a waiver of Lessor's rights to the balance of such Rent,
regardless of Lessor's endorsement of any check to stating. See Addendum.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof the Security Deposit as security for Lessee's faithful performance of
its obligations under this Lease. If Lessee fails to pay Rent, or otherwise
Defaults under this Lease, Lessor may use, apply or retain all or any portion
of said Security Deposit for the payment of any amount due Lessor or to
reimburse or compensate Lessor for any liability, expense, loss or damage which
Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or
any portion of said Security Deposit, Lessee shall within ten (10) days after
written request therefor deposit monies with Lessor sufficient to restore said
Security Deposit to the full amount required by this Lease. If the Base Rent
increases during the term of this Lease, Lessee shall, upon written request
from Lessor, deposit additional moneys with Lessor so that the total amount of
the Security Deposit shall at all times bear the same proportion to the
increased Base Rent as the initial Security Deposit bore to the initial Base
Rent. Should the Agreed Use be amended to accommodate a material change in the
business of Lessee or to accommodate a sublessee or assignee, Lessor shall have
the right to increase the Security Deposit to the extent necessary, in Lessor's
reasonable judgment, to account for any increased wear and tear that the
Premises may differ as a result thereof. If a change in control of Lessee
occurs during this Lease and following such change the financial condition of
Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall
deposit such additional monies with Lessor as shall be sufficient to cause the
Security Deposit to be at a commercially reasonable level based on said change
in financial condition. Lessor shall not be required to keep the Security
Deposit separate from its general accounts. Within fourteen (14) days after the
expiration or termination of this Lease, if Lessor elects to apply the Security
Deposit only to unpaid Rent, and otherwise within thirty (30) days after the
Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall
return that portion of the Security Deposit not used or applied by Lessor. No
part of the Security Deposit shall be considered to be held in trust, to bear
interest or to be prepayment for any monies to be paid by Lessee under this
Lease.
PAGE 2 Initials M B
------- -------
FORM 204N-R-2/97
<PAGE> 3
6. USE
6.1 USE. Lessee shall use and occupy the Premises only for the
Agreed Use, or any other legal use which is reasonably comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to neighboring properties. Lessor
shall not unreasonably withhold or delay its consent to any written request for
a modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, or waste
whose presence, use, manufacture, disposal, transportation, or release, either
by itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or welfare,
the environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, and/or crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Substances without the express prior
written consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long as such use
is in compliance with all Applicable Requirements, is not a Reportable Use, and
does not expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may condition its consent to any Reportable Use upon receiving such
additional assurances as Lessor reasonably deems necessary to protect itself,
the public, the Premises and/or the environment against damage, contamination,
injury and/or liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the Security
Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises, other than as previously consented to by Lessor,
Lessee shall immediately give written notice of such fact to Lessor, and
provide Lessor with a copy of any report, notice, claim or other documentation
which it has concerning the presence of such Hazardous Substance.
(c) LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup to concentration levels set forth in the Applicable Requirements or, if
none, to the reasonable satisfaction of Lessor of any contamination of, and for
the maintenance, security and/or monitoring of the Premises or neighboring
properties, that was caused or materially contributed to by Lessee, or
pertaining to or involving any Hazardous Substance brought onto the Premises
during the term of this Lease, by or for Lessee, or any third party.
(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend
(with counsel reasonably acceptable to Lessor) and hold Lessor, its agents,
shareholders, employees, lenders and ground lessor, if any, harmless from and
against any and all loss of rents and/or damages, liabilities, judgments,
claims, expenses, penalties, and reasonable attorneys' and consultants' fees
arising out of or involving any Hazardous Substance brought onto the Premises by
or for Lessee, or any third party (provided, however, that Lessee shall have no
liability under this Lease with respect to underground migration of any
Hazardous Substance under the Premises from adjacent properties). Lessee's
obligations shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation, removal, remediation,
restoration and/or abatement to the level set forth in Paragraph 6.2(c) above,
and shall survive the expiration or termination of this Lease. NO TERMINATION,
CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY LESSOR AND LESSEE SHALL
RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO HAZARDOUS
SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE TIME OF
SUCH AGREEMENT.
(e) LESSOR INDEMNIFICATION. Lessor and its successors and
assigns shall indemnify, defend (with counsel reasonably acceptable to Lessee),
reimburse and hold Lessee, its agents, directors, shareholders, employees and
lenders, harmless from and against any and all environmental damages, including,
without limitation, the cost of remediation, which existed as a result of
Hazardous Substances on the Premises prior to the Start Date or which are caused
by the gross negligence or willful misconduct of Lessor, its agents or
employees. Lessor's obligations, as and when required by the Applicable
Requirements, shall include, but not be limited to, the cost of investigation,
removal, remediation, restoration and/or abatement, and shall survive the
expiration or termination of this Lease.
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations, removal or remediation,
restoration and/or abatement measures required by governmental entities having
jurisdiction with respect to the existence of Hazardous Substances on the
Premises prior to the Start Date. Lessee shall cooperate fully in any such
activities at the request of Lessor, including allowing Lessor and Lessor's
agents to have reasonable access to the Premises at reasonable times in order
to carry out Lessor's responsibilities described herein.
(g) LESSOR TERMINATION OPTION. If a Hazardous Substance
Condition occurs during the term of this Lease, unless Lessee is legally
responsible therefor (in which case Lessee shall make the investigation and
remediation thereof required by the Applicable Requirements and this Lease shall
continue in full force and effect, but subject to Lessor's rights under
Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i)
investigate and remediate such Hazardous Substance Condition, if required, as
soon as reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to remediate
such condition exceeds twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater, give written notice to Lessee, within thirty (30) days
after receipt by Lessor of knowledge of the occurrence of such Hazardous
Substance condition, of Lessor's desire to terminate this Lease as of the date
sixty (60) days following the date of such notice. In the event Lessor elects to
give a termination notice, Lessee may, within ten (10) days thereafter, give
written notice to Lessor of Lessee's commitment to pay the amount by which the
cost of the remediation of such Hazardous Substance Condition exceeds an amount
equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater. Lessee shall provide Lessor with said funds or satisfactory assurance
thereof within thirty (30) days following such commitment. In such event, this
Lease shall continue in full force and effect, and Lessor shall proceed to make
such investigation and remediation as soon as reasonably possible after the
required funds are available. If Lessee does not give such notice and provide
the required funds or assurance thereof within the time provided, this Lease
shall terminate as of the date specified in Lessor's notice of termination.
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as
otherwise provided in this Lease, Lessee shall, at Lessee's sole expense,
fully, diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the reasonable recommendations of Lessor's engineers and/or
consultants which relate in any manner to the Premises, without regard to
whether said requirements are now in effect or become effective after the Start
Date. Lessee shall, within ten (10) days after receipt of Lessor's written
request, provide Lessor with copies of all permits and other documents, and
other information evidencing Lessee's compliance with any Applicable
Requirements specified by Lessor, and shall immediately upon receipt, notify
Lessor in writing (with copies of any documents involved) of any threatened or
actual claim, notice, citation, warning, complaint or report pertaining to or
involving the failure of Lessee or the Premises to comply with any Applicable
Requirements.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as
defined in Paragraph 30 below) and consultants shall have the right to enter
into Premises at any time, in the case of an emergency, and otherwise at
reasonable times, upon reasonable prior notice for the purpose of inspecting
the condition of the Premises and for verifying compliance by Lessee with this
Lease. The cost of any such inspections shall be paid by Lessor, unless a
violation of Applicable Requirements by Lessee or a contamination caused by
Lessee is found to exist or be imminent, or the inspection is requested or
ordered by a governmental authority (other than inspections relating to any
Hazardous Substance existing in, on, under or about the Premises prior to the
Start Date). In such case, Lessee shall upon request reimburse Lessor for the
cost of such inspections, so long as such inspection is reasonably related to
the violation or contamination.
PAGE 3 Initials JA BL
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FORM 204N-R-2/97
<PAGE> 4
7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements) 7.2 (Lessors Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair
(whether or not the portion of the Premises requiring repairs, or the means of
repairing the same, are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises), including, but
not limited to, all equipment or facilities, such as plumbing, heating,
ventilating, air-conditioning, electrical, lighting facilities, boilers,
pressure vessels, fire protection system, fixtures, walls (interior), ceilings,
roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways,
parking lots, fences, signs, sidewalks and parkways located in, on, or adjacent
to the Premises excluding structural elements of the roof, 2nd floor, bearing
walls, and foundation. Lessee, in keeping the Premises in good order, condition
and repair, shall exercise and perform good maintenance practices, specifically
including the procurement and maintenance of the service contracts required by
Paragraph 7.1(b) below. Lessee's obligations shall include restorations,
replacements of renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and state of
repair. Lessee shall, during the term of this Lease, keep the exterior
appearance of the Building in a first-class condition consistent with the
exterior appearance of other similar facilities of comparable age and size in
the vicinity, including, when necessary, the exterior repairing of the Building.
(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (v) roof covering and
drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic utility
feed to the perimeter of the Building, and (ix) any other equipment, if
reasonably required by Lessor. See Addendum.
(c) REPLACEMENT. Subject to Lessee's indemnification of Lessor
as set forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if the Basic Elements described in Paragraph 7.1(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of replacing
such Basic Elements, then such Basic Elements shall be replaced by Lessor, and
the cost thereof shall be prorated between the Parties and Lessee shall only be
obligated to pay, each month during the remainder of the term of this Lease, on
the date on which Base Rent is due, an amount equal to the product of
multiplying the cost of such replacement by a fraction, the numerator of which
is one, and the denominator of which is the number of months of the useful life
of such replacement as such useful life is specified pursuant to Federal income
tax regulations or guidelines for depreciation thereof (including interest on
the unamortized balance as is then commercially reasonable in the judgment of
Lessor's accountants), with Lessee reserving the right to prepay its obligation
at any time.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14
(Condemnation), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, or
the equipment therein, all of which obligations are intended to be that of the
Lessee. It is the intention of the Parties that the terms of this Lease govern
the respective obligations of the Parties as to maintenance and repair of the
Premises, and they expressly waive the benefit of any statute now or
hereinafter in effect to the extent it is inconsistent with the terms of this
Lease. See Addendum.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" refers to all floor and window coverings, air lines, power
panels, electrical distribution, security and fire protection systems,
communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing
in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery
and equipment that can be removed without doing material damage to the
premises. The term "ALTERATIONS" shall mean any modification of the
improvements on the Premises other than Utility Installations or Trade
Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR
UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations
made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).
Lessee shall not make any Alteration or Utility Installations to the Premises
without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the interior of the Premises (excluding
the roof) without such consent but upon notice to Lessor, as long as they are
not visible from the outside, do not involve puncturing, relocating or removing
the roof or any existing walls, and the cumulative cost thereof during this
Lease as extended does not exceed $25,000 in the aggregate or $5,000 in any one
year.
(b) CONSENT. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall
be presented to Lessor in written form with detailed plans. Consent shall be
deemed conditioned upon Lessee's: (i) acquiring all applicable governmental
permits, (ii) furnishing Lessor with copies of both the permits and the plans
and specifications prior to commencement of the work, and (iii) compliance with
all conditions of said permits and other Applicable Requirements in a prompt
and expeditious manner. Any Alterations or Utility Installations shall be
performed in a workmanlike manner with good and sufficient materials. Lessee
shall promptly upon completion furnish Lessor with as-built plans and
specifications. For work which costs an amount equal to the greater of one
month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee
providing a lien and completion bond in an amount equal to one and one-half
times the estimated cost of such Alteration or Utility Installation and/or upon
Lessee's posting an additional Security Deposit with Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility. If Lessee shall contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend and protect itself, Lessor and the Premises against the same and
shall pay and satisfy any such adverse judgment that may be rendered thereon
before the enforcement thereof. If Lessor shall require, Lessee shall furnish a
surety bond in an amount equal to one or one-half times the amount of such
contested lien, claim or demand, indemnifying Lessor against liability for the
same. If Lessor elects to participate in any such action, Lessee shall pay
Lessor's reasonable attorney's fees and costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered a
part of the Premises. Lessor may, at any time, elect in writing to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
termination of this Lease, become the property of Lessor and be surrendered by
Lessee with the Premises.
(b) REMOVAL. By delivery to Lessee of written notice from
Lessor not earlier than ninety (90) and not later than thirty (30) days prior
to the end of the term of this Lease, Lessor may require that any or all Lessee
Owned Alterations or Utility Installations be removed by the expiration or
termination of this Lease. Lessor may require the removal at any time of all or
any part of any Lessee Owned Alterations or Utility Installations made without
the required consent.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises
by the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order, condition and state of repair, ordinary wear and tear
casualty and condemnation, and Lessor's obligations per Paragraph 7.2 hereof
expected. "Ordinary wear and tear" shall not include any damage or
deterioration that would have bee prevented by good maintenance practice.
Lessee shall repair any damage occasioned by the installation, maintenance or
removal of Trade Fixtures, Lessee Owned Alterations and/or Utility
Installations, furnishings, and equipment as well as the removal of any storage
tank installed by or for Lessee, and the removal, replacement, or remediation
to the level set forth in Paragraph 6.2(c) above of any soil, material or
groundwater contaminated by Lessee. Trade Fixtures shall remain the property of
Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate
the Premises pursuant to this Paragraph 7.4(c) without the express written
consent of Lessor shall constitute a holdover under the provisions of
Paragraph 26 below.
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FORM 204N-R-2/97
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8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance
required under Paragraph 8 except to the extent of the cost attributable to
liability insurance carried by Lessor under Paragraph 8.2(b) in excess of
$2,000,000 per occurrence. Premiums for policy periods commencing prior to or
extending beyond the Lease term shall be prorated to correspond to the Lease
term. Payment shall be made by Lessee to Lessor within ten (10) days following
receipt of an invoice.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force
during the term of this Lease a Commercial Liability Policy of Insurance
protecting Lessee and Lessor against claims for bodily injury, personal injury
and property damage based upon or arising out of the ownership, use, occupancy
or maintenance of the Premises and all areas appurtenant thereto. Such
insurance shall be on an occurrence basis providing single unit coverage in an
amount not less than $5,000,000 per occurrence with an "ADDITIONAL
INSURED-MANAGERS OR LESSORS OF PREMISES ENDORSEMENT" and contain the "AMENDMENT
OF THE POLLUTION EXCLUSION ENDORSEMENT" for damage caused by heat, smoke or
fumes from a hostile fire. The Policy shall not contain any intra-insured
exclusions as between insured persons or organizations, but shall include
coverage for liability assumed under this Lease as an "insured contract" for
the performance of Lessee's indemnity obligations under this Lease. The limits
of said insurance shall not, however, limit the liability of Lessee nor relieve
Lessee of any obligation hereunder. All insurance carried by Lessee shall be
primary to and not contributory with any similar insurance carried by Lessor,
whose insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall maintain liability
insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of,
the insurance required to be maintained by Lessee. Lessee shall not be named as
an additional insured therein.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force during the term of this Lease a policy or policies in the
name of Lessor, with loss payable to Lessor, any groundlessor, and to any
Lender(s) insuring loss or damage to the Premises. The amount of such insurance
shall be equal to the full replacement cost (except with regard to flood and/or
earthquake insurance) of the Premises, as the same shall exist from time to
time, or the amount required by any Lenders, but in no event more than the
commercially reasonable and available insurable value thereof. If Lessor is the
Insuring Party, however, Lessee Owned Alterations and Utility Installations,
Trade Fixtures, and Lessee's personal property shall be insured by Lessee under
Paragraph 8.4 rather than by Lessor. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood and/or
earthquake), including coverage for debris removal and the enforcement of any
Applicable Requirements requiring the upgrading, demolition, reconstruction or
replacement of any portion of the Premises as the result of a covered loss.
Said policy or policies shall also contain an agreed valuation provision in
lieu of any coinsurance clause, waiver of subrogation, and inflation guard
protection causing an increase in the annual property insurance coverage amount
by a factor of not less than the adjusted U.S. Department of Labor
Consumer Price Index for All Urban Consumers for the city nearest to where the
Premises are located. If such insurance coverage has a deductible clause, the
deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be
liable for such deductible amount in the event of an Insured Loss.
(b) RENTAL VALUE. The Insuring Party shall obtain and keep
in force during the term of this Lease a policy or policies in the name of
Lessor with loss payable to Lessor and any Lender, insuring the loss of the
full Rent for one (1) year. Said insurance shall provide that in the event the
Lease is terminated by reason of an insured loss, the period of indemnity for
such coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of Rent from
the date of any such loss. Said insurance shall contain an agreed valuation
provision in lieu of any coinsurance clause, and the amount of coverage shall
be adjusted annually to reflect the projected Rent otherwise payable by Lessee,
for the next twelve (12) month period. Lessee shall be liable for any
deductible amount in the event of such loss.
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain
insurance coverage on all of Lessee's personal property, Trade Fixtures, and
Lessee Owned Alterations and Utility Installations. Such insurance shall be
full replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of Lessee's personal property, Trade Fixtures and Lessee Owned
Alterations and Utility Installations. Lessee shall provide Lessor with written
evidence that such insurance is in force.
(b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain
loss of income and extra expense insurance in amounts as will reimburse Lessee
for direct or indirect loss of earnings attributable to all perils commonly
insured against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits of forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 INSURANCE POLICIES. Insurance required herein shall be by
companies duly licensed or admitted to transact business in the state where the
Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least B+, V, as set forth in the most current issue
of "Best's Insurance Guide", or such other rating as may be required by a
Lender. Lessee shall not do or permit to be done anything which invalidates the
required insurance policies. Lessee shall, prior to the Start Date, deliver to
lessor certified copies of policies of such insurance or certificates
evidencing the existence and amounts of the required insurance. No such policy
shall be cancelable or limits reduced in scope except after thirty (30) days
prior written notice to Lessor. Lessee shall, at least thirty (30) days prior
to the expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by it, the other Party may, but shall not be required to, procure and
maintain the same.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other,
and waive their entire right to recover damages against the other, for loss of
or damage to its property arising out of or incident to the perils required to
be insured against herein. The effect of such releases and waivers is not
limited by the amount of insurance carried or required, or by any deductibles
applicable hereto. The Parties agree to have their respective property damage
insurance carriers waive any right to subrogation that such companies may have
against Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.
8.7 INDEMNITY. Except for Lessor's or its employee's or agent's
gross negligence or willful misconduct and/or breach of express warranties
herein Lessee shall indemnify, protect, defend and hold harmless the Premises,
Lessor and its agents, Lessor's master or ground lessor, partners and Lenders,
from and against any and all claims, loss of rents and/or damages, liens,
judgments, penalties, reasonable attorneys' and consultants' fees, expenses
and/or liabilities arising out of, involving, or in connection with, the use
and/or occupancy of the Premises by Lessee. If any action or proceeding is
brought against Lessor by reason of any of the foregoing matters, Lessee shall
upon notice defend the same at Lessee's expense by counsel reasonably
satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense.
Lessor need not have first paid any such claim in order to be defended or
indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Except for the negligence
or willful misconduct of Lessor or Lessor's employees or agents, Lessor shall
not be liable for injury or damage to the person or goods, wares, merchandise or
other property of Lessee, Lessee's employees, contractors, invitees, customers,
or any other person in or about the Premises, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a part
or from other sources or places. Lessor shall not be liable for any damages
arising from any act or neglect of any other tenant of Lessor except for the
gross negligence or willful misconduct of Lessor or Lessor's employees or
agents, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom. See Addendum.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction
to the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in six (6) months or
less from the date of the damage or destruction.
Initials _________
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<PAGE> 6
Lessor shall notify Lessee in writing within thirty (30) days from the date of
the damage or destruction as to whether or not the damage is Partial or Total.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
installations and Trade Fixtures, which cannot reasonably be repaired in six (6)
months or less from the date of the damage or destruction. Lessor shall notify
Lessee in writing within thirty (30) days from the date of the damage or
destruction as to whether or not the damage is Partial or Total.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of Applicable Requirements, and
without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and
Utility Installations) as soon as reasonably possible and this lease shall
continue in full force and effect; provided, however, that Lessee shall, at
Lessor's election, make the repair of any damage or destruction the total cost
to repair of which is $10,000 or less, and, in such event, Lessor shall make
any applicable insurance proceeds available to Lessee on a reasonable basis for
that purpose. Notwithstanding the foregoing, if the required insurance was not
in force or the insurance proceeds are not sufficient to effect such repair,
the Insuring Party shall promptly contribute the shortage in proceeds (except
as to the deductible which is Lessee's responsibility) as and when required to
complete said repairs. In the event, however, such shortage was due to the fact
that, by reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, the party responsible for making the repairs shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to: (i) make
such restoration and repair as is commercially reasonable with Lessor paying
any shortage in proceeds, in which case this Lease shall remain in full force
and effect, or have this Lease terminate thirty (30) days thereafter. Lessee
shall not be entitled to reimbursement of any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage to flood or
earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent or willful act
of Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee
shall have the right within ten (10) days after receipt of the termination
notice to give written notice to Lessor of Lessee's commitment to pay for the
repair of such damage without reimbursement from Lessor. Lessee shall provide
Lessor with said funds or satisfactory assurance thereof within thirty (30)
days after making such commitment. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such repairs as soon as
reasonably possible after the required funds are available. If Lessee does not
make the required commitment, this Lease shall terminate as of the date
specified in the termination notice.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if a Premises Total Destruction occurs, this Lease shall terminate sixty (60)
days following such Destruction. If the damage or destruction was caused by the
gross negligence or willful misconduct of Lessee, Lessor shall have the right
to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six
(6) months of this Lease there is damage for which the cost to repair exceeds
one (1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate
this Lease effective sixty (60) days following the date of occurrence of such
damage by giving a written termination notice to Lessee within thirty (30) days
after the date of occurrence of such damage. Notwithstanding the foregoing, if
Lessee at that time has an exercisable option to extend this Lease or to
purchase the Premises, then Lessee may preserve this Lease by, (a) exercising
such option and (b) providing Lessor with any shortage in insurance proceeds
(or adequate assurance thereof) needed to make the repairs on or before the
earlier of (i) the date which is ten days after Lessee's receipt of Lessor's
written notice purporting to terminate this Lease, or (ii) the day prior to the
date upon which such option expires. If Lessee duly exercises such option
during such period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's
commercially reasonable expense, repair such damage as soon as reasonably
possible and this Lease shall continue in full force and effect. If Lessee
fails to exercise such option and provide such funds or assurance during such
period, then this Lease shall terminate on the date specified in the
termination notice and Lessee's option shall be extinguished.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) ABATEMENT. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which Lessee
is not responsible under this Lease, the Rent payable by Lessee for the period
required for the repair, remediation or restoration of such damage shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired, but not to exceed the proceeds received from the Rental Value
insurance. All other obligations of Lessee hereunder shall be performed by
Lessee, and Lessor shall have no liability for any such damage, destruction,
remediation, repair or restoration except as provided herein.
(b) REMEDIES. If Lessor shall be obligated to repair or
restore the Premises and does not commence, in a substantial and meaningful
way, such repair or restoration within ninety (90) days after such obligation
shall accrue or does not diligently continue making such repair or restoration,
Lessee may, at any time prior to the commencement of such repair or
restoration, or at any time after Lessor fails to diligently continue making
such repair or restoration, give written notice to Lessor and to any Lenders of
which Lessee has actual notice, of Lessee's election to terminate this Lease on
a date not less than sixty (60) days following the giving of such notice. If
Lessee gives such notice and such repair or restoration is not commenced or is
not diligently continued to be made within thirty (30) days thereafter, this
Lease shall terminate as of the date specified in said notice. If the repair or
restoration is commenced or diligently continued to be made within said thirty
(30) days, this Lease shall continue in full force and effect. "COMMENCE"
shall mean either the unconditional authorization of the preparation of the
required plans, or the beginning of the actual work on the Premises, whichever
first occurs.
9.7 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments made by Lessee
to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's
Security Deposit as has not been, or is not then required to be, used by Lessor.
9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions
of any present or future statue to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term
"REAL PROPERTY TAXES" shall include any form of assessment; real estate,
general, special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises, Lessor's right to other income therefrom, and/or Lessor's
business of leasing, by any authority having the direct or indirect power to
tax and where the funds are generated
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with reference to the Building address and where the proceeds so generated are
to be applied by the city, county or other local taxing authority of a
jurisdiction within which the Premises are located. The term "REAL PROPERTY
TAXES" shall also include any tax, fee, levy, assessment or charge, or any
increase therein, imposed by reason of events occurring during the term of this
Lease, including but not limited to, a change in the ownership of the Premises.
10.2
(a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to Paragraph
10.2(b), all such payments shall be made at least ten (10) days prior to any
delinquency date. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes shall cover any
period of time prior to or after the expiration or termination of this Lease,
Lessee's share of such taxes shall be prorated to cover only that portion of the
tax bill applicable to the period that this Lease is in effect, and Lessor shall
reimburse Lessee for any overpayment. If Lessee shall fail to pay any required
Real Property Taxes, Lessor shall have the right to pay the same, and Lessee
shall reimburse Lessor therefor upon demand.
(b) ADVANCE PAYMENT. In the event Lessee incurs a late charge
on any Rent payment, Lessor may, at Lessor's option, estimate the current Real
Property Taxes, and require that such taxes be paid in advance to Lessor by
Lessee, either: (i) in a lump sum amount equal to the installment due, at least
twenty (20) days prior to the applicable delinquency date, or (ii) monthly in
advance with the payment of the Base Rent. If Lessor elects to require payment
monthly in advance, the monthly payment shall be an amount equal to the amount
of the estimated installment of taxes divided by the number of months remaining
before the month in which said installment becomes delinquent. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payments shall be adjusted as required to provide the funds needed to
pay the applicable taxes. If the amount collected by Lessor is insufficient to
pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand,
such additional sums as are necessary to pay such obligations. All moneys paid
to Lessor under this Paragraph may be intermingled with other moneys of Lessor
and shall not bear interest. In the event of a Breach by Lessee in the
performance of its obligations under this Lease, then any balance of funds paid
to Lessor under the provisions of this Paragraph may at the option of Lessor, be
treated as an additional Security Deposit.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to
delinquency, all taxes assessed against and levied upon Lessee Owned
Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and
all personal property of Lessee on or in the Premises. When possible, Lessee
shall cause such property to be assessed and billed separately from the real
property of Lessor. If any of Lessee's said personal property shall be assessed
with Lessor's real property, Lessee shall pay Lessor the taxes attributable to
Lessee's property within ten (10) days after receipt of a written statement.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.
(b) A change in the control of Lessee shall constitute an
assignment requiring consent. The transfer, on a cumulative basis, of thirty
percent (30%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction,
or series of transactions (by way of merger, sale, acquisition, financing,
transfer, leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee by an amount greater than
twenty-five percent (25%) of such Net Worth as it was represented at the time of
the execution of this Lease or at the time of the most recent assignment to
which Lessor has consented, or as it exists immediately prior to said
transaction or transactions constituting such reduction, whichever was or is
greater, shall be considered an assignment of this Lease to which Lessor may
withhold its consent. "NET WORTH OF LESSEE" shall mean the net worth of Lessee
(excluding any guarantors) established under generally accepted accounting
principles.
(d) An assignment or subletting without consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a noncurable
Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30)
days written notice, increase the monthly Base Rent to one hundred ten percent
(110%) of the Base Rent then in effect. Further, in the event of such Breach and
rental adjustment, (i) the purchase price of any option to purchase the Premises
held by Lessee shall be subject to similar adjustment to one hundred ten percent
(110%) of the price previously in effect, and (ii) all fixed and non-fixed
rental adjustments scheduled during the remainder of the Lease term shall be
increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
See Addendum.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Rent or for the performance of any other
obligations to be performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any
assignee or sublessee, without first exhausting Lessor's remedies against any
other person or entity responsible therefore to Lessor, or any security held by
Lessor.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not limited
to the intended use and/or required modification of the Premises, if any,
together with a fee of $1,000 or ten percent (10%) of the current monthly Base
Rent applicable to the portion of the Premises which is the subject of the
proposed assignment or sublease, whichever is greater, as consideration for
Lessor's considering and processing said request. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may be
reasonably requested. Upon Lessee's submission of a complete application
requesting Lessor's consent hereunder, Lessor shall respond to such request
within 5 business days.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed to
have assumed and agreed to conform and comply with each and every term,
covenant, condition and obligation herein to be observed or performed by Lessee
during the term of said assignment or sublease, other than such obligations as
are contrary to or inconsistent with provisions of an assignment or sublease to
which Lessor has specifically consented to in writing.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all Rent payable on any sublease, and Lessor may collect
such Rent and apply same toward Lessee's obligations under this Lease; provided,
however, that until a Breach shall occur in the performance of Lessee's
obligations, Lessee may collect said Rent. Lessor shall not, by reason of the
foregoing or any assignment of such sublease, nor by reason of the collection of
Rent, be deemed liable to the sublessee for any failure of Lessee to perform and
comply with any of Lessee's obligations to such sublessee. Lessee hereby
irrevocably authorizes and directs any such sublessee, upon receipt of a written
notice
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from Lessor stating that a Breach exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor all Rent due and to become due
under the sublease. Sublessee shall rely upon any such notice from Lessor and
shall pay all Rents to Lessor without any obligation or right to inquire as to
whether such Breach exists, notwithstanding any claim from Lessee to the
contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its option,
require sublessee to attorn to Lessor, in which event Lessor shall undertake
the obligations of the sublessor under such sublease from the time of the
exercise of said option to the expiration of such sublease; provided, however,
Lessor shall not be liable for any prepaid rents or security deposit paid by
such sublessee to such sublessor or for any prior Defaults or Breaches of such
sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The sublessee
shall have a right of reimbursement and offset from and against Lessee for any
such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the
Lessee to comply with or perform any of the terms, covenants, conditions or
rules under this Lease. A "BREACH" is defined as the occurrence of one or more
of the following Defaults, and the failure of Lessee to cure such Default
within any applicable grace period.
(a) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security, or
where the coverage of the property insurance described in Paragraph 8.3 is
jeopardized as a result thereof, or without providing reasonable assurances to
minimize potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to Lessor or
to a third party, when due, to provide reasonable evidence of insurance or
surety bond, or to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of
three (3) business days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service
contracts, (iii) the rescission of an unauthorized assignment or subletting,
(iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence
concerning any guaranty and/or Guarantor, (vii) any document requested under
Paragraph 42 (easements), or (viii) any other documentation or information
which Lessor may reasonably require of Lessee under the terms of this Lease,
where any such failure continues for a period of ten (10) days following
written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the
making of any general arrangement or assignment for the benefit of creditors;
(ii) becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days); (iii) the appointment of a trustee
or receiver to take possession of substantially all of Lessee's assets located
at the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution
or other judicial seizure of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of not force or effect, and not affect the validity of the
remaining provisions.
(f) The discovery that any financial statement of Lessee or of
any Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this
Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within sixty (60) days following
written notice of any such event, to provide written alternative assurance or
security, which, when coupled with the then existing resources of Lessee,
equals or exceeds the combined financial resources of Lessee and the Guarantors
that existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any of its affirmative
duties or obligations, within ten (10) days after written notice (or in case of
an emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid Rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid Rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
unlikely to result therefrom, including but not limited to the cost of
recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys'
fees, and that portion of any leasing commission paid by Lessor in connection
with this Lease applicable to the unexpired term of this Lease. The worth at
the time of award of the amount referred to in provision (iii) of the
immediately preceding sentence shall be computed by discounting such amount at
the discount rate of the Federal Reserve Bank of the District within which the
Premises are located at the time of award plus one percent (1%). Efforts by
Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not
waive Lessor's right to recover damages under Paragraph 13. If termination of
this Lease is obtained through the provisional remedy of unlawful detainer,
Lessor shall have the right to recover in such proceeding any unpaid Rent and
damages as are recoverable therein, or Lessor may reserve the right to recover
all or any part thereof in a separate suit. If a notice and grace period
required under Paragraph 13.1 was not previously given, a notice to pay rent or
quit, or to perform or quit given to Lessee under the unlawful detainer statute
shall also constitute the notice required by Paragraph 13.1. In such case, the
applicable grace period required by Paragraph 13.1 and the unlawful detainer
statute shall run concurrently, and the failure of Lessee to cure the Default
within the greater of the two such grace periods shall constitute both an
unlawful detainer and a Breach of this Lease entitling Lessor to the remedies
provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or assign,
subject only to reasonable limitations. Acts of maintenance, efforts to relet,
and/or the appointment of a receiver to protect the Lessor's interests, shall
not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under
the laws or judicial decisions of the state wherein the Premises are located.
The expiration or termination of this Lease and/or the termination of Lessee's
right to possession shall not relieve Lessee or Lessor from liability
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<PAGE> 9
under any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or
other charges, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering into
this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT
PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful
performance of all of the terms, covenants and conditions of this Lease. Upon
Breach of this Lease by Lessee, any such Inducement Provision shall
automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement Provision
shall be immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or
the cure of the Breach which initiated the operation of this paragraph shall
not be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any
Rent shall not be received by Lessor within five (5) days after such amount
shall be due, then, without any requirement for notice to Lessee, Lessee shall
pay to Lessor a one-time late charge equal to ten percent (10%) of each such
overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Lessor will incur by reason of such
late payment. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's Default or Breach with respect to such overdue
amount, nor prevent the exercise of any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) consecutive installments of Base Rent,
then notwithstanding any provision of this Lease to the contrary, Base Rent
shall, at Lessor's option, become due and payable quarterly in advance.
13.5 INTEREST. Any monetary payment due Lessor hereunder, other
than late charges, not received by Lessor, when due as to scheduled payments
(such as Base Rent) or within thirty (30) days following the date on which it
was due for non-scheduled payment, shall bear interest from the date when due,
as to scheduled payments, or the thirty-first (31st) day after it was due as to
non-scheduled payments. The interest ("INTEREST") charged shall be equal to the
prime rate reported in the Wall Street Journal as published closest prior to
the date when due plus four percent (4%), but shall not exceed the maximum rate
allowed by law. Interest is payable in addition to the potential late charge
provided for in Paragraph 13.4.
13.6 BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an
obligation required to be performed by Lessor. For purposes of this Paragraph,
a reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and any Lender whose name and address shall have been furnished
Lessee in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days are
reasonably required for its performance, then Lessor shall not be in breach if
performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event
that neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of one month's Base
Rent or the Security Deposit, and to pay any excess of such expense under
protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall
document the cost of said cure and supply said documentation to Lessor.
14. CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (collectively "CONDEMNATION"), this Lease shall terminate as to the part
taken as of the date the condemning authority takes title or possession,
whichever first occurs. If more than ten percent (10%) of any building portion
of the premises, or more than twenty-five percent (25%) of the land area
portion of the premises not occupied by any building, is taken by Condemnation,
Lessee may, at Lessee's option, to be exercised in writing within ten (10) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the Base Rent shall be
reduced in proportion to the reduction in utility of the Premises caused by
such Condemnation. Condemnation awards and/or payments shall be the property of
Lessor, whether such award shall be made as compensation for diminution in
value of the leasehold, the value of the part taken, or for severance damages;
provided, however, that Lessee shall be entitled to any compensation for
Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures,
without regard to whether or not this Lease is terminated pursuant to the
provisions of this Paragraph. All Alterations and Utility Installations made to
the Premises by Lessee, for purposes of Condemnation only, shall be considered
the property of the Lessee and Lessee shall be entitled to any and all
compensation which is payable therefor. In the event that this Lease is not
terminated by reason of the Condemnation, Lessor shall repair any damage to the
Premises caused by such Condemnation.
15. BROKERS' FEE.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS.
Lessee and Lessor each represent and warrant to the other that it has had no
dealings with any person, firm, broker or finder (other than the Brokers, if
any) in connection with this Lease, and that no one other than said named
Brokers is entitled to any commission or finder's fee in connection herewith.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.
16. ESTOPPEL CERTIFICATES.
(a) Each Party (as "RESPONDING PARTY") shall within ten (10)
days after written notice from the other Party (the "REQUESTING PARTY")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in form similar to the then most current "ESTOPPEL CERTIFICATE" form published
by the American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requested Party.
(b) If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such ten day period, the Requesting Party may
execute an Estoppel Certificate stating that: (i) the Lease is in full force
and effect without modification except as may be represented by the Requesting
Party, (ii) there are no uncured defaults in the Requesting Party's performance,
and (iii) if Lessor is the Requesting Party, not more than one month's rent has
been paid in advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.
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(c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee and all Guarantors shall deliver to any
potential lender or purchaser designated by Lessor such financial statements as
may be reasonably required by such lender or purchaser, including but not
limited to Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event of
a transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, and subject to the provisions of Paragraph
20 below, the original Lessor under this Lease, and all subsequent holders
of the Lessor's interest in this Lease shall remain liable and responsible with
regard to the potential duties and liabilities of Lessor pertaining to Hazardous
Substances as outlined in Paragraph 6 above.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17
above, the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and Lessee shall
look to the Premises, and to no other assets of Lessor, for the satisfaction
of any liability of Lessor with respect to this Lease, and shall not seek
recourse against the individual partners of Lessor, or its or their individual
partners, directors, officers or shareholders, or any of their personal assets
for such satisfaction.
21. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains
all agreements between the Parties with respect to any matter mentioned herein,
and no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that it
has made, and is relying solely upon, its own investigation as to the nature,
quality, character and financial responsibility of the other Party to this Lease
and as to the nature, quality and character of the Premises. Brokers have no
responsibility with respect to any default or breach hereof by either Party.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by courier)
or may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 DATE OF NOTICE. Any notice sent by registered or certified
mail, return receipt requested, shall be deemed given on the date of delivery
shown on the receipt card, or if no delivery date is shown, the postmark
thereon. If sent by regular mail the notice shall be deemed given forty-eight
(48) hours after the same is addressed as required herein and mailed with
postage prepaid. Notices delivered by United States Express Mail or overnight
courier that guarantee next day delivery shall be deemed given twenty-four (24)
hours after delivery of the same to the Postal Service or courier. Notices
transmitted by facsimile transmission or similar means shall be deemed delivered
upon telephone confirmation of receipt, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday, Sunday or legal holiday,
it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. The acceptance of
Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any
payment by Lessee may be accepted by Lessor on account of moneys or damages due
Lessor, notwithstanding any qualifying statements or conditions made by Lessee
in connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of
this Lease to be observed or performed by Lessee are both covenants and
conditions. In constructing this Lease, all headings and titles are for the
convenience of the parties only and shall not be considered a part of this
Lease. Whenever required by the context, the singular shall include the plural
and vice versa. This Lease shall not be construed as if prepared by one of the
parties, but rather according to its fair meaning as a whole, as if both parties
had prepared it.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any other Option granted hereby
shall be subject and subordinate to any ground lease, mortgage, deed of trust,
or other hypothecation or security device (collectively, "SECURITY DEVICE"), now
or hereafter placed upon the Premises, to any and all advances made on the
security thereof, and to all renewals, modifications, and extensions thereof.
Lessee agrees that the holders of any such Security Devices (in this Lease
together referred to as "Lessor's Lender") shall have no liability or obligation
to perform any of the obligations of Lessor under this Lease. Any Lender may
elect to have this Lease and/or any Option granted hereby superior to the lien
of its Security Device by giving written notice thereof to Lessee, whereupon
this Lease and such Options shall be deemed prior to such Security Device,
notwithstanding the relative dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new
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FORM 204N-R-2/97
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owner shall not: (i) be liable for any act or omission of any prior lessor or
with respect to events occurring prior to acquisition of ownership; (ii) be
subject to any offsets or defenses which Lessee might have against any prior
lessor, or (iii) be bound by prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into
by Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturb so long as
Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within sixty (60) days after the execution of this Lease,
Lessor shall use its commercially reasonable efforts to obtain a
Non-Disturbance Agreement from the holder of any pre-existing Security Device
which is secured by the Premises. In the event that Lessor is unable to provide
the Non-Disturbance Agreement within said sixty (60) days, the Lessee may, at
Lessee's option, directly contact Lessor's lender and attempt to negotiate for
the execution and delivery of a Non-Disturbance Agreement.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with
a sale, financing or refinancing of the Premises, Lessee and Lessor shall
execute such further writings as may be reasonably required to separately
document any subordination, attornment and/or Non-Disturbance Agreement
provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees.
Such fees may be awarded in the same suit or recovered in a separate suit,
whether or not such action or proceeding is pursued to decision or judgment.
The term "PREVAILING PARTY" shall include, without limitation, a Party or
Broker who substantially obtains or defeats the relief sought, as the case may
be, whether by compromise, settlement, judgment, or the abandonment by the
other Party or Broker of its claim or defense. The attorneys' fees award shall
not be computed in accordance with any court fee schedule, but shall be such as
to fully reimburse all attorneys' fees reasonably incurred. In addition,
Lessor shall be entitled to attorneys' fees, costs and expenses incurred in
the preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced
in connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times upon reasonable prior notice for
the purpose of showing the same to prospective purchasers, lenders, or lessees,
and making such alterations, repairs, improvements or additions to the Premises
as Lessor may deem necessary. All such activities shall be without abatement of
Rent or liability to Lessee except for damage to Lessee property or employees,
or to the Premises caused by Lessor or Lessor's agent. Lessor may at any time
place on the Premises any ordinary "FOR SALE" signs and Lessor may during the
last six (6) months of the term hereof place on the Premises any ordinary "FOR
LEASE" signs. Lessee may at any time place on or about the Premises any
ordinary "FOR SUBLEASE" sign.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent. Lessor shall
not be obligated to exercise any standard of reasonableness in determining
whether to permit an auction.
34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not
place any sign upon the Premises without Lessor's prior written consent. All
signs must comply with all Applicable Requirements. See Addendum.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing
by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereby by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, that Lessor may elect to continue any one
or all existing subtenancies. Lessor's failure within ten (10) days following
any such event to elect to the contrary by written notice to the holder of any
such lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. CONSENTS. Except as otherwise provided herein, whether in this Lease
the consent of a Party is required to an act by or for the other Party, such
consent shall not be unreasonably withheld or delayed. Lessor's reasonable
costs and expenses (including but not limited to architects', attorneys',
engineers and other consultants' fees) incurred in consideration of, or
response to, a request by Lessee for any Lessor consent, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and
supporting documentation therefor. Lessor's consent to any act, assignment or
subletting shall not constitute an acknowledgement that no Default or Breach by
Lessee of this Lease exists, nor shall such consent be deemed a waiver of any
then existing Default or Breach, except as may be otherwise specifically stated
in writing by Lessor at the time of such consent. The failure to specify herein
any particular condition to Lessor's consent shall not preclude the imposition
by Lessor at the time of consent of such further or other conditions as are
then reasonable with reference to the particular matter for which consent is
being given. In the event that either Party disagrees with any determination
made by the other hereunder and reasonably requests the reasons for such
determination, the determining party shall furnish its reasons in writing and
in reasonable detail within ten (10) business days following such request.
37. GUARANTOR.
37.1 EXECUTION. The Guarantors, if any, shall each execute a
guaranty in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same obligations as
Lessee under this Lease.
37.2 DEFAULT. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon reasonable request to provide: (a) evidence of
the execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, (b) current financial statements, (c)
a Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and
performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession and quiet enjoyment of the Premises during the term hereof.
39. OPTIONS. See Addendum.
39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the
term of or renew this Lease.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee, and cannot be assigned
or exercised by anyone other than said original Lessee and only while the
original Lessee is in full possession of the Premises and, if requested by
Lessor, with Lessee certifying that Lessee has no intention of thereafter
assigning or subletting.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later Option cannot be exercised
unless the prior Options have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option: (i)
during the period commencing with the giving of any notice of Default and
continuing until said Default is cured, (ii) during the period of time any Rent
is unpaid (without regard to whether notice thereof is given Lessee), (iii)
during the time Lessee is in Breach of this Lease, or (iv) in the event that
Lessee has been given three (3) or more notices of separate Default, whether or
not the Defaults are cured, during the twelve (12) month period immediately
preceding the exercise of the Option.
(b) The period of time which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or
effect, notwithstanding Lessee's due and timely exercise of the Option, if,
after such exercise and prior to the commencement of the extended term, (i)
Lessee fails to pay Rent for a period of thirty (30) days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), (ii)
Lessor gives to Lessee three (3) or more notices of separate Default during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including
Initials _____ _____
PAGE 11
<PAGE> 12
the care and cleanliness of the grounds and including the parking, loading and
unloading of vehicles, and that Lessee will pay its fair share of common
expenses incurred in connection therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other
security measures, and that Lessor shall have no obligation whatsoever to
provide same. Lessee assumes all responsibility for the protection of the
Premises, Lessee, its agents and invitees and their property from the acts of
third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time,
to grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay.
44. AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each party
shall, within (30) days after request, deliver to the other party satisfactory
evidence of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the
Mediation and/or the Arbitration of all disputes between the Parties and/or
Brokers arising out of this Lease [ ] IS [X] IS NOT attached to this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
- -------------------------------------------------------------------------------
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION
TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION
OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA,
CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS
OF THE STATE IN WHICH THE PREMISES IS LOCATED.
- -------------------------------------------------------------------------------
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Pasadena, California Executed at: Mission Viejo, California
------------------------- ---------------------------
on: 5/5/97 on: 5/2/97
---------------------------------- ------------------------------------
By LESSOR: By LESSEE:
HOFFMAN ASSOCIATES NO. 5 MASIMO CORPORATION,
a California limited partnership a Delaware corporation
- ------------------------------------- ---------------------------------------
By: Hoffman Associates, Inc. By:
---------------------------------- ------------------------------------
General Partner Name Printed:
---------------------------------- --------------------------
Title:
- ------------------------------------- ---------------------------------
By: /s/ JAMES J. HAWK By: /s/ BRADLEY R. LANGDALE
---------------------------------- ------------------------------------
Name Printed: James J. Hawk Name Printed: Bradley R. Langdale
------------------------ --------------------------
Title: President Title: Vice President, Finance -- CFO
------------------------------- ---------------------------------
Address: 225 South Lake Avenue, Address: 23361 Madero, Ste. 100
Suite 1150 Mission Viejo, CA 92691
Pasadena, CA 91101
Telephone: (818) 793-0043 Telephone: (714) 586-6022
Facsimile: (818) 793-0047 Facsimile: (714) 586-4350
Federal ID No. 95-3774288 Federal ID No. 33-0368882
NOTE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form. AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So.
Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777.
Fax No. (213) 687-8616.
PAGE 12 FORM 204N-R-2/97
(C) Copyright 1997 -- By American Industrial Real Estate Association.
All rights reserved. No part of these works may be reproduced
in any form without permission in writing.
<PAGE> 13
ADDENDUM TO LEASE DATED APRIL 25, 1997,
BETWEEN HOFFMAN ASSOCIATES NO. 5, LESSOR,
AND MASIMO CORPORATION, LESSEE
The following paragraphs are hereby incorporated by reference
into the Lease and made a part thereof, as though fully set forth therein. To
the extent any of the paragraphs of this Addendum conflict with any preprinted
portions of the Lease, these typed paragraphs of the Addendum shall control.
1.5 BASE RENT. June 1, 1997, provided Lessor has delivered
possession of the Premises to Lessee with Lessor's Work (which is more
particularly described on Exhibit C attached hereto) completed as evidenced by a
final inspection card signed by the City of Irvine. A delay in delivery by
Lessor will delay commencement of Base Rent payment an equal number of calendar
days. Certificate of Occupancy application will be the responsibility of Lessee.
3.2 EARLY POSSESSION. Notwithstanding Paragraphs 1.4 and 3.2 of
the Lease to the contrary, Lessee may take possession of the Premises on May 1,
1997, provided Lessor's Work is completed. However, Lessee may access the
Premises after this Lease is executed by all parties and delivered, for purposes
of completing Lessee's Work, provided: (i) Lessee's access does not interfere
with Lessor's Work, (ii) Lessor has received and approved in writing specific
plans for Lessee's proposed improvements, and (iii) Lessor, at its sole
discretion, controls the schedule and scope of work by Lessee to the extent
necessary to avoid scheduling conflicts. Lessor shall use reasonable efforts to
obtain insurance certificates from Lessor's contractors naming Lessee as an
additional insured.
4.3 RENT ADJUSTMENT. The monthly Rent for each month of the
Lease term shall be increased as follows: On December 1, 1999, the monthly Rent
payable under Paragraph 1.5 ("Base Rent") of the Lease shall be adjusted by the
increase from the Base Month specified below in the Consumer Price Index of the
Bureau of Labor Statistics of the U.S. Department of Labor (All Urban Consumers)
for the Los Angeles-Anaheim-Riverside Area, All items (1982-1984 = 100),
referred to herein as "CPI." The new monthly Rent shall be calculated as
follows: The Base Rent set forth in Paragraph 1.5 shall be multiplied by a
fraction, the numerator of which shall be the CPI for the month of November,
1999, and the denominator shall be the CPI for the month of May, 1997 ("Base
Month"). The increase shall not be less than 3% nor more than 8% per annum on a
cumulative and compounded basis. The sum so calculated shall constitute the new
monthly Rent hereunder. In the event the compilation and/or publication of the
CPI shall be transferred to any other governmental department, bureau or agency,
or shall be discontinued, then the index most nearly the same as the CPI shall
be used to make such calculation. In the event that Lessor and Lessee cannot
agree on such alternative index, then the matter shall be submitted for
decision to the American Arbitration Association in accordance with the then
rules of said association and the decision of the arbitrator shall be binding
upon the parties. The cost of said arbitrator shall be paid equally by Lessor
and Lessee.
7.1(b)(1) OBLIGATIONS TO MAINTAIN. Lessee shall, at its expense,
on or before the 30th day of November of each year during the term of this
Lease, deliver evidence reasonably satisfactory to Lessor that the roof of the
Building and the air-conditioning (HVAC) units are in good repair, which
evidence may consist of, but need not be limited to, inspection reports, repair
bills or maintenance agreements. Lessor and Lessee mutually agree that Lessee
shall be responsible for inspection and maintenance costs as required to
maintain the roof and HVAC in good order, condition and repair, and the roof in
a watertight condition. Subject to the description of Lessee's Work set forth in
Exhibit D, Lessee shall not make any
Addendum-1
<PAGE> 14
penetrations of the roof, or add additional equipment to the roof, or make
additions to existing equipment, plumbing or electrical piping or conduit on the
roof, for any reason whatsoever, without Lessor's prior written consent. Any
such roof modification shall require structural engineering plans and sleepers
for anchors with cant strips covered by customary roofing and metal coping caps,
at Lessee's expense. On or before the expiration of the term of the Lease,
Lessee shall, at Lessee's expense, remove old roofing materials and re-roof
modified areas with like quality materials within a two (2) course area around
each roof modification.
7.2 LESSOR'S OBLIGATIONS. Notwithstanding anything in this Lease
to the contrary, Lessor shall, at Lessor's sole expense, keep in good order,
condition and repair the structural elements of the roof, second floor, bearing
walls (without respect to paint), and foundation.
8.9 INSURING PARTY. Lessee shall be the Insuring Party and Lessor
and Loss Payee for purposes of all insurance articles under Paragraph 8 shall
mean:
Hoffman Associates No. 5, a California limited partnership, and
Hoffman shall appear as Additional Insured on all Certificates, Insurance
Policies and Endorsements required under this Lease.
12.1(f) LESSOR'S CONSENT REQUIRED. In the event of an assignment,
subletting or change in control, as defined in Paragraph 12.1 (a)-(d) of the
Lease, Lessee shall pay Lessor fifty percent (50%) of any amount in excess of
the Lease Rent received from the transferee, as escalated from time to time,
monthly in advance, together with the Rent due under the Lease. Any costs or
expenses incurred by Lessee in connection with such transfer, including, without
limitation, leasing commissions or tenant improvement allowances, shall not be
deducted.
34. SIGNS. Signage and method of attachment to the Premises is
subject to Lessor's prior written approval, which shall not be unreasonably
withheld. At the expiration of the Lease or Renewal thereof, any sign, however
affixed to the Premises, shall be removed or, in the case of a painted sign,
shall be painted out, and any building penetrations repaired to the Lessor's
reasonable satisfaction and at the Lessee's expense.
39. OPTION TO EXTEND. Lessor hereby grants to Lessee the option
to extend the Lease for one additional sixty (60)-month period, commencing June
1, 2002, upon each and all of the following terms and conditions:
a. Lessee gives to Lessor, and Lessor actually receives,
on or after June 1, 2001, and on or before December 1, 2001, a written notice of
the exercise of the option to extend this Lease for said additional term, time
being of the essence. If said notification of the exercise of said option is not
so given and received, the option shall automatically expire.
b. The provisions of Paragraph 39.4, including the
provision relating to default of Lessee set forth in Paragraph 39.4 of the
Lease, are conditions to this option.
c. All of the terms and condition of the Lease, except
where specifically modified by this option, shall apply.
d. The monthly Rent for each month of the option period
shall be calculated as follows: On June 1, 2002, the monthly Rent payable under
Paragraph 1.5 ("Base Rent") of the Lease shall be adjusted to the "Market Rental
Value" of the property as follows:
Addendum-2
<PAGE> 15
(1) On or about February 1, 2002, Lessor and Lessee
shall meet to establish an agreed upon new Market Rental Value for the specified
term. If agreement cannot be reached, then Lessor and Lessee shall immediately
appoint a mutually acceptable appraiser or broker to establish the Market Rental
Value within the next 30 days. Any associated costs will be split equally
between the parties. Alternatively, both Lessor and Lessee shall immediately
select and pay the appraiser or broker of their choice to establish a Market
Rental Value within the next 30 days. If, for any reason, either of the
appraisals is not completed within the next 30 days, as stipulated, then the
appraisal that is completed at that time shall automatically become the new
Market Rental Value. If both appraisals are completed and the two
appraisers/brokers cannot agree on a Market Rental Value, then they shall
immediately select a third mutually acceptable appraiser/broker to establish a
third Market Rental Value within the next 30 days. The average of the two
appraisals closest in value shall then become the new Market Rental Value. The
cost of the third party appraiser shall be equally split between the parties. In
any event, the new Market Rental Value shall not be less than the Rent payable
for the month immediately preceding the date for the last Rent adjustment.
(2) Upon the establishment of the new Market Rental
Value: (a) the monthly Rent sum so calculated shall become the new "Base Rent"
for the purpose of calculating any further cost of living adjustment as
specified in Paragraph 4.3 hereof; (b) the new Base Rent shall be adjusted on
December 1, 2004, in accordance with the provisions of Paragraph 4.3 hereof; and
(c) the month of May, 2002, shall become the new "Base Month" for the purpose
of calculating any further cost of living adjustment as specified in Paragraph
4.3.
50. LETTER OF CREDIT. As a material inducement for Lessor to
enter into this Lease, Lessee has delivered and made a part of this Lease, in
the form as set forth in Exhibit B, an unconditional letter of credit ("LOC")
equal to twelve (12) months of Rent, taxes and insurance issued by a bank
("Bank") satisfactory to Lessor. Terms of the LOC provide for the payment by
Bank to Lessor, on sight demand, all or a partial draw against the LOC to
satisfy any monetary Lease Breach by Lessee. If two consecutive or
non-consecutive monetary Breaches occur, the full balance of the LOC may be
drawn down. If Lessee does not reinstate the LOC to its original balance within
thirty (30) days of a draw down, Lessee will be deemed in Breach and all
remedies under the Lease will be available to the Lessor.
If at the end of the first Lease Commencement anniversary
date, Lessee's income is not equal to or greater than the income before
provisions for income tax at December 31, 1996, as computed for the SEC Form
10-QSB or equivalent, the LOC will be extended by Lessee for one (1) additional
year.
51. TENANT IMPROVEMENTS. Premises will be delivered by Lessor in
ADA and code compliance based on City approved plans of January 23, 1997, and
April 9, 1997, and ready for construction of Lessee's Work. If Lessee's use
requires modifications to the property, then such related costs shall be the
sole responsibility of Lessee.
The Building Allowance will include up to $22,315.00 for
floor covering, and $10,000.00 ($.60/sq. ft.) for existing office area floor
plan changes, including side lights in certain office walls, but excluding
electrical. Lessee may choose the floor covering. The cost of the finish
interior paint is included in Lessor's Work. Lessor shall reimburse Lessee for
such costs, not to exceed the Building Allowance, within fifteen (115) calendar
days after completion of tile work and the delivery to Lessor of a notice of
completion, final lien releases, and copies of invoices or bills.
Addendum-3
<PAGE> 16
In addition to the foregoing, Lessor shall reimburse
Lessee promptly, upon written request therefor from Lessee
following commencement of rent payment by Lessee, for allowances or credits in
connection with the following: (i) pulling 3-line standard telephone wire from
each office to the telephone room - $ 1,276; and (ii) concrete veneer pour in
the entry lobby - $850.
Lessee will obtain Lessor's prior written approval of all
proposed improvements to be installed on the Premises.
As well, Lessee's work will not materially interfere with work being done by
Lessor. The Lessee does plan to use Lundstrom & Associates to design the
improvements and will use Dennis Allison to select a bonded general contractor
and engineers.
Notwithstanding anything to the contrary in this Lease,
Lessor approves Lessee's proposed scope of work for tenant improvements, which
are more particularly described on Exhibit D attached hereto ("Lessee's Work"),
subject to Lessor's approval of specific plans and specifications relating to
Lessee's Work ("Specific Plans and Specifications"), which approval shall not be
unreasonably withheld. Lessor shall have the right to approve, disapprove or
request reasonable modifications to such Specific Plans and Specifications
within five (5) business days after Lessor's receipt thereof. Lessor's failure
to respond within such period shall be deemed Lessor's disapproval of Lessee's
Specific Plans and Specifications.
Without Lessor's prior written approval of specific plans
and specifications, Lessee's improvements of whatever nature or form will not:
(i) set upon, penetrate, alter or remove the roof or any components thereof or
thereon; or (ii) alter in any way the mechanical, electrical or plumbing of the
Premises.
52. PARKING. Lessee shall have the right to use up to 119
automobile spaces on the Premises during the term of the Lease and any
extensions or renewals thereof at no charge to Lessee.
53. LESSOR'S INDEMNITY. Lessor and its successors and assigns
shall indemnify, protect, defend (with counsel reasonably acceptable to Lessee)
and hold harmless Lessee and its employees and agents from and against any and
all claims, liabilities, losses, costs or expenses (including reasonable
attorneys' fees) arising from any (i) negligence or willful misconduct of Lessor
or Lessor's employees, agents or consultants (but excluding contractors); and
(ii) any Breach of Lessor in the performance of an obligation on Lessor's part
to be performed under the Lease.
HOFFMAN ASSOCIATES NO. 5, MASIMO CORPORATION,
a California limited partnership a Delaware corporation
By Hoffman Associates, Inc.
General Partner
By /s/ James J. Hawk By /s/ Bradley R. Langdale
---------------------------------- -----------------------------------
James J. Hawk, President Bradley R. Langdale
Vice President, Finance - CFO
Date: 5/5/97 Date: 5/2/97
------------------------------- ---------------------------------
Addendum-4
<PAGE> 17
[LOGO]
PROPERTY INFORMATION SHEET
(Non-Residential)
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
TO WHOM IT MAY CONCERN:
Hoffman Associates No. 5, a California Limited Partnership ("Owner"),
owns the property commonly known by the street address of 2852 Kelvin Avenue,
located in the City of Irvine, County of Orange, State of California, and
generally described as (describe briefly the nature of the property) a
free-standing concrete tilt-up facility consisting of approximately 29,162 SF of
office and warehouse space on 77,226 SF of land ("Property"), and certifies
that:
1. MATERIAL PHYSICAL DEFECTS. Owner has no actual knowledge of any material
physical defects in the Property or any improvements and structures thereon,
including, but not limited to the roof, except (it will be assumed no known
exceptions exist unless they are specified here):
None.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2. EQUIPMENT. Owner has no actual knowledge that the heating, ventilating,
air conditioning, plumbing, loading doors, electrical and lighting systems,
life safety systems and mechanical equipment existing on the Property as of the
date hereof, if any, are not in good operating order and condition, except (it
will be assumed no known exceptions exist unless they are specified here):
None.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3. SOIL CONDITIONS. Owner has no actual knowledge that the Property has any
slipping, sliding, settling, flooding, ponding or any other grading, drainage or
soil problems, except (it will be assumed no known exceptions exist unless they
are specified here):
None.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4. SEWER. Owner represents and warrants that the Property is served by a
(check the appropriate box) [X] public sewer system [ ] private septic
system, and that, if the Property is served by a public sewer system, the cost
of installation of such sewer system has been fully paid, except (it will be
assumed no known exceptions exist unless they are specified here):
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5. EARTHQUAKE ZONE. If the Property is located in the State of California,
Owner has no actual knowledge that the Property is located within a delineated
special studies zone (a zone that encompasses a potentially or recently active
trace of an earthquake fault that is deemed by the state geologist to be
sufficiently active and well defined enough to constitute a potential hazard
to structures from surface fault or fault creep) under an Alquist-Priolo
Special Studies Zone Map, except (it will be assumed no known exceptions exist
unless they are specified here): We are not in an earthquake zone.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6. COMPLIANCE WITH LAWS. Owner has no actual knowledge of any aspect or
condition of the Property which violates applicable laws, rules, regulations,
codes, or covenants, conditions or restrictions, or of improvements or
alterations made to the Property without a permit where one was required, or of
any unfulfilled order or directive of any applicable government agency or of
any casualty insurance company that any work of investigation, remediation,
repair, maintenance or improvement is to be performed on the Property, except
(it will be assumed no known exceptions exist unless they are specified here):
None.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
7. HAZARDOUS SUBSTANCES. Owner has no actual knowledge of the current
existence on the Property of asbestos, PCB transformers or any hazardous, toxic
or infectious substance whose nature and/or quantity of existence, use,
manufacture or effect, render it subject to Federal, state or local regulation,
investigation, remediation or removal as potentially injurious to public health
or welfare, except (it will be assumed no known exceptions exist unless they
are specified here):
Please see Environmental Assessment Reports dated October 6, 1994 and
December 10, 1996, and Asbestos Survey dated December 10, 1996,
sent to Masimo Corporation on April 9, 1997.
(C)1990, American Industrial Real Estate Association June, 1990
PAGE 1
<PAGE> 18
8. STORAGE TANKS. Owner has no actual knowledge of the past or present
existence of any above or below ground storage tank or tanks on the Property,
except (it will be assumed no known exceptions exist unless they are
specified):
- ----------------------------------------------------------------------------
None.
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
9. ACTIONS, SUITS OR PROCEEDINGS. Owner has no actual knowledge that any
actions, suits or proceedings are pending or threatened before any court,
arbitration tribunal, governmental department, commission, board, bureau,
agency or instrumentality that would affect the Property or the right or
ability of an owner or tenant to convey, occupy or utilize the Property, except
(it will be assumed no known exceptions exist unless they are specified here):
- ----------------------------------------------------------------------------
None.
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
10. GOVERNMENTAL PROCEEDINGS. Owner has no actual knowledge of any existing
or contemplated condemnation, environmental, zoning, redevelopment agency plan
or other land use regulation proceedings which could detrimentally affect the
value, use and operation of the Property, except (it will be assumed no known
exceptions exist unless they are specified here):
--------------------------
None.
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
11. UNRECORDED AND RECORDED TITLE MATTERS. Owner has no actual knowledge of
any encumbrances, covenants, conditions, restrictions, easements, licenses,
liens, charges or other matters which affect the title of the Property that are
not recorded in the official records of the county recorder where the Property
is located, except (it will be assumed no known exceptions exist unless they
are specified here):
-------------------------------------------------------
As set forth on Exhibit A attached hereto.
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
12. LEASES. Owner has no actual knowledge of any leases, subleases or other
tenancy agreements affecting the Property, except (it will be assumed no known
exceptions exist unless they are specified here):
---------------------------
None.
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- ----------------------------------------------------------------------------
Owner's statements herein will be relied upon by brokers, buyers,
lessees, lenders and others. Therefore, Owner has reviewed and modified this
printed statement as necessary to accurately and completely state all the known
material facts concerning the Property. To the extent such modifications are
not made, this statement may be relied upon as printed. This statement,
however, shall not relieve a buyer or lessee of responsibility for independent
investigation of the Property. Owner agrees to promptly notify, in writing, all
appropriate parties of any material changes which may occur in the statements
contained herein from the date this statement is signed until title to the
Property is transferred, by a recorded deed, by Owner.
"OWNER"
HOFFMAN ASSOCIATES NO. 5,
Date: April 25, 1997 a California Limited Partnership
------------------------------ -----------------------------------
(Fill in date of execution)
By: Hoffman Associates, Inc., G.P.
-------------------------------
By: /s/ JAMES J. HAWK
--------------------------------
Name Printed: James J. Hawk
---------------------
Title: President
-----------------------------
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the most
current form: American Industrial Real Estate Association, 345 South Figueroa
Street, Suite M-1, Los Angeles, CA 90071, Telephone No.: (213) 687-8777. Fax
No.: (213) 687-8616.
Page 2
<PAGE> 19
NOTICE
An environmental consultant was retained to assess and identify the
existence of asbestos-containing materials in property commonly known as 2852
Kelvin Avenue, Irvine, California 92714. As a result of that investigation, the
existence of asbestos was noted in some areas of the structure, specifically
the following:
1. Twelve inch tan with black streaks vinyl floor tile (VFT) black
mastic (trace chrysotile) located in the north portion of the
rear of the building;
2. Twelve inch gray with brown and white streaks (VFT) black
mastic (trace chrysotile) located in the northeast portion
of the rear of the building;
3. Drywall/tape/compound (trace chrysotile) located in the office
in the southwest portion of the lab area of the building and
the office walls of the hallway and two rooms in the southwest
portion of the first floor of the building;
4. Twelve inch white (VFT) black mastic (trace chrysotile) located
in the stock room lab west of the men's restroom on the first
floor of the building; and
5. Sprayed/applied acoustical ceiling material located in the
office hallway extending to the lab area and the lower flight
of stairs on the first floor of the building.
The asbestos in the areas referenced in the items 1 through 4 and the
office hallway section referred to in item 5 above was removed by a certified
asbestos abatement contractor. Drywall/tape/compound materials in office walls
referenced in 3. above, and acoustical ceiling material referenced in 5. above,
are encapsulated and deemed manageable in place. Copies of the original
Comprehensive Asbestos Survey dated December 10, 1996, and the certification of
removal of asbestos-containing materials from certain areas as referenced above,
are available upon request.
You, as tenant/lessee of the above-referenced property, shall not
undertake any work in or immediately adjacent to the areas described above
(with respect to which abatement removal of the asbestos has not occurred),
which may cause a disturbance of asbestos-containing construction materials
without prior written notice to and written approval by the undersigned owner.
Exposure to airborne asbestos creates potential health risks associated
with breathing such asbestos fibers. Such exposure has been linked to lung
cancer, and less frequently, to cancer of other organs in the body and to
diseases that cause scarring of the lung called asbestosis. Asbestosis is a
restrictive lung disease that reduces the capacity of the lungs.
Surveys, reports and documentation regarding the asbestos identified at
the property are available at the undersigned owner's offices located at 225
South Lake Avenue, Suite 1150, Pasadena, California 91101. Such materials are
available for inspection during normal business hours.
This notification is provided in accordance with current California and
federal laws requiring disclosure of the information contained herein. This
notice does not constitute a representation or warranty concerning the
existence of asbestos and simply reflects the information made known to the
undersigned owner in the reports referenced herein.
Dated: 5/5/97 HOFFMAN ASSOCIATES NO. 5,
-------------- A California Limited Partnership
By: Hoffman Associates, Inc., General Partner
By: /s/ James J. Hawk
------------------------------------
James J. Hawk, President
<PAGE> 1
EXHIBIT 10.10
COMERICA LOGO
REVOLVING CREDIT LOAN & SECURITY
AGREEMENT
(ACCOUNTS AND INVENTORY)
================================================================================
OBLIGOR # NOTE # AGREEMENT DATE
April 16, 1997
- --------------------------------------------------------------------------------
CREDIT LIMIT INTEREST RATE OFFICER NO./INITIALS
B+1.25%
$250,000.00 9.75% 48711 Thomas M. Hicks
================================================================================
THIS AGREEMENT is entered into on April 16, 1997, between COMERICA
BANK-CALIFORNIA ("Bank") as secured party, whose Headquarter Office is 333 West
Santa Clara Street, San Jose, CA and Masimo Corporation ("Borrower"), a Delaware
corporation whose sole place of business (if it has only one), chief executive
office (if it has more than one place of business) or residence (if an
individual) is located at 23361 Madero Street, Suite 100, Mission Viejo, CA. The
parties agree as follows:
1. DEFINITIONS.
1.1 "Agreement" as used in this Agreement means and includes this
Revolving Credit Loan & Security Agreement (Accounts and Inventory), any
concurrent or subsequent rider to this Revolving Credit Loan & Security
Agreement (Accounts and Inventory) and any extensions, supplements, amendments
or modifications to this Revolving Credit Loan & Security Agreement (Accounts
and Inventory) and to any such rider.
1.2 "Bank Expenses" as used in this Agreement means and includes: all
costs or expenses required to be paid by Borrower under this Agreement which are
paid or advanced by Bank; taxes and insurance premiums of every nature and kind
of Borrower paid by Bank; filing, recording, publication and search fees,
appraiser fees, auditor fees and costs, and title insurance premiums paid or
incurred by Bank in connection with Bank's transactions with Borrower; costs and
expenses incurred by Bank in collecting the Receivables (with or without suit)
to correct any default or enforce any provision of this Agreement, or in gaining
possession of, maintaining, handling, preserving, storing, shipping, selling,
disposing of, preparing for sale and/or advertising to sell the Collateral,
whether or not a sale is consummated; costs and expenses of suit incurred by
Bank in enforcing or defending this Agreement or any portion hereof, including,
but not limited to, expenses incurred by Bank in attempting to obtain relief
from any stay, restraining order, injunction or similar process which prohibits
Bank from exercising any of its rights or remedies; and attorneys' fees and
expenses incurred by Bank in advising, structuring, drafting, reviewing,
amending, terminating, enforcing, defending or concerning this Agreement, or
any portion hereof or any agreement related hereto, whether or not suit is
brought. Bank Expenses shall include Bank's in-house legal charges at reasonable
rates.
-1-
<PAGE> 2
1.3 "Base Rate" as used in this Agreement means that variable rate of
interest so announced by Bank at its headquarters office in San Jose, California
as its "Base Rate" from time to time and which serves as a basis upon which
effective rates of interest are calculated for those loans making reference
thereto.
1.4 "Borrower's Books" as used in this Agreement means and includes all
of the Borrower's books and records including but not limited to: minute books;
ledgers; records indicating, summarizing or evidencing Borrower's assets,
liabilities, Receivables, business operations or financial conditions, and all
information relating thereto, computer programs, computer disk or tape files;
computer printouts; computer runs; and other computer prepared information and
equipment of any kind.
1.5 "Borrowing Base" as used in this Agreement means the sum of "(1)
seventy-five percent (75%) of the net amount of Eligible Accounts after
deducting therefrom all payments, adjustments and credits applicable thereto
("Accounts Receivable Borrowing Base"); and (2) the amount, if any, of the
advances against inventory agreed to be made pursuant to any Inventory Rider
("Inventory Borrowing Base"), and other rider, amendment or modification to this
Agreement, that may now or hereafter be entered into by Bank and Borrower.
1.6 "Cash Flow" as used in this Agreement means, for any applicable
period of determination, the Net Income (after deduction for income taxes and
other taxes of such person determined by reference to income or profits of such
person) for such period, plus, to the extent deducted in computation of such Net
Income, the amount of depreciation and amortization expenses and the amount of
deferred tax liability during such period, all as determined in accordance with
GAAP. The applicable period of determination will be __________N/A____________,
beginning with the period from __________________ to ________________.
1.7 "Collateral" as used in this Agreement means and includes each and
all of the following: the Receivables; the Intangibles; the negotiable
collateral, the Inventory; all money, deposit accounts and all other assets of
Borrower in which Bank receives a security interest or which hereafter come into
the possession, custody or control of Bank, and the proceeds of any of the
foregoing, including, but not limited to, proceeds of insurance covering the
collateral and any and all Receivables, Intangibles, negotiable collateral,
inventory, equipment, money, deposit accounts or other tangible and intangible
property of borrower resulting from the sale of other disposition of the
collateral, and the proceeds thereof. Notwithstanding anything to the contrary
contained herein, collateral shall not include any waste or other materials
which have been or may be designated as toxic or hazardous by Bank.
1.8 "Credit" as used in this Agreement means all Obligations, except
those obligations arising pursuant to any other separate contract, instrument,
note, or other separate agreement which, by its terms, provides for a specified
interest rate and term.
1.9 "Current Assets" as used in this Agreement means, as of any
applicable date of determination, all cash, non-affiliated customer receivables,
United States government securities, claims against the United States
government, and inventories.
1.10 "Current Liabilities" as used in this Agreement means, as of any
applicable date of determination (i) all liabilities of a person that should be
classified as current in accordance
-2-
<PAGE> 3
with GAAP, including without limitation any portion of the principal of the
indebtedness classified as current, plus (ii) to the extent not otherwise
included, all liabilities of the Borrower to any of its affiliates whether or
not classified as current in accordance with GAAP.
1.11 "Daily Balance" as used in this Agreement means the amount
determined by taking the amount of the Credit owed at the beginning of a given
day, adding any new Credit advanced or incurred on such date, and subtracting
any payments or collections which are deemed to be paid and are applied by Bank
in reduction of the Credit on that date under the provisions of this Agreement.
1.12 "Eligible Accounts" as used in this Agreement means and includes
those accounts of Borrower which are due and payable within thirty (30) days, or
less, from the date of invoice (or, if approved in writing by Bank, sixty (60)
days from the date of invoice), have been validly assigned to Bank and strictly
comply with all of Borrower's warranties and representations to Bank; but
Eligible Accounts shall not include the following: (a) accounts with respect to
which the account debtor is an officer, employee, partner, joint venturer or
agent of Borrower; (b) accounts with respect to which goods are placed on
consignment, guaranteed sale or other terms by reason of which the payment by
the account debtor may be conditional; (c) accounts with respect to which the
account debtor is not a resident of the United States, except to the extent such
accounts are supported by a letter of credit in form and content and from an
issuer approved by Bank, or to the extent the account debtor is NEC Corporation
("NEC") or Kontron Corporation ("Kontron"); (d) accounts with respect to which
the account debtor is the United States or any department, agency or
instrumentality of the United States; (e) accounts with respect to which the
account debtor is any State of the United States or any city, county, town
municipality or division thereof; (f) accounts with respect to which the account
debtor is a subsidiary of, related to, affiliated or has common shareholders,
officers or directors with Borrower; (g) accounts with respect to which Borrower
is or may become liable to the account debtor for goods sold or services
rendered by the account debtor to Borrower; (h) accounts not paid by an account
debtor within ninety (90) days from the date of the invoice; (i) accounts with
respect to which account debtors dispute liability or make any claim, or has any
defense, crossclaim, counterclaim, or offset; (j) accounts with respect to which
any Insolvency Proceeding is filed by or against the account debtor, or if an
account debtor becomes insolvent, fails or goes out of business; and (k)
accounts owed by any single account debtor, other than NEC or Kontron, which
exceed twenty percent (20%) of all of the Eligible Accounts, or accounts owed by
NEC or Kontron which exceed the sum of One Hundred Thousand Dollars
($100,000.00); and (1) accounts with a particular account debtor on which over
twenty-five percent (25%) of the aggregate amount owing is greater than ninety
(90) days from the date of the invoice or, with respect to the Kontron accounts,
greater than one hundred twenty (120) days from the date of the invoice.
1.13 "Event of Default" as used in this Agreement means those events
described in Section 7 contained herein below.
1.14 Intentionally Omitted.
1.15 "GAAP" as used in this Agreement means as of any applicable period,
generally accepted accounting principles in effect during such period.
-3-
<PAGE> 4
1.16 "Insolvency Proceeding" as used in this Agreement means and
includes any proceeding or case commenced by or against the Borrower, or any
guarantor of Borrower's Obligations, or any borrower's account debtors, under
any provisions of the Bankruptcy Code, as amended, or any other bankruptcy or
insolvency law, including but not limited to assignments for the benefit of
creditors, formal or informal moratoriums, composition or extensions with some
or all creditors, any proceeding seeking reorganization, arrangement or any
other relief under the Bankruptcy code, as amended, or any other bankruptcy or
insolvency law.
1.17 "Intangibles" as used in this Agreement means and includes all
Borrower's present and future general Intangibles and other personal property
(including, without limitation, any and all rights in any legal proceeding,
goodwill, patents, trade names, copyrights, trademarks, blueprints, drawings,
purchase orders, computer programs, computer disks, computer tapes, literature,
reports, catalogs and deposit accounts) other than goods and Receivables, as
well as Borrower's Books relating to any of the foregoing.
1.18 "Inventory" as used in this Agreement means and includes all
present and future inventory in which Borrower has any interest, including, but
not limited to, goods held by Borrower for sale or lease or to be furnished
under a contract of service and all of Borrower's present and future raw
materials, work in process, finished goods, advertising materials and packing
and shipping materials, wherever located and any documents of title representing
any of the above, and any equipment, fixtures or other property used in the
storing, moving, preserving, identifying, accounting for and shipping or
preparing for the shipping of inventory, and any and all other items hereafter
acquired by Borrower by way of substitution, replacement, return, repossession
or otherwise, and all additions and accessions thereto, and the resulting
product or mass, and any documents of title respecting any of the above.
1.19 "Net Income" as used in this Agreement means the net income (or
loss) of a person for any period determined in accordance with GAAP but
excluding in any event:
(a) any gains or losses on the sale or other disposition, not in
the ordinary course of business, of investments or fixed or capital assets, and
any taxes on the excluded gains and any tax deductions or credits on account on
any excluded losses; and
(b) in the case of the Borrower, net earnings of any Person in
which Borrower has an ownership interest, unless such net earnings shall have
actually been received by Borrower in the form of cash distributions.
1.20 "Judicial Officer or Assignee" as used in this Agreement means and
includes any trustee, receiver, controller, custodian, assignee for the benefit
of creditors or any other person or entity having powers or duties like or
similar to the powers and duties of trustee, receiver, controller, custodian or
assignee for the benefit of creditors.
1.21 "Obligations" as used in this Agreement means and includes any and
all loans, advances, overdrafts, debts, liabilities (including, without
limitation, any and all amounts charged to Borrower's account pursuant to any
agreement authorizing Bank to charge Borrower's account), obligations, lease
payments, guaranties, covenants and duties owing by Borrower to Bank of any kind
and description whether advanced pursuant to or evidenced by this Agreement; by
any note or other instrument; or by any other agreement between
-4-
<PAGE> 5
Bank and Borrower and whether or not for the payment of money, whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and including, without limitation, any debt, liability or
obligation owing from Borrower to others which Bank may have obtained by
assignment, participation, purchase or otherwise, and further including, without
limitation, all interest not paid when due and all Bank Expenses which Borrower
is required to pay or reimburse by this Agreement, by law, or otherwise.
1.22 "Person" or "person" as used in this Agreement means and includes
any individual, corporation, partnership, joint venture, association, trust
unincorporated association, joint stock company, government, municipality,
political subdivision or agency, or other entity.
1.23 "Receivables" as used in this Agreement means and includes all
presently existing and hereafter arising accounts, instruments, documents,
chattel paper, general intangibles, all other forms of obligations owing to
Borrower, all of Borrower's rights in, to and under all purchase orders
heretofore or hereafter received, all moneys due to Borrower under all contracts
or agreements (whether or not yet earned or due), all merchandise returned to or
reclaimed by Borrower and the Borrower's books (except minutes books) relating
to any of the foregoing.
1.24 "Subordinated Debt" as used in this Agreement means indebtedness of
the Borrower to third parties which has been subordinated to the Obligations
pursuant to a subordination agreement in form and content satisfactory to the
Bank.
1.25 Intentionally Omitted.
1.26 "Tangible Effective Net Worth" as used in the Agreement means net
worth as determined in accordance with GAAP consistently applied, increased by
Subordinated Debt, if any, and decreased by the following: patents, licenses,
goodwill, subscription lists, organization expenses, trade receivables converted
to notes, money due from affiliates (including officers, directors, subsidiaries
and commonly held companies).
1.27 "Tangible Net Worth" as used in the Agreement means, as of any
applicable date of determination, the excess of
a. the net book value of all assets of a person (other than
patents, patent rights, trademarks, trade names, franchises, copyrights,
licenses, goodwill, and similar tangible assets) after all appropriate
deductions in accordance with GAAP (including, without limitation, reserves for
doubtful receivables, obsolescence, depreciation and amortization), over
b. all Debt of such person.
1.28 "Total Liabilities" as used in this Agreement means the total of
all items of indebtedness, obligation or liability which, in accordance with
GAAP consistently applied, would be included in determining the total
liabilities of the Borrower as of the date total Liabilities is to be
determined, including without limitation (a) all obligations secured by any
mortgage, pledge, security interest or other lien on property owned or acquired,
whether or not the obligations secured thereby shall have been assumed; (b) all
obligations which are capitalized lease obligations; and (c) all guaranties,
endorsements or other contingent or
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<PAGE> 6
surety obligations with respect to the indebtedness of others, whether or not
reflected on the balance sheets of the Borrower, including any obligation to
furnish funds, directly or indirectly through the purchase of goods, supplies,
services, or by way of stock purchase, capital contribution, advance or loan or
any obligation to enter into a contract for any of the following.
1.29 "Working Capital" as used in this Agreement means, as of any
applicable date of determination, Current Assets less Current Liabilities.
1.30 Any and all terms used in this Agreement shall be construed and
defined in accordance with the meaning and definition of such terms under and
pursuant to the California Uniform Commercial Code (hereinafter referred to as
the "Code") as amended.
2. LOAN AND TERMS OF PAYMENTS
For value received, Borrower promises to pay to the order of Bank such amount,
as provided for below, together with interest, as provided for below.
2.1 Upon the request of Borrower, made at any time and from time to time
during the term hereof, and so long as no Event of Default has Occurred, Bank
shall lend to Borrower an amount equal to the Borrowing Base; provided, however,
that in no event shall Bank be obligated to make advances to or under this
Section 2.1 whenever the Daily Balance exceeds, at any time, either the Borrower
Base or the sum of Two Hundred Fifty Thousand Dollars ($250,000.00), such amount
being referred to herein as an "Overadvance".
2.2 Except as hereinbelow provided, the Credit shall bear interest, on the
Daily Balance owing, at a rate of One and 250/1000 (1.250) percentage points per
annum above the Base Rate (the "Rate"). The Credit shall bear interest, from
and after the occurrence of an Event of Default and without constituting a
waiver of any such Event of Default, on the Daily Balance owing, at a rate of
three (3) percentage points per annum above the Rate. All interest chargeable
under this Agreement that is based upon a per annum calculation shall be
computed on the basis of a three hundred sixty (360) day year for actual days
elapsed.
The Base Rate as of the date of this Agreement is Eight and 500/100
percent (8.500%) per annum. In the event that the Base Rate announced is, from
time to time hereafter changed, adjustment in the Rate shall be made and based
on the Base Rate in effect on the date of such change. The Rate, as adjusted,
shall apply to the Credit until the Base Rate is adjusted again. The minimum
interest payable by the Borrower under this Agreement shall in no event be less
than __________N/A__________ per month. All interest payable by Borrower under
the Credit shall be due and payable on the first day of each calendar month
during the term of the Agreement and Bank may, at its option, elect to treat
such interest and any and all Bank Expenses as advances under the Credit, which
amounts shall thereupon constitute Obligations and shall thereafter accrue
interest at the rate applicable to the Credit under the terms of the Agreement.
2.3 Without affecting Borrower's obligation to repay immediately any
Overadvance in accordance with Section 2.1 hereof, all Overadvances shall bear
additional interest on the amount thereof at a rate equal to ____ N/A ____
(___N/A___%) percentage points per month in excess of the interest rate set
forth in Section 2.2, from the date incurred and for each month thereafter,
until repaid in full.
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<PAGE> 7
2.4 A fee of 0.375% per annum of the unused commitment is to be
calculated and payable in arrears on a quarterly basis.
3. TERM
3.1 This Agreement shall remain in full force and effect until July 15,
1998, or until terminated by notice by Borrower. Notice of such termination by
Borrower shall be effectuated by mailing of a registered or certified letter not
less than thirty (30) days prior to the effective date of such termination,
addressed to the Bank at the address set forth herein and the termination shall
be effective as of the date so fixed to such notice. Notwithstanding the
foregoing, should Borrower be in default of one or more of the provisions of the
Agreement, Bank may terminate this Agreement at any time without notice.
Notwithstanding the foregoing, should either Bank or Borrower become insolvent
or unable to meet its debts as they mature, or fail, suspend, or go out of
business, the other party shall have the right to terminate this Agreement at
any time without notice. On the date of termination all Obligations shall become
immediately due and payable without notice or demand; no notice of termination
by Borrower shall be effective until Borrower shall have paid all Obligations to
Bank in full. Notwithstanding termination, until all Obligations have been fully
satisfied, Bank shall retain its security interest in all existing Collateral
and Collateral arising thereafter, and Borrower shall continue to perform all of
its Obligations.
3.2 After termination and when Bank has received payment in full of
Borrower's Obligations to Bank, Bank shall reassign to Borrower all Collateral
held by Bank, and shall execute a termination of all security Agreements and
security interests given by Borrower to Bank, upon the execution and delivery
of mutual general releases.
4. CREATION OF SECURITY INTEREST
4.1 Borrower hereby grants to Bank a continuing security interest in all
presently existing and hereafter arising Collateral in order to secure prompt
repayment of any and all Obligations owed by Borrower to Bank and in order to
secure prompt performance by Borrower of each and all of its covenants and
obligations under the Agreement and otherwise created. Bank's security interest
in the Collateral, including proceeds, is evidenced by or consists of a letter
of credit, advance of credit, instrument, money, negotiable documents, chattel
paper or similar property (collectively "Negotiable Collateral"), Borrower
shall, immediately upon receipt thereof, endorse and assign such Negotiable
Collateral over to the Bank and deliver actual physical possession of the
Negotiable Collateral to Bank.
4.2 Bank's security interest in Receivables shall be attached to all
Receivables without further act on the part of Bank or Borrower. Upon request
from Bank, Borrower shall provide Bank with schedules describing all Receivables
created or acquired by Borrower (including without limitation agings listing the
names and addresses of, and amounts owing by date by account debtors), and shall
execute and deliver written assignments of all Receivables to Bank all in a form
acceptable to Bank, provided, however, Borrower's failure to execute and deliver
such schedules and/or assignments shall not affect or limit Bank's security
interest and other rights in and to the Receivables. Together with each
schedule, Borrower shall furnish Bank with copies of Borrower's customers'
invoices or the equivalent, and original shipping or delivery receipts for all
merchandise sold, and Borrower warrants the genuineness thereof. After an event
of default, Bank or Bank's designee may notify customers or account debtors of
the assignment of such Accounts to Bank and to direct such
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<PAGE> 8
customers or account debtors to make payment of all amounts due or to become due
to Borrower thereunder directly to Bank and, upon such notification and at the
expense of Borrower, to enforce collection of any such Accounts and to adjust,
settle or compromise the amount or payment thereof, in the same manner and to
the same extent as Borrower might have done, and to charge such collection costs
and expenses to Borrower's account, but unless and until Bank does so or gives
Borrower other written instructions, Borrower shall collect all Receivables for
Bank, receive in trust all payments thereon as Bank's trustee, and, if so
requested to do so from Bank, Borrower shall immediately deliver said payments
to Bank in their original form as received from the account debtor and all
letters of credit, advices of credit, instruments, documents, chattel paper or
any similar property evidencing or constituting Collateral. After an event of
default, or to the extent necessary to avoid an Overadvance, if sales of
Inventory are made for cash, Borrower shall immediately deliver to Bank, in
identical form, all such cash, checks, or other forms of payment which Borrower
receives. The receipt of any check or other item of payment by Bank shall not be
considered a payment on account until such check or other item of payment is
honored when presented for payment, in which event, said check or other item of
payment shall be deemed to have been paid to Bank two (2) calendar days after
the date Bank actually receives such check or other item of payment.
4.3 Bank's security interest in Inventory shall attach to all inventory
without further act on the part of Bank, or Borrower. Upon Bank's request after
an event of default Borrower will from time to time at Borrower's expense
pledge, assemble and deliver such Inventory to Bank or to a third party as
Bank's bailee; or hold the same in trust for Bank's account or store the same in
a warehouse in Bank's name; or deliver to Bank documents of title representing
said Inventory; or evidence of Bank's security interest in some other manner
acceptable to Bank. Until a default by Borrower under this Agreement or any
other Agreement between Borrower and Bank, Borrower may, subject to the
provisions hereof and consistent herewith, sell the Inventory, but only in the
ordinary course of Borrower's business. A sale of Inventory in Borrower's
ordinary course of business does not include an exchange or a transfer in
partial or total satisfaction of a debt owing by Borrower.
4.4 Borrower shall execute and deliver to Bank concurrently with
Borrower's execution of the Agreement, and at any time or times hereafter at the
request of Bank, all financing statements, continuation financing statements,
security agreements, mortgages, assignments, certificates of title, affidavits,
reports, notices, schedules of accounts, letters of authority and all other
documents that Bank may reasonably request, in form satisfactory to Bank, to
perfect and maintain perfected Bank's security interest in the Collateral and in
order to fully consummate all of the transactions contemplated under this
Agreement. Borrower hereby irrevocably makes, constitutes and appoints Bank (and
any of Bank's officers, employees or agents designated by Bank) as Borrower's
true and lawful attorney-in-fact with owner to sign the name of Borrower on any
financing statements, continuation financing statement, security agreement,
mortgage, assignment, certificate of title, affidavit, letter of authority,
notice of other similar documents which must be executed and/or filed in order
to perfect or continue perfected Bank's security interest in the Collateral.
Borrower shall make appropriate entries in Borrower's Books disclosing
Bank's security interest in the Receivables. Bank (through any of its officers,
employees or agents) all have the right at any time or times hereafter during
Borrower's usual business hours, or during the usual business hours of any third
party having control over the records of
<PAGE> 9
Borrower, to inspect and verify Borrower's Books in order to verify the amount
or condition of, or any other matter, relating to, said Collateral and
Borrower's financial condition.
4.5 Borrower appoints Bank, or any other person whom Bank may designate,
commencing upon an event of default, as Borrower's attorney-in-fact, with power
to endorse Borrower's name on any checks, notes acceptances, money order, drafts
or other forms of payment or security that may come into Bank's possession; to
sign Borrower's name on any invoice or bill of lading relating to any
Receivables, on drafts against account debtors, on schedules and assignments of
Receivables, on verifications of Receivables and on notices to account debtors;
to establish a lock box arrangement and/or to notify the post office authorities
to change the address for delivery of Borrower's mail addressed to Borrower to
an address designated by Bank, to receive and open all mail addressed to
Borrower, and to retain all mail related to the Collateral and forward all other
mail to Borrower; to send, whether in writing or by telephone, requests for
verification of Receivables; and to do all things necessary to carry out this
Agreement. Borrower ratifies and approves all acts of the attorney-in-fact.
Neither Bank nor its attorney-in-fact will be liable for any acts or omissions
or for any error of judgement or mistake of fact or law. This power being
coupled with an interest, is irrevocable so long as any Receivables in which
Bank has a security interest remain unpaid and until the Obligations have been
fully satisfied.
4.6 In order to protect or prefect any security interest which Borrower
is granted hereunder, Borrower may, in its sole discretion, discharge any lien
or encumbrance or bond the same, pay any insurance, maintain guards,
warehousemen, or any personnel to protect the Collateral, pay any service
bureau, or, obtain any records, and all costs for the same shall be added to the
Obligation and shall be payable on demand.
4.7 Borrower agrees that Bank may provide information relating to this
Agreement or relating to Borrower to Bank's parent, affiliates, subsidiaries and
services providers.
5. CONDITIONS PRECEDENT
5.1 Conditions precedent to the making of the loans and the extension of
the financial accommodations hereunder, Borrower shall execute, or cause to be
executed, and deliver to Bank, in form and substance satisfactory to Bank and
its counsel, the following:
a. This Agreement and other documents required by Bank.
b. Financing statements (Form UCC-1) in form satisfactory to Bank
for filing and recording with the appropriate governmental authorities.
c. If Borrower is a corporation, the certified extracts from the
minutes of the meeting of its board of directors, authorizing the borrowings and
the granting of the security interest provided for herein and authorizing
specific officers to execute and deliver the agreements provided for herein;
d. If Borrower is a corporation, then a certificate of good
standing showing that Borrower is in good standing under the laws of the state
of its incorporation and certificates indicating that Borrower is qualified to
transact business and is in good standing in any other state in which it is
required to be qualified to transact business;
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<PAGE> 10
e. If Borrower is a partnership, then a copy of Borrower's
partnership agreement certified by each general partner of Borrower;
f. UCC searches, tax lien and litigation searches, fictitious
business statement filings, insurance certificates, notices or other similar
documents which Bank may reasonably require and in such form as Bank may
reasonably require, in order to reflect, perfect or protect Bank's first
priority security interest in the Collateral and in order to fully consummate
all of the transactions contemplated under the Agreement;
g. Evidence that Borrower has obtained insurance and acceptable
endorsements;
h. Waivers executed by landlords and mortgages of any real property
on which any Collateral is located; and
i. Customary warranties and representations of officers on behalf
of Borrower.
6. WARRANTIES REPRESENTATIONS AND COVENANTS
6.1 If so requested by Bank, Borrower shall, at such intervals
designated by Bank, during the term hereof execute and deliver a Report of
Accounts Receivable or similar report, in form customarily used by Bank.
Borrower's Borrowing Base at all times pertinent hereto shall not be less than
the advances made hereunder. Bank shall have the right to recompute Borrower's
Borrowing Base in conformity with this Agreement.
6.2 If any warranty is breached as to any account, or any account is not
paid in full by an account debtor within ninety (90) days, or, with respect to
Kontron, one hundred twenty (120) days, from the date of invoice, or an account
debtor disputes liability or makes any claim with respect thereto, or a petition
in bankruptcy or other application for relief under the Bankruptcy Code or any
other insolvency law is filed by or against an account debtor, or an account
debtor makes an assignment for the benefit of creditors, becomes insolvent,
fails or goes out of business, then Bank may deem ineligible any and all
accounts owing by that account debtor, and reduce Borrower's Borrowing Base by
the amount thereof. Bank may retain its security interest in all Receivables and
accounts, whether eligible or ineligible, until all Obligations have been fully
paid and satisfied. Returns and allowances, if any, as between Borrower and its
customers, will be on the same basis and in accordance with the usual customary
practices of the Borrower, as they exist at this time. Any merchandise which is
returned by an account debtor or otherwise recovered shall be set aside, marked
with Bank's name, and Bank shall retain a security interest therein. Borrower
shall promptly notify Bank of all disputes and claims and settle or adjust them
on terms approved by Bank. After default by Borrower hereunder, no discount,
credit or allowance shall be granted to any account debtor by Borrower and no
return of merchandise shall be accepted by Borrower without Bank's consent. Bank
may, after default by Borrower, settle or adjust disputes and claims directly
with account debtors for amounts and upon terms which Bank considers advisable,
and in such cases Bank will credit Borrower's account with only the net amounts
received by Bank in payment of the accounts, after deducting all Bank Expenses
in connection therewith.
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<PAGE> 11
6.3 Borrower warrants, represents, covenants and agrees that:
a. Borrower has good and marketable title to the Collateral. Bank
has and shall continue to have a first priority perfected security interest in
and to the Collateral. The Collateral shall at all times remain free and clear
of all liens, encumbrances and security interests except those in favor of Bank.
b. All accounts are and will, at all times pertinent hereto, be
bona fide existing obligations created by the sale and delivery of merchandise
or the rendition of services to account debtors in the ordinary course of
business, free of liens, claims, encumbrances and security interests (except as
held by Bank and except as may be consented to, in writing, by Bank) and are
unconditionally owed to Borrower without defenses, disputes, offsets,
counterclaims, rights of return or cancellation, and Borrower shall have
received no notice of actual or imminent bankruptcy or insolvency of any account
debtor at the time and account due from such account debtor is assigned to Bank.
c. At the time each account is assigned to Bank, all property
giving rise to such account shall have been delivered to the account debtor or
to the agent for the account debtor for immediate shipment to, and unconditional
acceptance by, the account debtor. Borrower shall deliver to Bank, as Bank may
from time to time require, delivery receipts, customer's purchase orders,
shipping instruction, bills of lading and any other evidence of shipping
arrangements. Absent such a request by Bank, copies of all such documentation
shall be held by Borrower by custodian of Bank.
6.4 At the time each eligible account is assigned to Bank, all such
eligible accounts will be due and payable on terms set forth in Section 1.12, or
on such other terms approved in writing by Bank in advance of the creation of
such accounts and which are expressly set forth on the face of all invoices,
copies of which shall be held by Borrower as custodian for Bank, and no such
eligible account will then be past due.
6.5 Borrower shall keep the inventory only at the following locations:
See Attachment
_______________________________________________________________________________
____________________ and the owner or mortgages of the respective locations are:
a. Borrower, immediately upon demand by Bank therefor, shall now
and from time to time hereafter, at such intervals as are requested by Bank,
deliver to Bank, designations of Inventory specifying Borrower's cost of
inventory, the wholesale market value thereof and such other matters and
information relating to the Inventory as Bank may request;
b. Borrower's Inventory, valued at the lower of Borrower's cost or
the wholesale market value thereof, at all times pertinent hereto shall not be
less than ________________________ N/A __________________________ Dollars
($______ N/A ______) of which no less than ___________ N/A ____________
_________________ Dollars ($___N/A___) shall be in raw materials and finished
goods;
c. All of the Inventory is and shall remain free from all purchase
money or other security interests, liens or encumbrances, except as held by
Bank.
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<PAGE> 12
d. Borrower does now keep and hereafter at all times shall keep
correct and accurate records itemizing and describing the kind, type, quality
and quantity of the Inventory, its cost therefor and selling price thereof, and
the daily withdrawals therefrom and additions thereto, all of which records
shall be available upon demand to any of Bank's officers, agents and employees
for inspection and copying.
e. All Inventory, now and hereafter at all times, shall be new
Inventory of good and merchantable quality free from defects.
f. Inventory is not now and shall not at any time or times
hereafter be located or stored with a bailee, warehouseman or other third party
without Bank's prior written consent, and, in such event, Borrower will
concurrently therewith cause any such bailee, warehouseman or other third party
to issue and deliver to Bank, in a form acceptable to Bank, warehouse receipts
in Bank's name evidencing the storage of Inventory or other evidence of Bank's
prior rights in the Inventory. In any event, Bank shall instruct any third party
to hold all such Inventory for Bank's account subject to Borrower's security
interests and its instructions; and
g. Bank shall have the right upon demand now and/or at all times
hereafter, during Borrower's usual business hours, to inspect and examine the
Inventory and to check and test the same as to quality, quantity, value and
condition and Borrower agrees to reimburse Bank for Bank's reasonable costs and
expenses in so doing.
6.6 Borrower represents, warrants and covenants with Bank that Borrower
will not, without Bank's prior written consent:
a. Grant a security interest in or permit a lien, claim or
encumbrance upon any of the Collateral to any person, association, firm,
corporation, entity or government agency or instrumentality;
b. Permit any levy, attachment or restraint to be made affecting
any of Borrower's assets;
c. Permit any Judicial Officer or Assignee to be appointed or to
take possession of any or all of Borrower's assets;
d. Other than sales of Inventory in the ordinary course of
Borrower's business, to sell, lease, or otherwise dispose of, move, or transfer,
whether by sale or otherwise, any of Borrower's assets;
e. Change its name, business structure, corporate identity or
structure; add any new fictitious names, liquidate, merge or consolidate with or
into any other business organization;
f. Move or relocate any Collateral;
g. Acquire any other business organization;
h. Enter into any transaction not in the usual course of Borrower's
business;
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<PAGE> 13
i. Make any investment in securities of any person, association,
firm, entity, or corporation other than the securities of the United States of
America;
j. Make any change in Borrower's financial structure or in any of
its business objectives, purposes or operations which would adversely affect the
ability of Borrower to repay Borrower's Obligations;
k. Incur any debts outside the ordinary course of Borrower's
business greater than Two Hundred Fifty Thousand Dollars ($250,000.00)
outstanding at any one time;
l. Make any advance or loan except in the ordinary course of
Borrower's business as currently conducted;
m. Make loans, advances or extensions of credit to any Person,
except for (i) sales on open account and otherwise in the ordinary course of
business, and (ii) loans to employees in the ordinary course of business not
exceeding Fifty Thousand Dollars ($50,000.00) outstanding at any time,
n. Guarantee or otherwise, directly or indirectly, in any way be or
become responsible for obligations of any other Person, whether by agreement to
purchase the indebtedness of any other Person, agreement for furnishing of funds
to any other Person through the furnishing of goods, supplies or services, by
way of stock purchase, capital contribution, advance or loan, for the purpose of
paying or discharging (or causing the payment or discharge of) the indebtedness
of any other Person, or otherwise, except for the endorsement of negotiable
instruments by the Borrower in the ordinary course of business for deposit or
collection.
o. (a) Sell, lease, transfer or otherwise dispose of properties and
assets having an aggregate book value of more than Fifty Thousand Dollars
($50,000.00) (whether in one transaction or in a series of transactions) except
as to the sale of inventory in the ordinary course of business; (b) change its
name, consolidate with or merge into any other corporation, permit another
corporation to merge into it, acquire all or substantially all the properties or
assets of any other Person, enter into any reorganization or recapitalization or
reclassify its capital stock; or (c) enter into any sale-leaseback transaction;
p. Subordinate any indebtedness due to it from a person to
indebtedness of other creditors of such person;
q. Purchase or hold beneficially any stock or other securities of,
or make any investment or acquire any interest whatsoever in, any other Person,
except for the common stock of the Subsidiaries owned by the Borrower on the
date of this Agreement and except for certificates of deposit with maturities of
one year or less of United States commercial banks with capital, surplus and
undivided profits in excess of $100,000,000 and direct obligations of the United
States Government maturing within one year from the date of acquisition thereof;
r. Allow any fact, condition or event to occur or exist with
respect to any employee pension or profit sharing plans established or
maintained by it which might
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<PAGE> 14
constitute grounds for termination of any such plan or for the court appointment
of a trustee to administer any such plan; or
s. Make expenditures for capital assets in excess of Two Million
Dollars ($2,000,000.00) in the fiscal year 1998, or thereafter during the
remaining term of this Agreement, make expenditures for capital assets in excess
of Five Hundred Thousand Dollars ($500,000.00) in the aggregate.
6.7 Borrower is not a merchant whose sales for resale of goods for
personal, family or household purposes exceeded seventy-five percent (75%) in
dollar volume of its total sales of all goods during the 12 months preceding the
filing by Bank of a financing statement describing the Collateral. At no time
hereafter shall Borrower's sales for resale of goods for personal, family or
household purpose exceed seventy-five (75%) in dollar volume of its total sales.
6.8 Borrower's sole place of business or chief executive office or
residence is located at the address indicated above and Borrower covenants and
agrees that it will not, during the term of this Agreement, without prior
written notification to Bank, relocate said sole place of business or chief
executive office or residence, except for the proposed relocation to 5852
Kelvin, Irvine, California, and Borrower shall concurrently therewith execute
such additional financing statements as Bank shall require.
6.9 If Borrower is a corporation, Borrower represents, warrants and
covenants as follows:
a. Borrower will not make any distribution or declare or pay any
dividend (in stock or in cash) to any shareholder or on any of its capital
stock, of any class, whether now or hereafter outstanding, or purchase, acquire,
repurchase, redeem or retire any such capital stock;
b. Borrower is and shall at all times hereafter be a corporation
duly organized and existing in good standing under the laws of the state of its
incorporation and qualified and licensed to do business in California or any
other state in which it is required to be qualified;
c. Borrower has the right and power and is duly authorized to enter
into this Agreement; and
d. The execution by Borrower of this Agreement shall not constitute
a breach of any provision contained in Borrower's certificate of incorporation
or by-laws.
6.10 The execution of and performance by Borrower of all of the terms
and provisions contained in this Agreement shall not result in a breach of or
constitute an event of default under any agreement to which Borrower is now or
hereafter becomes a party.
6.11 Borrower shall promptly notify Bank in writing of its acquisition
by purchase, lease or otherwise of any after acquired property of the type
included in the Collateral, with the exception of purchase of inventory in the
ordinary course of business or otherwise not exceeding Fifty Thousand Dollars
($50,000.00) in the aggregate in any fiscal year.
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<PAGE> 15
6.12 All assessments and taxes; whether real, personal or otherwise, due
or payable by, or imposed, levied or assessed against, Borrower or any of its
property have been paid, and shall hereafter be paid in full, before
delinquency. Borrower shall make due and timely payment or deposit of all
federal, state and local taxes, assessments or contributions required of it by
law, and will execute and deliver to Bank, on demand, appropriate certificates
attesting to the payment or deposit thereof. Borrower will make timely payment
or deposit of all F.I.C.A. payments and withholding taxes required of it by
applicable laws, and will upon request furnish Bank with proof satisfactory to
it that Borrower has made such payments or deposit. If Borrower fails to pay any
such assessment, tax, contribution, or make such deposit, or furnish the
required proof, Bank may, in its sole and absolute discretion, and without
notice to Borrower, (i) make payment of the same or any part thereof; or (ii)
set up such reserves in Borrower's account as Bank deems necessary to satisfy
the liability therefor, or both, unless Borrower provides to Bank a bond or
other security satisfactory to Bank prior to the date payment is due. Bank may
conclusively rely on the usual statements of the amount owing or other official
statements issued by the appropriate governmental agency. Each amount so paid or
deposited by Banks shall constitute a Bank Expense and an additional advance to
Borrower.
6.13 There are no actions or proceedings pending by or against Borrower
or any guarantor of Borrower before any court or administrative agency and
Borrower has no knowledge of any pending, threatened or imminent litigation,
governmental investigations or claims, complaints, actions or prosecutions
involving Borrower or any guarantor of Borrower, except as heretofore
specifically disclosed in writing to Bank. If any of the foregoing arise during
the term of the Agreement, Borrower shall immediately notify Bank in writing of
all pending actions in the event that the aggregate of all claims asserted in
all actions pending exceed or could exceed One Hundred Thousand Dollars
($100,000.00).
6.14 a. Borrower, at its expense, shall keep and maintain its assets
insured against loss or damage by fire, theft, explosion, sprinklers and all
other hazards and risks ordinarily insured against by other owners who use such
properties in similar businesses for the full insurable value thereof. Borrower
shall also keep and maintain business interruption insurance and public
liability and property damage insurance relating to Borrower's ownership and
use of the Collateral and its other assets. All such policies of insurance shall
be in such form, with such companies, and in such amounts as may be satisfactory
to Bank. Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All such
policies of insurance (except those of public liability and property damage)
shall contain an endorsement in a form reasonably satisfactory to Bank showing
Bank as a loss payee thereof, with a waiver of warranties (Form 438-BFU), and
all proceeds payable thereunder shall be payable to Bank and, upon receipt by
Bank, shall be applied on account of the Obligations owing to Bank. To secure
the payment of the Obligations, Borrower grants Bank a security interest in and
to all such policies of insurance (except those of public liability and property
damage) and the proceeds thereof, and Borrower shall direct all insurers under
such policies of insurance to pay all proceeds thereof directly to Bank.
b. Borrower hereby irrevocably appoints Bank (and any of Bank's
officers, employees or agents designated by Bank) as Borrower's attorney for the
purpose of making, selling and adjusting claims under such policies of
insurance, endorsing the name of Borrower or any check, draft, instrument or
other item of payment for the proceeds of such policies of insurance and for
making all determinations and decisions with respect to such
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policies of insurance. Borrower will not cancel any of such policies without
Bank's prior written consent. Each such insurer shall agree by endorsement upon
the policy or policies of insurance issued by it to Borrower as required above,
or by independent instruments furnished to Bank, that it will give Bank at least
ten (10) days written notice before any such policy or policies of insurance
shall be altered or canceled, and that no act or default of Borrower, or any
other person, shall affect the right of Bank to recover under such policy or
policies of insurance required above or to pay any premium in whole or in part
relating thereto. Bank, without waiving or releasing any Obligations or any
Event of Default, may, but shall have no obligation to do so, obtain and
maintain such policies of insurance and pay such premiums and take any other
action with respect to such policies which Bank deems advisable. All sums so
disbursed by Bank, as well as reasonable attorneys' fees, court costs, expenses
and other charges relating thereto, shall constitute Bank Expenses and are
payable on demand.
6.15 All financial statements and information relating to Borrower which
have been or may hereafter be delivered by Borrower to Bank are true and correct
and have been prepared in accordance with GAAP consistently applied and there
has been no material adverse change in the financial condition since the
submission of such financial information to Bank.
6.16 a. Borrower at all times hereafter shall maintain a standard and
modern system of accounting in accordance with GAAP consistently applied with
ledger and account cards and/or computer tapes and computer disks, computer
printouts and computer records pertaining to the Collateral which contain
information as may from time to time be requested by Bank, not modify or change
its method of accounting or enter into, modify or terminate any agreement
presently existing, or at any time hereafter entered into with any third party
accounting firm and/or service bureau for the preparation and/or storage of
Borrower's accounting records without the written consent of Bank first obtained
and without said accounting firm and/or service bureau agreeing to provide
information regarding the Receivables and Inventory and Borrower's financial
condition to Bank; permit Bank and any of its employees, officers or agents,
upon demand, during Borrower's usual business hours, or the usual business hour
of third persons having control thereof, to have access to and examine all of
the Borrower's Books relating to the Collateral, Borrower's Obligations to Bank,
Borrower's financial condition and the results of Borrower's operations and in
connection therewith, permit Bank or any of its agents, employees or officers to
copy and make extracts therefrom.
b. Borrower shall deliver to Bank within thirty (30) days after the
end of each month, a company prepared balance sheet and profit and loss
statement covering Borrower's operations and deliver to Bank within ninety (90)
days after the end of each of Borrower's fiscal year a(n) audited statement of
the financial condition of the Borrower for each such fiscal year, including but
not limited to, a balance sheet and profit and loss statement and any other
report requested by Bank relating to the Collateral and the financial condition
of Borrower, and a certificate signed by an authorized employee of Borrower to
the effect that all reports, statements, computer disk or tape files, computer
printouts, computer runs, or other computer prepared information of any kind or
nature relating to the foregoing or documents delivered or caused to be
delivered to Bank under this subparagraph are complete, correct and thoroughly
present the financial condition of Borrower and that there exists on the date of
delivery to Bank no condition or event which constitutes a breach or Event of
Default under this Agreement.
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During such time as Borrower is subject to the reporting
requirements of the Securities Exchange Act of 1934, within forty five (45) days
of quarter end Borrower will deliver to Bank a 10Q Report including balance
sheet and profit and loss statement covering Borrower's operations, and within
ninety (90) days after the end of each fiscal year end, a 10K report with a
balance sheet and profit and loss statement covering Borrower's operations.
c. In addition to the financial statements requested above, the
Borrower agrees to provide Bank with the following schedules:
Accounts Receivable Agings on a monthly basis within
fifteen (15) days of the end of each calendar month;
Accounts Payable Agings on a monthly basis within fifteen
(15) days of the end of each calendar month.
Copies of all other agings, projections or other financial exhibits which the
Bank may reasonably require.
6.17 Borrower shall maintain the following financial ratios and
covenants on a consolidated and non-consolidated basis:
a. Working Capital in the amount not less than _______N/A______.
b. Tangible Effective Net Worth in an amount not less than
$5,000,000.00 as of June 30, 1997; $3,750,000.00 as of September 30, 1997;
$2,800,000.00 as of December 31, 1997; and $2,200,000.00 as of March 31, 1998;
and $1,800,000.00 thereafter.
c. A ratio of Current Assets to Current Liabilities of not less
than ________ N/A __________.
d. A quick ratio of cash plus securities plus Receivables to
Current Liabilities not less than 1.60:1.00 through February 28, 1998; beginning
March 1, and thereafter 1.00:1.00.
e. A ratio of Total Liabilities (less debt subordinated to Bank) to
Tangible Effective Net Worth of less than 1.00:1.00 through February 28, 1998;
beginning March 1, and thereafter 2.00:1.00.
f. A ratio of Cash Flow to Fixed Charges of not less than _________
N/A _________.
g. Net Income after taxes of _______ N/A _______.
h. Borrower shall not without Bank's prior written consent acquire
or expend for or commit itself to acquire or expend for fixed assets by lease,
purchase or otherwise in excess of Two Million Dollars ($2,000,000.00) in the
fiscal year 1998, or thereafter during the remaining term of this Agreement, in
excess of Five Hundred Thousand Dollars ($500,000.00) in the aggregate. in an
aggregate amount that exceeds no/100 Dollars ($0.00) in any fiscal year; and
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<PAGE> 18
l. Semi-annual A/R audits; Borrower will not enter into guarantees
of other Bank lending relationships.
k. This loan is cross-collateralized and cross-defaulted to all
present and future indebtedness of Masimo Corporation.
All financial covenants shall be computed in accordance with GAAP
consistently applied except as otherwise specifically set forth in this
Agreement. All monies due from affiliates (including officers, directors and
shareholders) shall be excluded from Borrower's assets for all purposes
hereunder.
6.18 Borrower shall promptly supply Bank (and cause any guarantor to
supply Bank) with such other information (including tax returns) concerning its
financial affairs (or that of any guarantor) as Bank may request from time to
time hereafter, and shall promptly notify Bank of any material adverse change in
Borrower's financial condition and of any condition or event which constitute a
breach of or an event which constitutes an Event of Default under this
Agreement.
6.19 Borrower is now and shall be at all times hereafter solvent and
able to pay its debts (including trade debts) as they mature.
6.20 Borrower shall immediately and without demand reimburse Bank for
all sums expended by Bank in connection with any act brought by Bank to correct
any default or enforce any provision of this Agreement, including all Bank
Expenses; Borrower authorizes and approves all advances and payments by Bank for
items described in this Agreement as Bank Expenses.
6.21 Each warranty, representation and agreement contained in this
Agreement shall be automatically deemed repeated with each advance and shall be
conclusively presumed to have been relied on by Bank regardless of any
investigation made or information possessed by Bank. The warranties,
representations and agreements set forth herein shall be cumulative and in
addition to any and all other warranties, representations and agreements which
Borrower shall give, or cause to be given, to Bank either now or hereafter.
6.22 From and after June 30, 1997, Borrower shall keep all of its
principal bank accounts with Bank and shall notify the Bank immediately in
writing of the existence of any other bank account, or any other account into
which money can be deposited.
6.23 Borrower shall furnish to the Bank:(a) as soon as possible, but in
no event later than thirty (30) days after Borrower knows or has reason to know
that any reportable event with respect to any deferred compensation plan has
occurred, a statement of chief financial officer of Borrower setting forth the
details concerning such reportable event and the action which Borrower proposes
to take with respect thereto, together with a copy of the notice of such
reportable event given to the Pension Benefit Guaranty Corporation, if a copy of
such notice is available to Borrower; (b) promptly after the filing thereof with
the United States Secretary of Labor or the Pension Benefit Guaranty
Corporation, copies of each annual report with respect to each deferred
compensation plan; (c) promptly after receipt thereof, a copy of any notice
Borrower may receive from the Pension Benefit Guaranty Corporation or the
Internal Revenue Service; and (d) when the same is made available to
participants in the
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<PAGE> 19
deferred compensation plan, all notices and other forms of information from time
to time disseminated to the participants by the administrator of the deferred
compensation plan.
6.24 Borrower is now and shall at all times hereafter remain in
compliance with all federal, state and municipal laws, regulations and
ordinances relating to the handling, treatment and disposal of toxic substances,
wastes and hazardous material and shall maintain all necessary authorizations
and permits.
6.25 Borrower shall maintain insurance on the life of _______
N/A________ in an amount not to be less than no/100 Dollars ($____N/A_____)
under one or more policies issued by insurance companies satisfactory to Bank,
which policies shall be assigned to Bank as security for the Obligations and on
which Bank shall be named as sole beneficiary.
6.26 Borrower shall limit direct and indirect compensation paid to the
following employees: ______ N/A ______, to an aggregate of _______ N/A _______
Dollars ($___N/A___) per _____________.
7. EVENTS OF DEFAULT
Any one or more of the following events shall constitute a default by
Borrower under this Agreement:
a. If, within three (3) days of notice by Bank to do so, Borrower
fails or neglects to perform, keep or observe any term, provision, condition,
covenant, agreement, warranty or representation contained in this Agreement, or
any other present or future agreement between Borrower and Bank (which notice
need not be in writing);
b. If any representation, statement, report or certificate made or
delivered by Borrower, or any of its officers, employees or agents to Bank is
not true and correct;
c. If Borrower fails to pay when due and payable or declared due
and payable, all or any portion of the Borrower's obligations (whether of
principal, interest, taxes, reimbursement of Bank Expenses, or otherwise);
d. If there is a material impairment of the prospect of repayment
of all or any portion of Borrower's Obligations or a material impairment of the
value or priority of Bank's security interest in the Collateral;
e. If all or any of Borrower's assets are attached, seized, subject
to a writ or distress warrant, or are levied upon, or come into the possession
of any Judicial Officer or Assignee and the same are not released, discharged or
bonded against within ten (10) days thereafter;
f. If any Insolvency Proceeding is filed or commenced by or against
Borrower, or if any involuntary Insolvency Proceeding is filed or commenced
against Borrower without such involuntary Insolvency Proceeding being dismissed
within thirty (30) days thereafter;
g. If any proceeding is filled or commenced by or against Borrower
for its dissolution or liquidation;
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<PAGE> 20
h. 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;
i. If a notice of lien, levy or assessment is filed of record with
respect to any or all of Borrower's assets by the United States Government, or
any department, agency or instrumentality thereof, or by any state, county,
municipal or other government agency, or if any taxes or debts owing at any time
hereafter to any one or more of such entities becomes a lien, whether choate or
otherwise, upon any or all of the Borrower's assets and the same is not paid on
the payment date thereof unless Borrower provides to Bank a bond or other
security satisfactory to Bank prior to such payment date;
j. If any judgments or other claims aggregating in excess of Fifty
Thousand Dollars ($50,000.00) become a lien or encumbrance upon any or all of
Borrower's assets other than the Collateral, or if any other judgments or other
claims become a lien or encumbrance upon the Collateral, and the same is not
satisfied, dismissed or bonded against within ten (10) days thereafter;
k. If Borrower's records are prepared and kept by an outside
computer service bureau at the time this Agreement is entered into or during the
term of this Agreement such an agreement with an outside service bureau is
entered into, and at any time thereafter, without first obtaining the written
consent of Bank, Borrower terminates, modifies, amends or changes its
contractual relationship with said computer service bureau or said computer
service bureau fails to provide Bank with any request information or financial
data pertaining to Bank's Collateral, Borrower's financial condition or the
results of Borrower's operations;
l. If Borrower permits a default in any material agreement to which
Borrower is a party with third parties so as to result in an acceleration of the
maturity of Borrower's indebtedness to others, whether under any indenture,
agreement or otherwise;
m. If Borrower makes any payment on account of indebtedness which
has been subordinated to Borrower's Obligations to Bank;
n. If any misrepresentation exists now or thereafter in any
warranty or representation made by Bank by any officer or director of Borrower,
or if any such warranty or representation is withdrawn by any officer or
director;
o. If any party subordinating its claims to that of Bank's or any
guarantor of Borrower's Obligations dies or terminates its subordination or
guaranty, becomes insolvent or an Insolvency Proceeding is commenced by or
against any such subordinating party or guarantor;
p. If Borrower is an Individual and Borrower dies;
q. If there is a change of ownership or control of _____ N/A ______
percent (_____%) or more of the issued and outstanding stock of Borrower; or
r. If any reportable event, which the Bank determines constitutes
grounds for the termination of any deferred compensation plan by the Pension
Benefit Guaranty Corporation or for the appointment by the appropriate United
States District Court of a
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<PAGE> 21
trustee to administer any such plan, shall have occurred and be continuing
thirty (30) days after written notice of such determination shall have been
given to Borrower by Bank, or any such Plan shall be terminated within the
meaning of Title IV of the Employment Retirement Income Security Act ("ERISA"),
or a trustee shall be appointed by the appropriate United States District Court
to administer any such plan, or the Pension Benefit Guaranty Corporation shall
institute proceedings to terminate any plan and in case of any event described
in this Section 7.0, the aggregate amount of the Borrower's liability to the
Pension Benefit Guaranty Corporation under Sections 4062, 4063 or 4064 of ERISA
shall exceed five percent (5) of Borrower's Tangible Effective Net Worth.
Notwithstanding anything contained in Section 7 to the contrary,
Bank shall refrain from exercising its rights and remedies and Event of Default
shall thereafter not be deemed to have occurred by reason of the occurrence of
any of the events set forth in Sections 7.e, 7.f or 7.j of this Agreement if,
within ten (10) days from the date thereof, the same is released, discharged,
dismissed, bonded against or satisfied; provided, however, if the event is the
Institution of Insolvency Proceedings against Borrower, Bank shall not be
obligated to make advances to Borrower during such cure period.
8. BANK'S RIGHTS AND REMEDIES
8.1 Upon the occurrence of an Event of Default by Borrower under this
Agreement, Bank may, at its election, without notice of its selection and
without demand, do any one or more of the following, all of which are authorized
by Borrower:
a. Declare Borrower's Obligations, whether evidenced by this
Agreement, installment notes, demand notes or otherwise, immediately due and
payable to the Bank;
b. Cease advancing money or extending credit to or for the benefit
of Borrower under this Agreement, or any other agreement between Borrower and
Bank;
c. Terminate this Agreement as to any future liability or
obligation of Bank, but without affecting Bank's rights and security interests
in the Collateral, and the Obligations of Borrower to Bank,
d. Without notice to or demand upon Borrower or any guarantor, 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 designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, take and maintain possession of the Collateral and the
premises (at no charge to Bank), or any part thereof, and to pay, purchase,
contest or compromise any encumbrance, charge or lien which in the opinion of
Bank appears to be prior or superior to its security interest and to pay all
expenses incurred in connection therewith;
e. Without limiting Bank's rights under any security interest, Bank
is hereby granted a license or other right to use, without charge, Borrower's
labels, patents, copyrights, rights of use of any name, trade secret, trade
names, trademarks 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 Borrower's rights under all licenses and all
franchise agreement shall inure to Bank's benefit, and Bank shall have the
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<PAGE> 22
right and power to enter into sublicense agreements with respect to all such
rights with third parties on terms acceptable to Bank;
f. Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sales and sell (in the manner provided for herein) the
inventory;
g. Sell or dispose 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 is
commercially reasonable in the opinion of Bank. It is not necessary that the
Collateral be present at any such sale;
h. Bank shall give notice of the disposition of the Collateral as
follows:
(1) Bank shall give the Borrower and each holder of a
security interest in the collateral who has filed with Bank a written request
for notice, a notice in writing of the time and place of public sale, or, if the
sale is a private sale or some disposition other than a public sale is to be
made of the Collateral, the time on or after which the private sale or the
disposition is to be made;
(2) The notice shall be personally delivered or mailed,
postage prepaid, to Borrower's address appearing in this Agreement, at least
five (5) calendar days before the date fixed for the sale, or at least five (5)
calendar days before the date on or after which the private sale or other
disposition is to be made, unless the Collateral is perishable or threatens to
decline speedily in value. Notice to persons other than Borrower claiming an
interest in the Collateral shall be sent to such addresses as they have
furnished to Bank;
(3) If the sale is to be a public sale, Bank shall also
give notice of the time and place by publishing a notice one time at least five
(5) calendar days before the date of this sale in a newspaper of general
circulation in the county in which the sale is to be held; and
(4) Bank may credit bid and purchase at any public sale.
i. Borrower shall pay all Bank Expenses incurred in connection with
Bank's enforcement and exercise of any of its rights and remedies as herein
provided, whether or not suit is commenced by Bank;
j. Any deficiency which exists after disposition of the Collateral
as provided above will be paid immediately by Borrower. Any excess will be
returned, without interest and subject to the rights of third parties, to
Borrower by Bank, or, in Bank's discretion, to any party who Bank believes, in
good faith, is entitled to the excess; and
k. Without constituting a retention of Collateral in satisfaction
of an obligation within the meaning of 9505 of the Uniform Commercial Code or an
action under California Code of Civil Procedure 726, apply any and all amounts
maintained by Borrower as deposit accounts (as that term is defined under 9105
of the Uniform Commercial Code) or other accounts that Borrower maintains with
Bank against the Obligations.
8.2 Bank's rights and remedies under this Agreement and all other
agreements shall be cumulative. Bank shall have all other rights and remedies
not inconsistent herewith
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<PAGE> 23
as provided 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 default on Borrower's
part shall be deemed a continuing waiver. No delay by Bank shall constitute a
waiver, election or acquiescence by Bank.
9. TAXES AND EXPENSES REGARDING BORROWER'S PROPERTY.
If Borrower fails to pay promptly when due to another person or entity, monies
which Borrower is required to pay by reason of any provision in this Agreement,
Bank may, but need not, pay the same and charge Borrower's account therefor, and
Borrower shall promptly reimburse Bank. All such sums shall become additional
indebtedness owing to Bank, shall bear interest at the rate hereinabove
provided, and shall be secured by all Collateral. Any payments made by Bank
shall not constitute (i) an agreement by it to make similar payments in the
future; or (ii) a waiver by Bank of any default under this Agreement. Bank need
not inquire as to, or contest the validity of, any such expense, tax security
interest, encumbrance or lien and the receipt of the usual official notice of
the payment thereof shall be conclusive evidence that the same was validly due
and owing. Such payments shall constitute Bank Expenses and additional advances
to Borrower.
10. WAIVERS
10.1 Borrower agrees that checks and other instruments received by Bank
in payment or on account of Borrower's Obligations constitute only conditional
payment until such items are actually paid to Bank and Borrower waives the right
to direct the application of any and all payments at any time or times hereafter
received by Bank on account of Borrower's Obligations and Borrower agrees that
Bank shall have the continuing exclusive right to apply and reapply such
payments in any manner as Bank may deem advisable, notwithstanding any entry by
Bank upon its books.
10.2 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
any of all commercial paper, accounts, documents, instruments chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10.3 Bank shall not in any way or manner be liable or responsible for
(a) the safekeeping of the inventory; (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 inventory shall be borne by Borrower.
10.4 Borrower waives the right and the right to assert a confidential
relationship, if any, it may have with any accountant, accounting firm and/or
service bureau or consultant in connection with any information requested by
Bank pursuant to or in accordance with this Agreement, and agrees that a Bank
may contact directly any such accountants, accounting firm and/or service bureau
or consultant in order to obtain such information.
10.5 BORROWER AND BANK EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY TRANSACTION HEREUNDER, OR
CONTEMPLATED HEREUNDER, OR ANY OTHER
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<PAGE> 24
CLAIM (INCLUDING TORT OR BREACH OF DUTY CLAIMS) OR DISPUTE HOWSOEVER ARISING
BETWEEN BANK AND BORROWER.
10.6 In the event that Bank elects to waive any rights or remedies
hereunder, or compliance with any of the terms hereof, or delays or fails to
pursue or enforce any terms, such waiver, delay or failure to pursue or enforce
shall only be effective with respect to that single act and shall not be
construed to affect any subsequent transactions or Bank's right to later pursue
such rights and remedies.
11. ONE CONTINUING LOAN TRANSACTION.
All loans and advances heretofore, no or at any time or times hereafter
made by Bank to Borrower under this Agreement or any other agreement between
Bank and Borrower, shall constitute one loan secured by Bank's security
interests in the Collateral and by all other security interests, liens,
encumbrances heretofore, now or from time to time hereafter granted by Borrower
to Bank.
Notwithstanding the above, (i) to the extent that any portion of the
Obligations are a consumer loan, that portion shall not be secured by any deed
or trust or mortgage on or other security interest in the Borrower's principal
dwelling which is not a purchase money security interest as to that portion,
unless expressly provided to the contrary in another place, or (ii) if the
Borrower (or any of them) has (have) given to or give(s) Bank a deed of trust or
mortgage covering real property, that deed of trust or mortgage shall not secure
the loan and any other Obligation of the Borrower (or any of them), unless
expressly provided to the contrary in another place.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by
either party on the other relating to this Agreement shall be in writing and
sent by regular United States mail, postage prepaid, properly addressed to
Borrower or to Bank at the addresses stated in this Agreement, or to such other
addresses as Borrower or Bank may from time to time specify to the other in
writing. Requests to Borrower by Bank hereunder may be made orally.
13. AUTHORIZATION TO DISBURSE
Bank is hereby authorized to make loans and advances hereunder upon
telephonic or other instructions received from anyone purporting to be an
officer, employee, or representative of Borrower, or at the discretion of Bank
if said loans and advances are necessary to meet any Obligations of Borrower to
Bank. Bank shall have no duty to make inquiry or verify the authority of any
such party, and Borrower shall hold the Bank harmless from any damage, claims or
liability by reason of Bank's honor of, or failure to honor, any such
instructions.
14. DESTRUCTION OF BORROWER'S DOCUMENTS
Any documents, schedules, invoices or other papers delivered to Bank,
may be destroyed or otherwise disposed of by Bank six (6) months after they are
delivered to or received by Bank, unless Borrower requests, in writing, the
return of the said documents,
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schedules, invoices or other papers and makes arrangements, at Borrower's
expense, for their return.
15. CHOICE OF LAW
The validity of this Agreement, its construction, interpretation and
enforcement, and the rights of the parties hereunder and concerning the
Collateral, shall be determined according to the laws of the State of
California. The parties agree that all actions or proceedings arising in
connection with this Agreement shall be tried and litigated only in the state
and federal courts in the Northern District of California or County of Santa
Clara.
16. GENERAL PROVISIONS
16.1 This Agreement shall be binding and deemed effective when executed
by the Borrower and accepted and executed by Bank at its Headquarter Office.
16.2 This Agreement shall bind and inure to the benefit of the
respective successors and assigns of each of the parties, provided, however,
that Borrower may not assign this Agreement or any rights hereunder without
Bank's prior written consent and any prohibited assignment shall be absolutely
void. No consent to an assignment by Bank shall release Borrower or any
guarantor from their Obligations to Bank. Bank may assign this Agreement and its
rights and duties hereunder. Bank reserves the right to sell, assign, transfer,
negotiate or grant participation in all or any part of, or any interest in
Bank's rights and benefits hereunder. In connection therewith, Bank may disclose
all documents and information which Bank now or hereafter may have relating to
Borrower or Borrower's business.
16.3 Paragraph headings and paragraph numbers have been set forth herein
for convenience only; unless the contrary is compelled by the context,
everything contained in each paragraph applies equally to this entire Agreement.
16.4 Neither this Agreement nor any uncertainty or ambiguity herein
shall be construed or resolved against Bank or Borrower, whether under any rule
of construction or otherwise; on the contrary, this Agreement has been reviewed
by all parties and shall be construed and interpreted according to the ordinary
meaning of the words used so as to fairly accomplish the purposes and intentions
of all parties hereto. When permitted by the context, the singular includes the
plural and vice versa.
16.5 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.
16.6 This Agreement cannot be changed or terminated orally. Except as to
currently existing Obligations owing by Borrower to Bank, all prior agreements,
understandings, representations, warranties, and negotiations, if any, with
respect to the subject matter hereof, are merged into this Agreement.
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<PAGE> 26
16.7 The parties intend and agree that their respective rights, duties,
powers liabilities, obligations and discretions shall be performed, carried out,
discharged and exercised reasonably and in good faith.
IN WITNESS WHEREOF, the parties hereto have caused this Revolving Credit
Loan & Security Agreement (Accounts and inventory to be executed as of the date
first hereinabove written.
ATTEST: BORROWER: MASIMO CORPORATION
By: [SIG]
- ----------------------------- ------------------------------
Title Signature of
Title: Chief Financial Officer
- ----------------------------- ---------------------------
Accepted and effective as of By:
______________________ at Bank's -----------------------------
Headquarters Office Signature of
Title:
---------------------------
(Bank) By:
-----------------------------
Signature of
By:
--------------------------
Signature of Title:
---------------------------
Title:
-----------------------
By:
-----------------------------
Signature of
By:
--------------------------
Signature of
Title:
---------------------------
Title:
-----------------------
-26-
<PAGE> 27
Attachment for Paragraph 6.5
CURRENT LOCATION FUTURE LOCATION (6/1/97)
- ---------------- ------------------------
23361 Madero Street, Ste. 100 2852 Kelvin Avenue
Mission Viejo, CA 92691 Irvine, CA 92614
OWNER: OWNER:
- ------ ------
Nasib Gannam, DBA Hoffman Associates No. 5
Highpark Corporate Office Center a California limited
SZ Real Estate Management Svcs. partnership
4100 Newport Place, Ste. 830 225 South Lake Ave, Ste. 1150
Newport Beach, CA 92660 Pasadena, CA 91101
<PAGE> 28
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: Masimo Corporation, a Delaware corporation
Number of Shares: Ten Thousand (10,000)
Class of Stock: Common
Initial Exercise Price: $3.00 per share
Issue Date: April 16, 1997
Expiration Date: May 1, 2004
THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for
other good and valuable consideration, COMERICA BANK-CALIFORNIA ("Holder") is
entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the corporation (the "Company") at the
initial exercise price per Share (the "Warrant Price") all as set forth above
and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions
and upon the terms and conditions set forth of this Warrant.
ARTICLE 1. EXERCISE.
1.1 Method of Exercise. Holder may exercise this Warrant by
delivering a duly executed Notice of Exercise in substantially the form attached
as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as
specified in Section 1.1, Holder may from time to time convert this Warrant, in
whole or in part, into a number of Shares determined by dividing (a) the
aggregate fair market value of the Shares or other securities otherwise issuable
upon exercise of this Warrant minus the aggregate Warrant Price of such Shares
by (b) the fair market value of one Share. The fair market value of the Shares
shall be determined pursuant Section 1.4.
1.3 Intentionally Omitted.
1.4 Fair Market Value. If the Shares are traded in a public market,
the fair market value of the Shares shall be the closing price of the Shares (or
the closing price of the Company's stock into which the Shares are convertible)
reported for the business day immediately before Holder delivers its Notice of
Exercise to the Company. If the Warrant is being exercised in connection with a
public offering of the Company's common stock, the fair market value of the
Shares shall be the offering price of the Shares. If the Shares are not
-1-
<PAGE> 29
traded in a public market, the Board of Directors of the Company shall determine
fair market value in its reasonable good faith judgment.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the Company;
Price Protection.
1.7.1. "Acquisition". For the purpose of this Warrant,
"Acquisition" means any sale, license, or other disposition of all or
substantially all of the assets of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.7.2. Assumption of Warrant. If upon the closing of any
Acquisition the successor entity assumes the obligations of this Warrant, then
this Warrant shall be exercisable for the same securities, cash, and property as
would be payable for the Shares issuable upon exercise of the unexercised
portion of this Warrant as if such Shares were outstanding on the record date
for the Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly.
1.7.3. Nonassumption. If upon the closing of any
Acquisition the successor entity does not assume the obligations of this Warrant
and Holder has not otherwise exercised this Warrant in full, then the
unexercised portion of this Warrant shall be deemed to have been automatically
converted pursuant to Section 1.2 and thereafter Holder shall participate in the
acquisition on the same terms as other holders of the same class of securities
of the Company.
1.7.4. Purchase Right. Notwithstanding the foregoing, at
the election of Holder, the Company shall purchase the unexercised portion of
this Warrant for cash upon the closing of any Acquisition for an amount equal to
(a) the fair market value of any consideration that would have been received by
Holder in consideration of the Shares had Holder exercised the unexercised
portion of this Warrant immediately before the record date for determining the
shareholders entitled to participate in the proceeds of the Acquisition, less
(b) the aggregate Warrant Price of the Shares, but in no event less than zero.
1.7.5. Price Protection. In the event that the Company
closes an initial public offering of its common stock, and the Holder has
requested to be included in such offering but has been disallowed to sell
certain or all of its shares in the offering (the "Disallowed Shares") pursuant
to an underwriter cutback, and the Holder sells the Disallowed
-2-
<PAGE> 30
Shares in the public market within ninety five (95) days of the offering, the
Company shall pay the Holder an amount equal to the difference between (i) the
sales price of the Disallowed Shares, and (ii) the initial public offering price
(the "IPO Price") that the Holder would have received for the Disallowed Shares
had it been allowed to sell such shares in the offering, in each case net of the
Warrant Price for the Disallowed Shares (unless paid separately by Holder). If
the Holder is unable to sell the Disallowed Shares as a result of restrictions
under Rule 144 or a lock-up agreement with the underwriters of the offering,
then the period in which the Holder must sell the Disallowed Shares in order to
take advantage of this Section shall commence on the date such restrictions no
longer apply and shall end of the fifth (5th) day thereafter. If Holder's sale
price is greater than or equal to the IPO Price, or if the Holder does not sell
the Disallowed Shares within the applicable time period, then the Company shall
have no obligation to make any payment to the Holder pursuant to this Section.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
Shares are securities other than common stock, subdivides the Shares in a
transaction that increases the amount of common stock into which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been entitled had Holder owned the Shares of record
as of the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article 2 including, without limitation,
adjustments to the Warrant Price and to the number of securities or property
issuable upon exercise of the new Warrant. The provisions of this Section 2.2
shall similarly apply to successive reclassifications, exchanges, substitutions,
or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances.
(a) If the Company issues additional shares of common stock or
rights to acquire common stock after the date of this Warrant and the
consideration per additional share is less than the Warrant Price in effect
immediately before such issue, the
-3-
<PAGE> 31
Warrant Price in effect immediately before such issue shall be reduced,
concurrently with such issue, to a price determined by multiplying the Warrant
Price by a fraction:
(i) the numerator of which is the amount of
common stock outstanding immediately before such issue plus the amount of common
stock that the aggregate consideration received by the Company for the
additional shares would purchase at the Warrant Price in effect immediately
before such Issue, and
(ii) the denominator of which is the amount of
common stock outstanding immediately before such issue plus the number of such
additional shares.
(b) Upon each adjustment of the Warrant Price, the number of Shares
issuable upon exercise of the Warrant shall be increased to equal the quotient
obtained by dividing (a) the product resulting from multiplying (i) the number
of Shares issuable upon exercise of the Warrant and (ii) the Warrant Price, in
each case as in effect immediately before such adjustment, by (b) the adjusted
Warrant Price.
(c) For the purpose of this Section 2.4, all securities issuable
upon exercise of any outstanding convertible securities or options, warrants, or
other rights to acquire securities of the Company shall be deemed to be
outstanding.
(d) For purposes of Section 2.4(a), the following issuances shall
not be considered the issuance or sale of shares of stock or rights to acquire
stock: (i) the issuance of securities issuable upon exercise of any outstanding
convertible securities or options, warrants, or other right to acquire
securities of the Company, whether now or hereafter issued; and (ii) the
issuance of shares of Common Stock to employees, directors or consultants of the
Company under a stock plan approved by the board of directors (including the
reissuance of shares purchased by the corporation from employees or consultants
of the corporation).
2.5 No Impairment. The Company shall not, by amendment of its Articles
of Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out of all the provisions of this Article 2 and
in taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment.
2.6 Fractional Shares. No fractional Shares shall be issuable upon
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share interest
arises upon any exercise or conversion of the Warrant, the Company shall
eliminate such fractional share interest by paying Holder amount computed by
multiplying the factional interest by the fair market value of a full Share.
2.7 Certificate as to Adjustments. Upon each adjustment of the Warrant
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request,
-4-
<PAGE> 32
furnish Holder a certificate setting forth the Warrant Price in effect upon the
date thereof and the series of adjustments leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 Representations and Warranties. The Company hereby represents and
warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of this
Warrant is not greater than (i) the price per share at which the Shares were
last issued in an arms-length transaction and (ii) the fair market value of the
Shares as of the date of this Warrant.
(b) All Shares which may be issued upon the exercise of the
purchase right represented by this Warrant, and all securities, if any, issuable
upon conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of common stock any
additional shares of common stock or other rights; (c) to effect any
reclassification or recapitalization of common stock; or (d) to merge or
consolidate with or into any other corporation, or sell, lease, license, or
convey all or substantially all of its assets, or to liquidate, dissolve or wind
up, then, in connection with each such event, the Company shall give Holder (1)
at least 20 days prior written notice of the date on which a record will be
taken for such dividend, distribution, or subscription rights (and specifying
the date on which the holders of common stock will be entitled thereto) or for
determining rights to vote, if any, in respect of the matters referred to in (c)
and (d) above; and (2) in the case of the matters referred to in (c) and (d)
above at least 20 days prior written notice of the date when the same will take
place (and specifying the date on which the holders of common stock will be
entitled to exchange their common stock for securities or other property
deliverable upon the occurrence of such event).
3.3 Information Rights. So long as the Holder holds this Warrant and/or
any of the Shares and until such time as the Company has consummated an initial
public offering of its common stock, the Company shall deliver to the Holder (a)
promptly after mailing, copies of all notices or other written communications to
the shareholders of the Company, (b) within ninety (90) days after the end of
each fiscal year of the Company, the annual audited financial statements of the
Company certified by independent public accountants of recognized standing and
(c) within forty-five (45) days after the end of each of the first three
quarters of each fiscal year, the Company's quarterly, unaudited financial
statements.
3.4 Registration Under Securities Act of 1933, as amended. The Company
agrees that the Shares shall be subject to the registration rights set forth on
Exhibit A, if attached.
-5-
<PAGE> 33
ARTICLE 4. MISCELLANEOUS.
4.1 Term; Notice of Expiration. This Warrant is exercisable, in whole or
in part, at any time and from time to time on or before the Expiration Date set
forth above.
4.2 Legends. This Warrant and the Shares (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO
RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as reasonably
requested by the Company). If the Company has registered its equity securities
under the Securities Exchange Act of 1934, the Company shall not require Holder
to provide an opinion of counsel if the transfer is to an affiliate of Holder or
if there is no material question as to the availability of current information
as referenced in Rule 144(c), Holder represents that it has complied with Rule
144(d) and (e) in reasonable detail, the selling broker represents that it has
complied with Rule 144(f), and the Company is provided with a copy of Holder's
notice of proposed sale, and the Company's counsel is able to conclude that such
sale may be made under Rule 144. The Company may transfer the Warrants and the
Shares issuable upon exercise of this Warrant in compliance with Rule 144(k).
4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) by giving the Company notice of the portion of
the Warrant being transferred setting forth the name, address and taxpayer
identification number of the transferee and surrendering this Warrant to the
Company for reissuance to the transferee(s) (and Holder if applicable). Unless
the Company is filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right to refuse to
transfer any portion of this Warrant to any person who directly competes with
the Company.
4.5 Notices. All notices and other communications from the Company to
the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such holder from time
to time.
-6-
<PAGE> 34
4.6 Waiver. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 Attorneys Fees. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
"COMPANY"
MASIMO CORPORATION,
a Delaware corporation
By: [SIG]
-----------------------------------
Print
Name: /s/ Brad Langdale
------------------------------
Print
Title: Chief Financial Officer
------------------------------
By:
-----------------------------------
Print
Name:
------------------------------
Print
Title:
------------------------------
-7-
<PAGE> 35
APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase ____________ shares of the
Common/Series _____ Preferred [strike one] Stock of _______________ pursuant to
the terms of the attached Warrant, and tenders herewith payment of the purchase
price of such shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This conversion
is exercised with respect to ________________ of the Shares covered by the
Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares
in the name of the undersigned or in such other name as is specified below:
--------------------
(Name)
--------------------
--------------------
(Address)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
--------------------------------
(Signature)
- -------------------
(Date)
-8-
<PAGE> 36
EXHIBIT A
Registration Rights
The Shares (if common stock), or the common stock issuable upon
conversion of the Shares, shall be deemed "registrable securities" or otherwise
entitled to "piggy back" registration rights in accordance with the terms of the
following agreement (the "Agreement") between the Company and its investor(s):
Third Amended and Restated Registration Rights Agreement dated
January 17, 1995, between the Company and the holders of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock referred to therein.
The Company agrees that no amendments will be made to the Agreement
which would have an adverse impact on Holder's registration rights thereunder
without the consent of Holder. By acceptance of the Warrant to which this
Exhibit A is attached, Holder shall be deemed to be a party to the Agreement.
If no Agreement exists, then the Company and the Holder shall enter into
Holder's standard form of Registration Rights Agreement as in effect on the
Issue Date of the Warrant.
-9-
<PAGE> 37
[COMERICA LOGO] AKM
COMERICA BANK-CALIFORNIA
TELEX NO: 160455 CMACALLB INTERNATIONAL DEPARTMENT
FAX NO: (562) 427-5203 301 E. OCEAN BOULEVARD, 18TH FLOOR
SWIFT: MNBDUS6S LAX LONG BEACH, CA 90802
BENEFICIARY: ISSUANCE DATE: MAY 2, 1997
HOFFMAN ASSOCIATES NO. 5 LETTER OF CREDIT NO: 539211
A CALIFORNIA LIMITED PARTNERSHIP
225 SOUTH LAKE AVENUE, SUITE 1150, AMOUNT: USD 265,582.00
PASADENA, CA. 91101
EXPIRATION DATE: APRIL 30, 1998
WE HEREBY OPEN OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. 539211 IN YOUR
FAVOR, FOR ACCOUNT OF MASIMO CORPORATION, 23361 MADERO STREET, SUITE 100,
MISSION VIEJO, CA. 92691 FOR A SUM NOT EXCEEDING USD 265,582.00 (TWO HUNDRED
SIXTY FIVE THOUSAND FIVE HUNDRED EIGHTY TWO AND 00/100'S U.S. DOLLARS AVAILABLE
BY YOUR DRAFT(S) AT SIGHT DRAWN ON COMERICA BANK-CALIFORNIA, WHEN ACCOMPANIED
BY:
BENEFICIARY'S STATEMENT PURPORTEDLY SIGNED BY AN AUTHORIZED OFFICIAL READING:
"THE AMOUNT OF THIS DRAWING, $________ UNDER COMERICA BANK-CALIFORNIA, LONG
BEACH, CALIFORNIA IRREVOCABLE STANDBY LETTER OF CREDIT NO. 539211 DATED MAY 2,
1997 REPRESENTS FUNDS DUE US SINCE WE CERTIFY THAT MASIMO CORPORATION, (LESSEE)
FOR THE PROPERTY COMMONLY KNOWN AS 2852 KELVIN AVE., IRVINE, CA. 92614 HAS
DEFAULTED AND IS IN BREACH OF THE TERMS, COVENANTS AND CONDITIONS OF THAT
CERTAIN LEASE AGREEMENT, EXECUTED BETWEEN HOFFMAN ASSOCIATES NO. 5 A CALIFORNIA
LIMITED PARTNERSHIP (LESSOR) AND LESSEE, AND THAT LESSEE WAS NOTIFIED IN WRITING
OF THE ITEMS IN DEFAULT."
SPECIAL CONDITIONS:
1) PARTIAL DRAWINGS ARE PERMITTED.
2) IT IS A CONDITION OF THIS LETTER OF CREDIT THAT IF A DRAWING HAS BEEN
HONORED BY COMERICA BANK-CALIFORNIA, AND THE ORIGINAL AMOUNT OF THE CREDIT
$265,582.00 HAS NOT BEEN REINSTATED BY AMENDMENT WITHIN 30 DAYS OF SAID
DRAWING, THE BENEFICIARY MAY DRAW FOR THE ENTIRE AVAILABLE BALANCE BY MEANS
OF A SIGHT DRAFT AND A SIGNED STATEMENT WORDED AS FOLLOWS:
"THE AMOUNT OF THIS DRAWING, $_______ UNDER COMERICA BANK-CALIFORNIA, LONG
BEACH, CALIFORNIA IRREVOCABLE LETTER OF CREDIT NO. 539211 DATED MAY 2, 1997
REPRESENTS FUNDS DUE US SINCE WE CERTIFY THAT MASIMO CORPORATION HAVE
FAILED TO REINSTATE THE ORIGINAL AMOUNT OF THE LETTER OF CREDIT WITHIN 30
DAYS OF OUR DRAWING DATED ________ IN THE AMOUNT OF $______ AS REQUIRED IN
THAT CERTAIN LEASE AGREEMENT EXECUTED BETWEEN LESSOR AND LESSEE."
IT IS A CONDITION OF THIS LETTER OF CREDIT THAT IT SHALL BE AUTOMATICALLY
EXTENDED WITHOUT AMENDMENT FOR ONE (1) YEAR FROM THE PRESENT EXPIRATION DATE,
UNLESS AT LEAST THIRTY (30) DAYS PRIOR TO SUCH DATE WE NOTIFY YOU BY REGISTERED,
CERTIFIED MAIL OR COURIER THAT WE ELECT NOT TO RENEW THIS LETTER OF CREDIT FOR
SUCH ADDITIONAL PERIOD. UPON YOUR RECEIPT OF SUCH NOTICE, YOU MAY DRAW ON US BY
MEANS OF YOUR SIGHT DRAFT UP TO THE AVAILABLE VALUE OF THE LETTER OF CREDIT. IN
ANY EVENT, THE FINAL EXPIRY OF THIS
<PAGE> 38
PAGE: 2
LETTER OF CREDIT IS TWO (2) YEARS FROM DATE OF ISSUE.
(FINAL EXPIRY MAY 2, 1999).
ALL DOCUMENTS ARE TO BE FORWARDED TO COMERICA BANK IN ONE COVER BY AIR COURIER
AT BENEFICIARY'S EXPENSE. OUR ADDRESS IS 301 EAST OCEAN BOULEVARD, 18TH FLOOR,
INTERNATIONAL DIVISION, LONG BEACH, CA 90802. DIRECT INQUIRIES TO SWIFT ADDRESS
MNBDUS6S LAX, TELEX 160455.
ALL DRAFTS DRAWN UNDER THIS CREDIT MUST BE MARKED "DRAWN UNDER OUR LETTER OF
CREDIT NO. 539211".
THIS LETTER OF CREDIT IS SUBJECT TO AND GOVERNED BY THE UNIFORM CUSTOMS AND
PRACTICE FOR DOCUMENTARY CREDITS OF THE INTERNATIONAL CHAMBER OF COMMERCE, 1993
REVISION, PUBLICATION 500.
THIS ORIGINAL LETTER OF CREDIT AND ALL AMENDMENTS THERETO MUST BE SUBMITTED TO
US TOGETHER WITH ANY DRAWINGS HEREUNDER FOR OUR ENDORSEMENT OF ANY PAYMENTS
EFFECTED BY US AND/OR FOR CANCELLATION.
WE ENGAGE WITH YOU THAT EACH DRAFT DRAWN UNDER AND IN COMPLIANCE WITH THE TERMS
OF THIS CREDIT WILL BE DULY HONORED ON DELIVERY OF THE DOCUMENTS AS SPECIFIED IF
PRESENTED AT THIS OFFICE ON OR BEFORE APRIL 30, 1998 OR ANY AUTOMATICALLY
EXTENDED DATE.
YOURS VERY TRULY,
_______________________________
AUTHORIZED SIGNATURE
<PAGE> 39
In consideration of the issuance by the Bank of the Credit, the Applicant
hereby agrees with the Bank as follows:
1. The Applicant will reimburse the Bank at its principal office, in cash,
the amount required to pay each instrument, such reimbursement
[ILLEGIBLE] made on demand in the case of each sight draft or receipt,
with interest from the date of payment of the instrument to the date of
reimbursement. Upon the occurrence of an event of default the Applicant
shall pay the Bank in cash an amount sufficient to pay all monies that
are or [ILLEGIBLE] be paid at any time by the Bank or its correspondents
to meet disbursements of any kind made or that may be required to be
made [ILLEGIBLE] the Letter of Credit regardless of whether the
beneficiary under the Letter of Credit has requested payment or whether
those obligations have matured or remain contingent.
2. The Applicant will pay the Bank such commission as has been agreed to,
the reasonable fees and expenses of the Bank in connection with the
Credit according to the Bank's standard practice, as in effect from time
to time, and interest on the amount paid by the Bank and not reimbursed
as provided in paragraph 1 hereof, including all charges and expenses
paid or incurred by the Bank in connection therewith, at the rate of the
lesser of (a) the maximum rate permitted by applicable law, or (b) three
(3%) percent above the Bank's base rate; and effect shall be given to
any change in the interest rate resulting from a change in the base rate
on the date of such change in the base rate. The "base rate" shall mean
the rate of interest established by the Bank from time to time as its
base rate, which may not necessarily be the lowest interest rate charged
by the Bank to its borrowers. Interest shall be computed on the basis of
the actual number of days elapsed, but computed as if each year
consisted of three hundred sixty (360) days. However, if the actual
amount of interest charged for and collected shall ever exceed the
maximum amount permitted by applicable law, interest shall be calculated
on a per diem basis of a year of 365 or 366 days, as the case may be.
The Bank is authorized to charge Applicant's deposit account for all
required payments.
3. If any law or regulation or the interpretation or implementation thereof
by any court or administrative or governmental authority charged with
the administration thereof shall either: (a) impose, modify or deem
applicable any reserve, special deposit, limitation or similar
requirement against letters of credit issued by, or assets held by, or
deposits in or for the account of, the Bank, or (b) impose on the Bank
any insurance premium or other condition regarding this Application or
the Credit, and the result of any event referred to in clause (a) or (b)
above shall be to increase the cost of issuing or maintaining the Credit
over that which the Bank assumed in determining its fees, then, upon
demand by the Bank, the Applicant shall immediately pay to the Bank,
from time to time as specified by the Bank, additional amounts which
shall be sufficient to compensate the Bank for such increased cost,
together with interest on each such amount from the date demanded until
payment in full thereof at the rate and on the terms set forth in
paragraph 2 above. A certificate as to such increased cost incurred by
the Bank as a result of any event mentioned in clause (a) or (b) above,
submitted by the Bank to Applicant, shall be conclusive, absent manifest
error, as to the amount thereof.
4. The Applicant agrees to indemnify and hold the Bank harmless from and
against any and all claims, damages, losses, liabilities, costs or
expenses whatsoever which the Bank may incur (or which may be claimed
against the Bank by any person) by reason of, or in connection with, the
execution and delivery or transfer of, or payment or failure to pay
under, the Credit, or by reason of, or in connection with, any other
matters arising under this Application, or any of the transactions
contemplated hereby; provided, however, the Applicant shall not be
required to indemnify the Bank for any claims, damages, losses,
liabilities, costs or expenses to the extent, but only to the extent,
caused by the willful and wrongful misconduct or gross negligence of the
Bank.
5. The Applicant assumes all risks of the acts or omissions of any
beneficiary or transferee of the Credit with respect to its use of the
Credit. Neither the Bank nor any of its officers or directors shall be
liable or responsible for: (a) the use which may be made of the Credit
or for any acts or omissions of any beneficiary or transferee in
connection therewith; (b) the validity, sufficiency or genuineness of
documents, or of any endorsements thereof, even if such documents should
in fact prove to be in any or all respects invalid, insufficient,
fraudulent or forged; (c) payment by the Bank made against presentation
of documents which substantially comply with the terms of the Credit; or
(d) any other circumstances whatsoever in making or failing to make
payment under the Credit. In furtherance and not in limitation of the
foregoing, the Bank may accept documents that appear on their face to be
in order, without responsibility for further investigation, regardless
of any notice or information to the contrary. The Bank shall not be
responsible for any act, error, neglect or default, omission, insolvency
or failure in business of any of its correspondents. The occurrence of
any one or more of the contingencies referred to in the preceding
clauses of this paragraph shall not affect, impair or prevent the
vesting of any of the Bank's rights or powers hereunder or the
Applicant's obligation to make reimbursement. The Applicant will
promptly examine (i) the copy of the Credit (and any amendments thereof)
sent to it by the Bank and (ii) all documents and instruments delivered
to it from time to time by the Bank, and, in the event of any claim of
noncompliance with Applicant's instructions or other irregularity, will
immediately notify the Bank thereof in writing, the Applicant being
conclusively deemed to have waived any such claim against the Bank and
its correspondents unless such notice is given as aforesaid.
6. The Applicant will pay on demand all reasonable costs and expenses
(including without limitation, reasonable attorneys' fees and legal
expenses) incurred by the Bank in connection with the enforcement of
this Application and such other documents which may be delivered in
connection with this Application or any action or proceeding relating to
a court order, injunction or other process or decree restraining or
seeking to restrain the Bank from paying any amount under the Credit.
7. Except insofar as instructions may be given by the Applicant in writing
or by a Request (as defined in paragraph 9 below) expressly to the
contrary with regard to, and prior to, the Bank's issuance of the
Credit, the Bank may, but shall not be required to, honor, as complying
with the terms of the Credit and the Application, any instruments or
other documents otherwise in order signed or issued by any
administrator, executor, trustee in bankruptcy, debtor in possession,
assignee for the benefit of creditors, liquidator, receiver or other
legal representative of the party authorized under the Credit to draw or
issue such instruments or other documents.
8. These Terms and Conditions and the Credit shall be subject to the
Uniform Customs and Practice (a copy of which is available upon request)
and, in the event any provision of the Uniform Customs and Practice is
or is construed to vary from or be in conflict with any provision of the
California Uniform Commercial Code, as from time to time amended and
enforced (the "Commercial Code"), the Uniform Customs and Practice shall
prevail.
9. The Applicant authorizes the Bank to honor the Applicant's orders to
issue, amend or pay the Credit for the Applicant's account and risk upon
a request communicated to the Bank by telegram, telex, computer,
facsimile transmission, or other electronic means (a "Request") subject
to the following: (a) a Request shall be made only by those persons
authorized by the Applicant in accordance with the Bank's established
requirements and the Bank shall not be obligated to identify such
persons so authorized beyond the use of the authorized name or code
identification if any is established, (b) all Requests will be confirmed
by the Bank in writing by sending to the Applicant a copy of the
documents authorized or requested by the Applicant and the Applicant
agrees promptly to examine such documents and to report any
discrepancies promptly upon receipt of such confirmation, (c) if
frequent Requests are to be made, the Bank may, but shall not be
obligated to, assign a unique code number or word and require that such
code be used by the Applicant (and if such a code number or word is
established, all further Requests shall refer to such code), (d) the
Bank shall not be liable for any loss that the Applicant may incur as a
result of the Bank's compliance with a Request in accordance with this
Application even if unauthorized, provided that the Bank acted in good
faith, and the Applicant indemnifies the Bank and holds the Bank
harmless for any such loss, (e) the Bank will not be liable for any
delays in honoring any Request, nor for any delays caused by others to
whom the Bank may transmit such Request either at the Applicant's
direction or otherwise and the Bank will not be required to honor
Requests on the day on which Requests are received unless the Bank has
agreed to do so and the Applicant has caused such Request to be received
before the time the Bank has specified to honor such Request, (f) the
Bank shall not be obligated to honor any Requests provided that the Bank
has notified the Applicant by telephone or other prompt means, (g) all
Requests shall be subject to the terms of this Application and any other
written or electronic agreement entered into with the Bank by the
Applicant in connection with any transaction relating to such Request.
Bank may record any Request made by telephone and any other telephone
communications between the Applicant and the Bank regarding the Credit.
<PAGE> 40
10. All funds, property and account balances of the Applicant with or in the
Bank's possession or any of the Bank's agents or correspondents at any
time, whether before or after any default, shall secure the obligations of
the Applicant hereunder and the Applicant hereby grants the Bank a security
interest in the same for the purpose of securing such obligations. In the
event of default by Applicant hereunder, the Bank shall have all remedies
available to the Bank under the Commercial Code.
11. Upon the death of any Applicant, or if any of the obligations and/or
liabilities of the Applicant to the Bank shall not be paid or performed
when due; or if there is a breach in any warranty or representation herein;
or if the Applicant shall become insolvent (however such insolvency may be
evidenced) or commit any act of bankruptcy or insolvency, or make a general
assignment for the benefit of creditors; or if the Applicant shall suspend
the transaction of its usual business or be expelled or suspended from any
exchange; or if any application is made by any judgment creditor of the
Applicant for an order directing the Bank to pay money or deliver other
property (and the Applicant is unable to have such order set aside within
45 days of notice thereof); or if a petition in bankruptcy shall be filed
by or against the Applicant or a petition or any proceeding shall be filed
or instituted by or against the Applicant for any relief under any
bankruptcy or insolvency laws or any law relating to the relief of debtors,
readjustment of indebtedness, reorganization, composition or extension; or
if any governmental authority, or any court at the instance of any
governmental authority, shall take possession of any substantial part of
the property of the Applicant or shall assume control over the affairs or
operations of the Applicant, or if a receiver shall be appointed of, or a
writ of order of attachment or garnishment shall be issued or made against,
any of the property or assets of the Applicant (and the Applicant is unable
to have such order or attachment set aside within 45 days of the entry
thereof); or if the Bank shall in good faith deem itself insecure at any
time; thereupon, unless the Bank shall otherwise elect, any and all
obligations and liabilities of the Applicant to the Bank hereunder, whether
now existing or hereafter incurred, shall become and be due and payable
forthwith without presentation, demand or notice, all of such are waived,
and the Bank is hereby authorized to sell immediately, without demand for
payment, advertisement or notice to the Applicant, all of which are hereby
expressly waived, at private sale or at public auction, any property
shipped or to be shipped under the credit in which the Applicant may have
any interest, applying the proceeds, less the reasonable costs and expenses
of such sale and any other reasonable expenses paid or incurred in respect
of said property, in and towards any indebtedness of the Applicant to the
Bank, paying the surplus to the Applicant or the Applicant's legal
representative.
12. The Applicant submits, in any legal proceeding related to the Application
or the Credit, to the nonexclusive jurisdiction over the person of the
Applicant of any court of competent jurisdiction sitting in the State of
California and agrees to a suit being brought in any such court, waives any
objection that it may now have or hereafter have to the venue of such
proceeding in any such court or that such proceeding was brought in an
inconvenient court; agrees that service of process and any such legal
proceeding may be made, and shall be conclusively deemed sufficient and
adequate, by mailing of copies thereof (by registered or certified mail, if
practicable) postage prepaid, or by teletransmission to the Applicant at
its address set forth herein or such other address of which the Bank shall
be notified in writing, in which event, service shall be deemed complete
upon the filing with the court of a copy of the process mailed or sent and
an affidavit attesting the mailing or sending. The Applicant agrees that
nothing herein shall affect the Bank's right to effect service of process
in any other manner permitted by law.
13. The Bank shall not be deemed to have waived any of its rights hereunder,
unless the Bank or its authorized agents shall have signed such waiver in
writing. No such waiver unless expressly as stated therein, shall be
effective as to any transaction which occurs subsequent to the date of such
waiver, nor as to any continuance of a breach after such waiver.
14. The obligations hereof shall bind the successors and assigns of the
Applicant, and all rights, benefits and privileges conferred on the Bank
shall be and are extended to and conferred upon and may be enforced by its
successors and assigns. If the Applicant is a partnership, the obligations
hereof shall continue in force and apply, notwithstanding any change in the
membership of such partnership, whether arising from the death or
retirement of one or more partners or the accession of one or more new
partners. If this Application is signed by two or more Applicants, it shall
be the joint and several agreement of each Applicant.
15. Except as otherwise provided herein, any notice from the Bank to the
Applicant, if mailed, shall be deemed given when mailed, postage paid,
addressed to the Applicant at its address set forth herein or such other
address of which the Bank shall be notified in writing. Whenever possible
each provision of this Application shall be interpreted in such manner as
to be effective and valid under applicable law, but if any provision of
this Application shall be prohibited by or invalid under applicable law,
such provision shall be ineffective only to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Application.
16. Subject to the provisions of paragraph 8 above, this Application and all
rights, obligations and liabilities arising hereunder shall be both
governed by, and construed in accordance with, the law of the State of
California.
17. The Applicant acknowledges and agrees that the Credit is not collateral or
security for any obligation secured by real property and that it is not
intended to guaranty or relate in any way to any obligation secured by real
property. The Applicant further acknowledges and agrees that Credit is not
governed by the California antideficiency statutes (Code Civ. Proc.,
sections 580a, 580b, and 580d), the One-Action Rule (Code Civ. Proc.,
section 726) or the Security-First Rule (Code Civ. Proc., section 726), and
that it constitutes a separate and independent obligation.
18. The Applicant agrees that the Bank may provide information relating to this
Application, any Credit, or relating to the Applicant to the Bank's parent,
affiliates, subsidiaries and service providers.
19. This Agreement, any collateral documents relating to security for the
Credit, and any Requests constitute the entire agreement of the parties
with respect to the subject matter hereof, and except as provided in
paragraph 9, this Application may not be amended except in writing signed
by both parties.
In consideration of your issuing the Credit, as requested in this application,
the Applicant agrees to all terms and conditions of the Agreement set forth
above, including but not limited to the payment obligations therein set forth.
The Applicant is referred to as the "Applicant" in such terms and conditions.
APPLICANT
MASIMO CORPORATION
- -----------------------------------------
NAME
[SIG] V.P. Finance, CFO
- -----------------------------------------
AUTHORIZED SIGNATURE/TITLE
- -----------------------------------------
AUTHORIZED SIGNATURE/TITLE
IMPORTANT; Please indicate the name of the persons authorized to waive
discrepancies, if any, found in the documents upon presentation.
( ) ( )
- --------------------------------------------------------------------------------
NAME TELEPHONE NO. FACSIMILE
<PAGE> 41
[COMERICA LOGO]
- -------------------------------------------------------------------------------
COMERICA BANK-CALIFORNIA Comerica Bank Tower
April 16, 1996 611 Anton Boulevard, Suite 100
Costa Mesa, California 92626-1904
Brad Langdale
Masimo Corporation
23361 Madero Street, Ste 100
Mission Viejo, CA 92691
Dear Brad:
In reference to the Variable Rate - Single Payment Note Dated April 16, 1997
("Agreement"), in the amount of One Million Seven Hundred Thousand Fifty
Dollars ($1,750,000) between Comerica Bank - California ("Comerica") and
Masimo Corporation ("Obligor"). Obligor and Comerica desire to amend said
Agreement. This amendment shall be call the first Amendment to the Agreement.
The following terms and conditions are added:
1) Amounts advanced will be 80% of the cost of the items purchased.
2) A sub-limit of up to $250,000 for leasehold improvements will be
allowed. Eligible equipment will include up to $300,000 for equipment
purchased in the third quarter of the 1997 fiscal year. Borrower to
submit evidence of purchases prior to advancing under this facility.
At the expiration of the line of credit, the amounts outstanding will be
amortized over 48 months, (equal principal payments with interest added).
If you agree to accept the terms of this Amendment, please sign the enclosed
and return it to me with the enclosed documentation, but not later than May 31,
1997.
Very Truly Yours,
/s/ Thomas M. Hicks
- --------------------------
Thomas M. Hicks
Vice President
Comerica Bank - California
Agreed and Accepted this 14th day of
May, 1997
Masimo Corporation
"Obligor"
By: [SIGNATURE]
Its: Chief Financial Officer
<PAGE> 42
[COMERICA LOGO]
VARIABLE RATE-SINGLE PAYMENT NOTE
- --------------------------------------------------------------------------------
AMOUNT NOTE DATE MATURITY DATE TAX IDENTIFICATION #
$1,750,000.00 APRIL 16, 1997 APRIL 30, 1998 33-0368882
- --------------------------------------------------------------------------------
On the Maturity Date, as stated above, for value received the undersigned
promise(s) to pay to the order of COMERICA BANK-CALIFORNIA ("Bank"), at any
office of the Bank in the State of California, ONE MILLION SEVEN HUNDRED FIFTY
THOUSAND AND NO/100 Dollars (U.S.) with interest from the date of this Note at
a per annum rate equal to the Bank's base rate from time to time in effect PLUS
1.500% per annum, until maturity, whether by acceleration or otherwise, or
until Default, as later defined, and after that at a default rate equal to the
rate of interest otherwise prevailing under this Note plus 3% per annum (but in
no event in excess of the maximum rate permitted by law). The Bank's "base rate"
is that annual rate of interest so designated by the Bank and which is changed
by the Bank from time to time. Interest rate changes will be effective for
interest computation purposes as and when the Bank's base rate changes.
Interest shall be calculated for the actual number of days the principal is
outstanding on the basis of a 360-day year if this Note evidences a business or
commercial loan or a 365-day year if a consumer loan. Accrued interest on this
Note shall be payable on either (i) [ ] the Maturity Date or (ii) [X] the 30TH
day of each MONTH commencing MAY 30, 1997, until the Maturity Date when all
amounts outstanding under this Note shall be due and payable in full. If the
frequency of interest payments is not otherwise specified, accrued interest on
this Note shall be payable monthly on the first day of each month. If any
payment of principal or interest under this Note shall be payable on a day
other than a day on which the Bank is open for business, this payment shall be
extended to the next succeeding business day and interest shall be payable at
the rate specified in this Note during this extension. A late payment charge
equal to 5% of each late payment may be charged on any payment not received by
the Bank within 10 calendar days after the payment due date, but acceptance of
payment of this charge shall not waive any Default under this Note.
This Note and any other indebtedness and liabilities of any kind of the
undersigned (or any of them) to the Bank, and any and all modifications,
renewals or extensions of it, whether joint or several, contingent or absolute,
now existing or later arising, and however evidenced (collectively
"Indebtedness") are secured by and the Bank is granted a security interest in
all items deposited in any account of any of the undersigned with the Bank and
by all proceeds of these items (cash or otherwise), all account balances of any
of the undersigned from time to time with the Bank, by all property of any of
the undersigned from time to time in the possession of the Bank and by any
other collateral, rights and properties described in each and every deed of
trust, mortgage, security agreement, pledge, assignment and other security or
collateral agreement which has been, or will at any time(s) later be, executed
by any (or all) of the undersigned to or for the benefit of the Bank
(collectively "Collateral"). Notwithstanding the above, (i) to the extent that
any portion of the Indebtedness is a consumer loan, that portion shall not be
secured by any deed of trust or mortgage on or other security interest in any
of the undersigned's principal dwelling or in any of the undersigned's real
property which is not a purchase money security interest as to that portion,
unless expressly provided in the contrary in another place, or (ii) if the
undersigned (or any of them) has(have) given or give(s) Bank a deed of trust or
mortgage covering real property, that deed of trust or mortgage shall not
secure this Note or any other indebtedness of the undersigned (or any of them),
unless expressly provided to the contrary in another place.
If the undersigned (or any of them) or any guarantor under a guaranty of all or
part of the Indebtedness ("guarantor") (i) fail(s) to pay any of the
Indebtedness when due, by maturity, acceleration or otherwise, or fail(s) to
pay any Indebtedness owing on a demand basis upon demand; or (ii) fail(s) to
comply with any of the terms or provisions of any agreement between the
undersigned (or any of them) or any guarantor and the Bank; or (iii) become(s)
insolvent or the subject of a voluntary or involuntary proceeding in
bankruptcy, or a reorganization, arrangement or creditor composition
proceeding, (if a business entity) cease(s) doing business as a going concern,
(if a natural person) die(s) or become(s) incompetent, (if a partnership)
dissolve(s) or any general partner of it dies or becomes incompetent or becomes
the subject of a bankruptcy proceeding or (if a corporation or a limited
liability company) is the subject of a dissolution, merger or consolidation; or
(a) if any warranty or representation made by any of the undersigned or any
guarantor in connection with this Note or any of the Indebtedness shall be
discovered to be untrue or incomplete; or (b) if there is any termination,
notice of termination, or breach of any guaranty, pledge, collateral assignment
or subordination agreement relating to all or any part of the Indebtedness; or
(c) if there is any failure by any of the undersigned or any guarantor to pay
when due any of its indebtedness (other than to the Bank) or in the observance
or performance of any term, covenant or condition in any document evidencing,
securing or relating to such indebtedness; or (d) if the Bank deems itself
insecure believing that the prospect of payment of this Note or any of the
Indebtedness is impaired or shall fear deterioration, removal or waste of any
of the Collateral; or (e) if there is filed or issued a levy or writ of
attachment or garnishment or other like judicial process upon the undersigned
(or any of them) or any guarantor or any of the Collateral, including without
limit, any accounts of the undersigned (or any of them) or any guarantor with
the Bank, then the Bank, upon the occurrence of any of these events (each a
"Default"), may at its option and without prior notice to the undersigned (or
any of them), declare any or all of the Indebtedness to be immediately due and
payable (notwithstanding any provisions contained in the evidence of it to the
contrary), sell or liquidate all or any portion of the Collateral, set off
against the Indebtedness any amounts owing by the Bank to the undersigned (or
any of them), charge interest at the default rate provided in the document
evidencing the relevant Indebtedness and exercise any one or more of the rights
and remedies granted to the Bank by any agreement with the undersigned (or any
of them) or given to it under applicable law. In addition, if this Note is
secured by a deed of trust or mortgage covering real property, then the trustor
or mortgager shall not mortgage or pledge the mortgaged premises as security
for any other indebtedness or obligations. This Note, together with all other
indebtedness secured by said deed of trust or mortgage, shall become due and
payable immediately, without notice, at the option of the Bank, (a) if said
trustor or mortgagor shall mortgage or pledge the mortgaged premises for any
other indebtedness or obligations or shall convey, assign or transfer the
mortgaged premises by deed, installment sale contract or other instrument, or
(b) if the title to the mortgaged premises shall become vested in any other
person or party in any manner whatsoever, or (c) if there is any disposition
(through one or more transactions) of legal or beneficial title to a
controlling interest of said trustor or mortgagor. All payments under this Note
shall be in immediately available United States funds, without setoff or
counterclaim.
If this Note is signed by two or more parties (whether by all as makers or by
one or more as an accommodation party or otherwise), the obligations and
undertakings under this Note shall be that of all and any two or more jointly
and also of each severally. This Note shall bind the undersigned, and the
undersigned's respective heirs, personal representatives, successors and
assigns.
The undersigned waive(s) presentment, demand, protest, notice of dishonor,
notice of demand or intent to demand, notice of acceleration or intent to
accelerate, and all other notices, and agree(s) that no extension or indulgence
to the undersigned (or any of them) or release, substitution or nonenforcement
of any security, or release or substitution of any of the undersigned, any
guarantor or any other party, whether with or without notice, shall affect the
obligations of any of the undersigned. The undersigned waive(s) all defenses or
right to discharge available under Section 3-605 of the California Uniform
Commercial Code and waive(s) all other suretyship defenses or right to
discharge. The undersigned agree(s) that the Bank has the right to sell,
assign, or grant participations, or any interest, in any or all of the
Indebtedness, and that, in connection with this right, but without limiting its
ability to make other disclosures to the full extent allowable, the Bank may
disclose all documents and information which the Bank now or later has relating
to the undersigned or the Indebtedness. The undersigned agree(s) that the Bank
may provide information relating to this Note or to the undersigned to the
Bank's parent, affiliates, subsidiaries and service providers.
The undersigned agree(s) to reimburse the holder or owner of this Note for any
and all costs and expenses (including without limit, court costs, legal
expenses and reasonable attorney fees, whether inside or outside counsel is
used, whether or not the suit is instituted and, if suit is instituted, whether
at the trial court level, appellate level, in a bankruptcy, probate or
administrative proceeding or otherwise) incurred in collecting or attempting to
collect this Note or incurred in any other matter or proceeding relating to
this Note.
CA 00179 (12-94)
<PAGE> 43
The undersigned acknowledge(s) and agree(s) that there are no contrary
agreements, oral or written, establishing a term of this Note and ????? that the
terms and conditions of this Note may not be amended, waived or modified except
in a writing signed by an officer of the Bank expressly stating that the writing
constitutes an amendment, waiver or modification of the terms of this Note. As
used in this Note, the word "undersigned" means, individually and collectively,
each maker, accommodation party, indorser and other party signing this Note in a
similar capacity. If any provision of this Note is unenforceable in whole or
part for any reason, the remaining provisions shall continue to be effective.
THIS NOTE IS MADE IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA,
WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
THE MAXIMUM INTEREST RATE SHALL NOT EXCEED THE HIGHEST APPLICABLE USURY CEILING.
THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR
HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY
AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY
JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR
IN ANY WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS.
THIS NOTE IS SUBJECT TO THE TERMS OF A REVOLVING LOAN AND SECURITY AGREEMENT
DATED APRIL 16, 1997.
FOR CORPORATIONS, PARTNERSHIPS, TRUST OR ESTATES
<TABLE>
<S> <C> <C>
MASIMO CORPORATION By: [SIGNATURE] Its: Chief Financial Officer
- ------------------------------ --------------------------- --------------------------
OBLIGOR NAME TYPED/PRINTED SIGNATURE OF TITLE
23361 MADERO STREET, SUITE 100 By: Its:
- ------------------------------ --------------------------- --------------------------
STREET ADDRESS SIGNATURE OF TITLE
MISSION VIEJO By: Its:
- ------------------------------ --------------------------- --------------------------
CITY SIGNATURE OF TITLE
CA 92691 By: Its:
- ------------------------------ --------------------------- --------------------------
STATE ZIP CODE SIGNATURE OF TITLE
FOR INDIVIDUALS OR SOLE PROPRIETORSHIPS
NAME(S) OF OBLIGOR(S) (TYPE OR PRINT) SIGNATURE(S) OF OBLIGOR(S)
------------------------------- ------------------------------
- ------------------------------ ------------------------------- ------------------------------
STREET ADDRESS
- ------------------------------ ------------------------------- ------------------------------
CITY
- ------------------------------ ------------------------------- ------------------------------
STATE ZIP CODE
- ------------------------------------------------------------------------------------------------------
For Bank Use Only CCAR #
- ------------------------------------------------------------------------------------------------------
Loan Officer Initials Loan Group Name Obligor(s) Name
THOMAS M. HICKS HIGH TECH. SOUTH MASIMO CORPORATION
- ------------------------------------------------------------------------------------------------------
Loan Officer I.D. No. Loan Group No. Obligor # Note # Amount
48711 95829 $1,750,000.00
- ------------------------------------------------------------------------------------------------------
CA 00179 (12-94)
</TABLE>
<PAGE> 1
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------------- ----------------
<S> <C> <C>
Net loss ($3,228,489) ($2,765,470)
Accretion of redemption value on preferred stock (722,003) (1,563,712)
----------------- ----------------
Net loss applicable to common stockholders ($3,950,492) ($4,329,182)
================= ================
Net loss per common share ($1.45) ($1.54)
================= ================
Weighted average common shares outstanding 2,726,118 2,812,083
================= ================
</TABLE>
Primary and fully diluted net loss per share do not differ.
39
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 8,084,925
<SECURITIES> 0
<RECEIVABLES> 162,179
<ALLOWANCES> 0
<INVENTORY> 211,781
<CURRENT-ASSETS> 8,559,122
<PP&E> 1,168,751
<DEPRECIATION> (422,987)
<TOTAL-ASSETS> 9,822,490
<CURRENT-LIABILITIES> 735,856
<BONDS> 0
19,760,814
1,394,246
<COMMON> 2,832
<OTHER-SE> (146,723)
<TOTAL-LIABILITY-AND-EQUITY> 9,822,490
<SALES> 267,065
<TOTAL-REVENUES> 367,065
<CGS> 632,791
<TOTAL-COSTS> 632,791
<OTHER-EXPENSES> 3,826,270
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,764,670)
<INCOME-TAX> 800
<INCOME-CONTINUING> (2,765,470)
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<CHANGES> 0
<NET-INCOME> (2,765,470)
<EPS-PRIMARY> (1.54)
<EPS-DILUTED> (1.54)
</TABLE>
