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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 1997
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-26670
NORTH AMERICAN SCIENTIFIC, INC.
(Name of small business issuer in its charter)
Delaware 51-0366422
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7435 Greenbush Avenue
North Hollywood, CA 91605
(Address of principal executive (Zip Code)
offices)
Issuer's telephone number: (818) 503-9201
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of class)
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(Title of class)
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
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Check if no disclosure of delinquent filers in response to item 405 of
Regulation SB is 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
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Issuer's revenues for its most recent fiscal year were $3,381,400.
At January 21, 1998, there were 4,251,201 shares of the registrant's common
stock outstanding. As of said date, the aggregate market value of the voting
stock held by non-affiliates of the registrant (computed by reference to the
closing sale price on such date) was approximately $82,533,649.
Documents incorporated by reference: Proxy Statement for the Registrant's 1998
Annual Meeting of Stockholders, in Part III hereof.
Transitional Small Business Disclosure Format: Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
CERTAIN MATTERS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-KSB ARE
FORWARD LOOKING AS THAT TERM IS DEFINED BY: (I) THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 (THE "1995 ACT") AND (II) RELEASES ISSUED BY
THE SEC. THESE STATEMENTS ARE BEING MADE PURSUANT TO THE PROVISIONS OF THE
1995 ACT AND WITH THE INTENTION OF OBTAINING THE BENEFITS OF THE "SAFE
HARBOR" PROVISIONS OF THE 1995 ACT. THE COMPANY CAUTIONS INVESTORS THAT ANY
FORWARD LOOKING STATEMENTS MADE BY THE COMPANY ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE IN SUCH
FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING, BUT NOT
LIMITED TO THE RISKS DETAILED HEREIN OR DETAILED FROM TIME TO TIME IN THE
COMPANY'S FILINGS WITH THE SEC.
Through its wholly-owned subsidiary North American Scientific, Inc., a
California corporation, North American Scientific, Inc., a Delaware
corporation (the "Company"), manufactures and markets a broad line of
low-level radiation sources and standards for medical, scientific and
industrial uses. The Company currently operates in two principal business
areas: (i) radioactive "reference" sources, which are sealed devices
containing radioactive sources used to calibrate a variety of medical and
commercial equipment; and (ii) interstitial radioactive brachytherapy
sources, sometimes called "seeds," which are small, implantable radioactive
"pellets" used for the treatment of cancer and certain other diseases. The
Company has been in the business of manufacturing radioactive sources since
1990 and recently expanded its business strategy to include the development
of brachytherapy products. In June 1997, the Company entered into agreements
with Mentor Corporation, a Delaware corporation ("Mentor"), pursuant to which
Mentor will distribute the Company's Iodine (125) ("I(125)") brachytherapy
seeds. Additionally, through its relationship with RadioMed Corporation, a
Delaware corporation ("RadioMed"), the Company is expanding its presence in
the field of radioactive medical devices by leveraging RadioMed's expertise
in ion implantation to identify and commercialize other novel medical
products and services. RadioMed is a newly-formed company in which the
Company made an investment in October, 1997. For the term of the agreement
between the Company and RadioMed, the Company will be the exclusive
manufacturer for all of RadioMed's requirements for radioactive medical
devices using ion implantation technology in North America.
The Company was originally organized in 1987 and became a Delaware
corporation on April 20, 1995.
RADIATION CALIBRATION AND REFERENCE SOURCE BUSINESS
Radioactivity is a natural physical property. Each radioactive isotope
("radioisotope") radiates energy characteristic to that specific isotope.
Radiation detection instruments monitor the emitted radiation from a given
sample (i.e., soil, air, water, etc.) to identify and quantify the
radioisotopes present in that sample. In order to determine a particular
instrument's efficiency, an accurately measured and contained amount of a
radioactive isotope is required to serve as a calibration reference standard.
Each type of sample being monitored by an instrument typically requires a
radiation source standard of identical form and geometry to the sample. The
fact that a radiation standard and sample geometry preferably must be
identical, combined with the existence of several hundred radioisotopes,
results in the need for a great many different radiation standards.
The Company's principal products in this business are its radiation
sources and standards, which are used in a variety of areas for calibration,
measurement and control.
A. STANDARDS FOR NUCLEAR MEDICINE
Nuclear medicine is practiced at over 5,000 U.S. hospitals. Consistent
performance of imaging and calibration instrumentation is crucial to
successful diagnostics and patient management and cannot be maintained
without extensive calibration programs. The Company supplies many of the
required types of sources and standards.
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B. STANDARDS FOR ENVIRONMENTAL MONITORING AND ANALYSIS
The Company manufactures both uniform products and customized products for
commercial laboratories serving the environmental sector. Calibration standards
are critical for accurate environmental analysis of unknown samples collected in
the field.
c. STANDARDS FOR INDUSTRIAL APPLICATIONS
The Company's products have a variety of industrial uses, ranging from
measuring the thickness of materials and gauging fluid levels to electronics
stabilization and calibration.
D. STANDARDS FOR GOVERNMENT AGENCIES AND RESEARCH FACILITIES
The Company makes standards available to various organizations including
certain government agency contractors and laboratories. These standards are
often designed to meet special requirements, customized configurations or
special processing services.
MARKETING AND SALES
The Company's radiation sources are sold through a select group of
representatives and distributors in North America, Europe and the Far East.
The Company supports its products with a full product catalog, advertising
and telemarketing and through trade shows. The Company engages in direct
selling to end users and also sells to equipment manufacturers for inclusion
in their product lines. In 1995, the Company entered into an agreement with
CIS-US, a Massachusetts based subsidiary of CIS-Biointernational, a French
company. CIS acts as the exclusive distributor in the U.S. for certain of
the Company's nuclear medicine products.
The Company's commercial customers include federal and state
governmental agencies, leading medical equipment manufacturers and nuclear
utilities, among others and private organizations. During the 1997 and 1996
fiscal years, revenues from two customers in this industry accounted for 71%
and 65%, respectively, of total revenues.
MANUFACTURING
Radioisotopes are purchased primarily from government facilities around
the world or are manufactured by irradiation of target materials in
third-party commercial facilities. The Company radiochemically processes and
purifies these isotopes in its laboratories. Once purified, these materials
are further processed and contained and calibrated by the Company.
The Company is dependent upon a limited number of outside unaffiliated
suppliers for its radioisotopes, including Nordion International, Inc. and
The Los Alamos National Laboratories. The Company believes that it will be
able to continue to obtain required radioisotopes from these or other
sources, although there can be no assurance thereof. The delay or
unavailability of radioisotopes would have a material adverse effect on the
Company's production and sales levels.
COMPETITION
The radiation reference source business is subject to intense
competition. Most of the Company's major competitors are substantially larger
in size and have greater financial resources than the Company. Foremost
among its competitors are Amersham International, a public company
headquartered in England, and Dupont. The Company believes that these
companies have a dominant position in the market for radiation reference
source products. However, the Company believes that it competes favorably
with these and its other competitors on the basis of price, a diverse product
line, customer service, quality and delivery time. In addition to the
competition from other manufacturers of I(125) based products, products using
alternative technologies may continue to be developed which will compete with
the Company's products. There can be no assurance, however, that the Company
will be able to continue to successfully compete with its competitors.
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INTERSTITIAL BRACHYTHERAPY SOURCE BUSINESS
In February 1997, the Company was granted 510(k) clearance from the FDA
for an I(125) radioactive brachytherapy source which is designed for use by
urologists for the treatment of prostate cancer in a brachytherapy procedure
referred to as "seeding". In this brachytherapy procedure, a number of
radioactive sources (currently either I(125) or Pd(103)) are inserted into the
prostate, using thin, hollow needles, to treat cancerous prostatic tissue.
Independent clinical studies investigating the safety and efficacy of
brachytherapy have demonstrated that brachytherapy appears to be as effective
as Radical Prostatectomy ("RP"), with lower incidences of side effects and at
a significantly lower cost. Brachytherapy is gaining wide acceptance from the
urological community as a safe and effective treatment for patients with
prostate cancer at an early stage of the disease. In June 1997, the Company
filed a second 510(k) application for marketing clearance of an I(125)-based
seed that contains two small gold alloy markers to assist physicians in
determining seed orientation and location using x-rays or fluoroscopy, which
was approved by the FDA on October 28, 1997. Also, in June 1997, the
Company entered into an exclusive worldwide sales and marketing relationship
with Mentor for its I(125)-based brachytherapy products for the treatment of
prostate cancer. Mentor is a leading provider of urology products in the
United States and expects to launch the product through its urology
salesforce. On August 1, 1997, the Company filed for a U.S. patent on its
I(125) brachytherapy product design to be marketed by Mentor under Mentor's
trade name IOGOLD-TM-. On January 5, 1998, the Company and Mentor formally
launched the IOGOLD-TM- product.
Prostate cancer is the most prevalent form of cancer in men in the
United States. The American Cancer Society estimates that 317,000 new cases
of prostate cancer were diagnosed in the United States in 1996 and that in
excess of 40,000 deaths are attributable to prostate cancer each year. The
cost of medical treatment in the United States for patients with prostate
cancer is estimated to be approximately $3 billion annually. Currently, the
most prevalent therapy for prostate cancer is RP, which is an invasive
surgical procedure. Although effective, this therapy is costly (estimated to
cost between $20,000 and $30,000), requires a two- to three-day hospital stay
with several weeks of recovery time, and often results in undesired side
effects, such as impotence and incontinence. A brachytherapy procedure, on
the other hand, costs approximately $10,000 - $15,000, is performed on an
outpatient basis under local anesthesia with a two- to three-day recovery
period, and has a comparatively low incidence of side effects.
The Company intends to develop additional medical devices that it
believes will complement its I(125) brachytherapy product line. These products
may include a Pd(103)-based brachytherapy seed intended for use in prostate and
other cancers, as well as radioactive, biocompatible devices for therapeutic
applications. In September 1997, the Company filed a 510(k) application for
marketing clearance of a Pd(103)-based brachytherapy seed utilizing the
Company's proprietary design.
RadioMed is also developing devices intended for implantation in the
body for treatment of various proliferative diseases or subsequent to surgery
to prevent or delay re-occlusion of structures blocked by arteriosclerotic
deposits or by tumors. The RadioMed devices are intended to deliver a
therapeutic dose of radiation over time to reduce the risk of disease
recurrence.
MENTOR RELATIONSHIP
On June 16, 1997, the Company entered into an exclusive worldwide
distribution agreement with Mentor to market and sell all I(125) brachytherapy
sources for the treatment of prostate cancer, which will be marketed by
Mentor under its trade name IOGOLD-TM-. Under the terms of the five year
agreement, Mentor is responsible for all sales and marketing activities,
including the education and training of urologists, radiation oncologists and
other personnel involved in the use of brachytherapy seeds. The Company
manufactures and ships the brachytherapy seeds in exchange for a fixed
percentage of the sales price received by Mentor, subject to an agreed upon
minimum transfer price. The agreement also provides Mentor (subject to
certain conditions) with exclusive marketing and distribution rights to any
Pd(103)-based brachytherapy seeds the Company may develop, and contemplates
that Mentor will have the right to negotiate with the Company on future
radioactive implantable devices addressing the prostate cancer market.
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Pursuant to the stock purchase agreement between the parties, Mentor
purchased 250,000 shares of Common Stock at $4.00 per share, (the approximate
market price of the Common Stock at the time of investment). In addition,
the stock purchase agreement between the parties provides that, upon
clearance by the FDA of the 510(k) application for IOGOLD-TM- Mentor will
purchase $2,000,000 of Preferred Stock. At the Company's sole discretion,
the Mentor Preferred Stock, if issued, may be redeemed by the Company at any
time within five years after the date of issuance at par value plus any
accrued and unpaid dividends. If the Company decides not to redeem the Mentor
Preferred Stock, Mentor may convert the Mentor Preferred Stock, after five
years from the date of issuance, into Common Stock at a conversion price of
$6.00 per share, subject to adjustment for certain diluting events. In light
of the Company's recent private offering of Common Stock and the redemption
provisions of the Preferred Stock , the Company and Mentor may choose not to
effectuate the Preferred Stock purchase.
The Company believes that the alliance with Mentor will provide for
accelerated market penetration and increased sales of I(125) brachytherapy
sources without the need for developing a comprehensive sales, marketing and
product training staff, while allowing the Company to focus on the
manufacturing and development of additional brachytherapy products and other
radioactive source materials. The Company intends to develop additional
brachytherapy sources utilizing different isotopes, including Pd(103). Under
the terms of the alliance, Mentor has the right to negotiate with the Company
for the distribution of Pd(103) brachytherapy seeds. If the Company and Mentor
are successful in negotiating terms on Pd(103) brachytherapy sources, the
Company believes Mentor will hold a significant marketing advantage over
other radioactive seed distributors due to the breadth of its product line.
The Company believes Mentor is the preferred distribution partner due to
Mentor's reputation in the marketplace as a knowledgeable urology
distribution organization. Mentor currently distributes a broad line of
urology products and has a dedicated sales force targeting urologists and
radiation oncologists.
Mentor is a publicly traded company (NMS - "MNTR") which is based in
Minneapolis, Minnesota. According to its Annual Report on Form 10-K for the
fiscal year ended March 31, 1997, during that fiscal year Mentor had total
sales of $203.4 million.
RADIOMED TRANSACTION
On October 7, 1997, the Company and RadioMed entered into a strategic
alliance which created the first entity in North America intended to provide
ion implantation of radioisotopes in commercially viable quantities. RadioMed
is a newly formed privately-held company which has been organized to
specialize in ion implantation of radioactive elements and the development of
therapeutic devices for the delivery of site-specific, low level radiation.
RadioMed's proprietary technology will allow the Company to implant a
radioactive element into virtually any substrate. A substrate is "activated"
by implanting charged, radioactive elements which have been accelerated to
speeds capable of penetrating the surface of the substrate, thereby fixing
the radioactive element at the molecular level. Non-radioactive ion
implantation is currently used to create hybrid materials for a variety of
medical, commercial and industrial applications. Radiation has long been used
as a therapy to control rapidly proliferating cells, such as cancer.
However, the inability to effectively administer the radiation to a localized
area and to control the amount of tissue which will be destroyed has limited
its potential therapeutic applications. With the recent advances in
site-specific drug delivery technologies, many companies are evaluating the
possibility of developing medical devices using radiation therapy. Management
believes that certain disease conditions (e.g. restenosis and certain
localized cancers) may best be treated by implantable, biocompatible
radioactive devices and that RadioMed's proprietary ion implantation
capabilities will provide a superior platform from which to develop novel,
site-specific radiation therapy products.
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RadioMed's strategy is to (i) offer ion implantation services to third
parties developing radioactive medical devices and (ii) develop, for its own
account, proprietary therapeutic products utilizing its site-specific
radiation delivery technology. RadioMed will conduct the necessary research
and development efforts in order to identify new indications and the most
appropriate materials to deliver therapy to such indications. The alliance
provides that the Company will perform and oversee the ion implantation
services and will receive payments from RadioMed for all such services.
As part of the transaction, the Company purchased a ten-year, ten
percent (10%) secured subordinated convertible note (the "Note") from
RadioMed. At the Company's option, the Note is convertible into RadioMed
Series A convertible preferred stock. The Series A convertible preferred
stock can, in turn, be converted into a substantial minority interest of
RadioMed's common stock. As a result of the agreement, RadioMed added Irwin
J. Gruverman and L. Michael Cutrer to its Board of Directors. Pursuant to
the Company's agreements with RadioMed, the Company is in the process of
establishing an ion implantation facility at the Company's North Hollywood,
California location. The Company's commitments to RadioMed required, and may
continue to require, the hiring of additional personnel.
GOVERNMENT REGULATION
FDA REGULATION
The manufacture and sale of the Company's products are subject to
stringent government regulation in the U.S. and other countries. FDA and
other governmental approvals and clearances are subject to continual review,
and later discovery of previously unknown problems may result in restrictions
on a product's marketing, or withdrawal of the product from the market. The
commercial distribution in the U.S. of any new products developed by the
Company will be dependent upon obtaining the prior approval or clearance of
the FDA, which can take many years and entail significant costs. The Company
has received 510(k) clearance from the FDA for the IOGOLD-TM- product and has
applied for 510(k) clearance with respect to a Pd(103)-based brachytherapy
seed. No assurances can be made that such approval will be obtained on a
timely basis or at all. In countries where the Company's products are not
currently approved, the use or sale of the Company's products may require
approval by government agencies comparable to the FDA. The process of
obtaining such approvals may be lengthy, expensive and uncertain, and there
can be no assurance that the necessary approvals for the marketing of the
Company's products in other markets will be obtained on a timely basis or at
all. The Company is also required to adhere to applicable FDA regulations
for current Good Manufacturing Practices ("GMP"), including extensive record
keeping and reporting and periodic inspections of its manufacturing
facilities. Similar requirements are imposed by foreign governmental
agencies.
NRC AND CALIFORNIA DEPARTMENT OF HEALTH
The Company's manufacturing operations involve the manufacturing and
processing of radioactive materials, which are subject to stringent
regulation. The Company operates under a license issued by the California
Department of Health which is renewable every eight years. The Company's
license is subject for renewal on January 31, 1998. The Company has already
applied for such license and expects renewal in due course. California is
one of the "Agreement States" which are so named because the NRC has granted
such states regulatory authority over radioactive material manufacturers
provided such states have regulatory standards meeting or exceeding the
standards imposed by the NRC. Users of the Company's IOGOLD-TM- product will
be required to possess licenses issued by the state in which they reside (if
they are Agreement States) or the NRC. Use licenses are also required by
some of the foreign jurisdictions in which the Company may seek to market its
products. There can be no assurance that current licenses held by the
Company for its manufacturing operations will remain in force or that
additional licenses required for the Company's operations will be issued.
There also can be no assurance that the Company's customers will receive or
retain the radioactive materials licenses required to possess and use the
Company's products, including IOGOLD-TM-, or that delays in the granting of
such licenses will not hinder the Company's ability to market its products.
Furthermore, regulation of the Company's radioactive materials manufacturing
processes involves the imposition of financial requirements related to public
safety and decommissioning, and there are high costs and regulatory
uncertainties associated with the disposal of radioactive waste generated by
the Company's manufacturing operations. There can be no
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assurance that the imposition of such requirements and the costs and
regulatory restrictions associated with disposal of waste will not adversely
affect the Company's business, operating results and financial condition.
Any failure to obtain and maintain regulatory approvals, licenses and
permits could significantly delay the Company's marketing efforts.
Furthermore, changes in or interpretations of existing regulations, or the
adoption of new restrictive regulations, could adversely affect either the
obtaining or timing of future regulatory approvals. Failure to comply with
applicable regulatory requirements could result in, among other things,
significant fines, suspension of approvals, seizures or recalls of products,
operating restrictions or criminal prosecution and could materially adversely
affect the Company's business, operating results and financial condition.
COMPETITION
Significant competitors in the brachytherapy seed business include
Amersham International PLC, which manufactures and sells I(125) brachytherapy
sources and Theragenics Corporation, which manufacturers and sells Pd(103)
brachytherapy sources through a sales and marketing relationship with Indigo
Medical, Inc., a subsidiary of Johnson & Johnson.
Certain of the Company's competitors are significantly larger than the
Company and have greater financial, technical, research, marketing, sales,
distribution and other resources than the Company. There can be no assurance
that the Company's competitors will not succeed in developing or marketing
technologies and products that are more effective or commercially attractive
than any that are being developed or marketed by the Company, or that such
competitors will not succeed in obtaining regulatory approval, introducing or
commercializing any such products prior to the Company. Such developments
could have a material adverse effect on the Company's business, operating
results and financial condition. Further, there can be no assurance that,
even if the Company is able to successfully compete, that it would do so in a
profitable manner.
RESEARCH AND DEVELOPMENT
The Company's research and development expenses were $71,800 and $15,000
for the fiscal years ended October 31, 1997 and 1996, respectively. During
the 1997 fiscal year, the Company devoted significant time and effort to its
I(125) brachytherapy line of products, including necessary facility expansion.
During fiscal 1998, the Company expects to continue to focus research and
development efforts in its medical therapeutics business as well as its
radiation reference source.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company holds rights to an issued U.S. Patent on a
radioisotope-based device for site localization during biopsy procedures. On
August 1, 1997, the Company filed for a U.S. Patent on a radioactive
brachytherapy source using multiple markers. The Company also relies to a
significant degree on trade secrets, proprietary know-how and technological
advances that are either not patentable or that the Company chooses not to
patent. The Company seeks to protect non-patented proprietary information,
in part, by confidentiality agreements with suppliers, employees and
consultants. 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 and proprietary know-how will not otherwise
become known or be independently discovered by others. The disclosure to
third parties of proprietary non-patented information could have a material
adverse effect on the Company's business, operating results and financial
condition.
EMPLOYEES
As of January 22, 1998, North American Scientific had a total of 15
employees. Of those employees, 8 are engaged in manufacturing and 7 in
general and administrative positions. The Company has currently engaged 7
temporary workers, which the Company expects will become full time positions.
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BUSINESS --RISK FACTORS
Early Stage of Product Commercialization
Certain of the Company's products are in an early stage of development
and commercialization. The Company's core business historically has involved
the manufacture and distribution of low-level radiation sources and reference
standards for use in medical imaging, environmental measurement and
instrument calibration procedures. However, the Company has recently begun
to broaden its line of products to include products involved in medical
therapeutics. In particular, the Company expects future revenues to be
generated from sales of its I(125) brachytherapy sources, which have received
510(k) clearance from the FDA and are being marketed to physicians by Mentor
for the treatment of prostate cancer under Mentor's trade name IOGOLD-TM-.
The success of the IOGOLD-TM-product will be dependent, to a large extent, on
the efforts of Mentor, which will be the exclusive worldwide distributor of
the product. The Company's long-term growth may be significantly affected by
whether it will be able to manufacture, market and distribute the I(125)
brachytherapy product, or other similar products the Company may develop, to
a large portion of the medical community. The time frame necessary to
accomplish this objective may be long and uncertain, and the development and
production of additional medical therapeutic products, including products
utilizing Pd(103), may require even longer development and clinical trial
periods than the Company has experienced with the I(125) brachytherapy product.
There can be no assurance that the Company's products in development will
prove to be safe and effective in clinical trials under applicable regulatory
guidelines, and clinical trials may identify significant technical or other
obstacles that must be overcome prior to obtaining necessary regulatory or
reimbursement approvals. There can be no assurance that the Company will be
able to manufacture the I(125) brachytherapy product at an acceptable cost and
appropriate quality, that the Company will be able to develop other new
products, obtain regulatory approval for such products in a cost-effective
manner or that the Company will be able to increase sales in its target
markets. Any failure by the Company to do so could have a material adverse
effect on the Company's business, operating results and financial condition.
DEPENDENCE ON MARKETING ALLIANCE
The Company has only limited experience marketing and selling its
products, and does not have experience marketing and selling its products in
commercial quantities. On June 16, 1997, the Company entered into a
five-year marketing and exclusive distribution agreement with Mentor, whereby
Mentor agreed to market and distribute the Company's I(125) brachytherapy
product under Mentor's trade name IOGOLD-TM-. As a result, future sales of
the I(125) brachytherapy product will be dependent on the marketing efforts of
Mentor. Mentor is marketing IOGOLD-TM- through its established sales force,
which is currently dedicated to sales of Mentor's existing urology product
line. This sales force will market the product to urologists and radiation
oncologist on a worldwide basis. Mentor is also expected to be actively
involved in the education and training of physicians in the procedures for
the use of IOGOLD-TM-. The Company currently derives limited revenue from
the sales of IOGOLD-TM-, yet it expects that sales of IOGOLD-TM- could
constitute a significant percentage of its net sales in the foreseeable
future. Any failure by Mentor to successfully market IOGOLD-TM- or other
products that are manufactured by the Company and distributed by Mentor, or
to successfully educate and/or train physicians in the use of the product
could have a material adverse effect on the Company's sales of IOGOLD-TM- and
consequently on the business, operating results and financial condition of
the Company. Subject to certain limitations, Mentor also has the exclusive
marketing and distribution rights to the Company's Pd(103)-based brachytherapy
seeds.
If the Company is unable to maintain its relationship with Mentor, or if
the Company introduces new products for which Mentor does not act as the
distributor, the Company may need to develop third party distribution
channels and/or its own direct sales force, which will be time consuming and
require significant resources, and there can be no assurance that the Company
would be successful. The Company's failure to do so could have a material
adverse effect upon its business, operating results and financial condition.
In the event that Mentor fails to achieve certain performance targets in
specified territories, the Company may terminate Mentor's exclusive
distribution rights in such territory or territories, in which case Mentor
may have the right to independently manufacture and distribute the I(125) and
Pd(103)-based brachytherapy products. The loss of the Mentor relationship
could also result in the Company's inability to market its I(125) brachytherapy
products under the
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IOGOLD-TM- trade name. Any such inability could also have a material adverse
effect on the Company's business, operating results and financial condition.
UNCERTAINTY OF MARKET ACCEPTANCE OF BRACHYTHERAPY SOURCES
Ultrasound guided transperineal seeding, currently the most prevalent
seeding technique practiced by physicians, is a relatively new treatment
method for prostate cancer with a relatively low level of market penetration.
There can be no assurance that brachytherapy will gain significant market
acceptance among physicians, patients and health care payors. The success of
the Company's I(125) brachytherapy product will depend on maintaining and
increasing favorable perceptions by patients, doctors, health care payors and
medical researchers regarding the safety, efficacy and cost effectiveness of
the product. Management believes that recommendations by physicians and
health care payors will be essential to increase market acceptance of
seeding, and there can be no assurance that any such recommendations will be
obtained. Physicians in the U.S. or elsewhere will not recommend seeding
unless they conclude, based on clinical data and other factors, that it is an
attractive alternative to traditional methods of prostate cancer treatment,
of which RP and external beam radiation therapy ("EBRT") the most commonly
used. RP has a long history as the treatment of choice for early-stage,
localized prostate cancer, and many physicians have been trained in this
procedure. EBRT has experienced some negative results, which could create an
unfavorable public perception of radiation treatment for prostate cancer in
general, and could adversely affect public acceptance of seeding. In
addition, although Mentor has been granted worldwide distribution rights to
the Company's I(125) brachytherapy sources to be marketed under Mentor's trade
name IOGOLD-TM-, physicians in many countries, including most European
countries, do not currently aggressively treat prostate cancer. The failure
of the brachytherapy technique in general, or of IOGOLD-TM-in particular, to
gain acceptance among physicians, patients and/or health care payors in the
U.S. or elsewhere could have a material adverse effect on the business,
operating results and financial condition of the Company.
MANAGEMENT OF GROWTH
The Company's business has grown significantly over the past several
years. However, there can be no assurance that the Company will continue to
grow. If growth does occur, there can be no assurance the Company will be
effective in managing such future growth, in expanding its facilities and
operations or in retaining additional qualified personnel. In particular,
the Company expects to significantly increase its production capacity in
order to produce IOGOLD-TM-. This expansion of production capacity is
expected to include a significant increase in the number of employees
dedicated to that production. Furthermore, pursuant to the Company's
agreements with RadioMed, the Company is in the process of establishing an
ion implantation facility at the Company's North Hollywood, California
location. The Company's commitments to RadioMed are also expected to require
the hiring of additional personnel. Any failure to effectively manage
growth, expand its operations or attract and retain qualified personnel could
have a material adverse effect on the Company's business, operating results
and financial condition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's results of operations have historically varied from
quarter to quarter and the Company expects that further variability may
continue to occur and may be significant. In the past, operating results
have varied as a result of a number of factors, including the size and timing
of customer orders, the timing of the introduction and customer acceptance of
new products or product enhancements by the Company or its competitors,
changes in pricing policies by the Company or its competitors, research and
development expenditures, certain non-operational expenses (including
litigation costs) and changes in general economic conditions. Future
variability in the Company's results of operations may result from the
changes in the Company's business disclosed in this Annual Report on Form
10-KSB, in particular due to the marketing of IOGOLD-TM- through the
Company's relationship with Mentor.
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COMPETITION
The radiation source business is highly competitive. The Company
competes with several national and international companies which are
substantially larger and have greater technical, sales, marketing and
financial resources than the Company. The Company has no experience in human
therapeutic products and will be competing against companies with greater
experience in this sector. Developments by any of these companies or
advances by medical researchers at universities, government research
facilities or private research laboratories could render the Company's
products obsolete. Furthermore, if demand for treatment of prostate cancer
increases, companies with substantially greater financial resources than the
Company, as well as extensive experience in research and development, the
regulatory approval process and manufacturing and marketing, may develop
seeding treatments and products that are similar to the Company's I(125)
brachytherapy product. There can be no assurance that such future
competition will not have a material adverse effect on the Company's
business, operating results and financial condition. In addition to
competition from other manufacturers of I(125) based products, products using
alternative technologies may continue to be developed which will compete with
the Company's products. In particular, if the Company does not develop and
manufacture products using Pd(103), and if Pd(103)-based products
manufactured by the Company's competitors achieve greater market acceptance,
the Company's failure to develop and manufacture such products could have a
material adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE ON KEY CUSTOMERS
Two of the Company's reference source customers accounted for 71% of the
Company's total revenues in fiscal 1997. Significant customers may continue
to account for a substantial percentage of the Company's sales in both its
reference service and brachytherapy source businesses in the future. In
particular, the Company expects that Mentor will be a significant customer in
the future through the distribution of the IOGOLD-TM- brachytherapy product.
There can be no assurance that such customers will maintain their volume of
business with the Company. A loss of the Company's sales to such customers
could have a material adverse effect on the Company's business, operating
results and financial condition.
MARKET PRICE FLUCTUATIONS
The Company has recently experienced significant variability in the
market price and the trading volume of its Common Stock. In addition, the
securities markets from time to time experience significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies. Announcements of delays in the Company's testing and development
schedules, technological innovations or new product introductions by the
Company or its competitors, developments or disputes concerning patents or
proprietary rights, regulatory developments in the U.S. and foreign
countries, public concern as to the safety of products containing radioactive
compounds and economic and other external factors, as well as
period-to-period fluctuations in the Company's financial results, may have a
significant impact on the market price of the Common Stock and the Company
may experience further volatility in the market price and trading volume of
the Common Stock.
EFFECT OF REIMBURSEMENT POLICIES
A substantial percentage of the patients treated for prostate cancer in
the U.S. are covered by Medicare, and, consequently, the costs of prostate
cancer treatment are subject to Medicare's prescribed rates of reimbursement.
Medicare reimbursement amounts for seeding are currently significantly less
than for RP. Although seeding requires less physician time than RP,
reimbursement amounts, when combined with physician familiarity with RP,
provide disincentives for urologists to perform seeding. There can be no
assurance that (i) current or future limitations or requirements for
reimbursement by Medicare or other third party payors for prostate cancer
treatment will not materially adversely affect the market for the IOGOLD-TM-
product, (ii) health administration authorities outside the U.S. will provide
reimbursement at acceptable levels or at all or (iii) any such reimbursement
will continue at rates that enable the Company to maintain prices at levels
sufficient to realize an appropriate return. The non-occurrence of any such
factors could have a material adverse effect on the business, operating
results and financial condition of the Company.
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GOVERNMENT REGULATION
The manufacture and sale of the Company's products are subject to
stringent government regulation in the U.S. and other countries. FDA and
other governmental approvals and clearances are subject to continual review,
and later discovery of previously unknown problems may result in restrictions
on a product's marketing or withdrawal of the product from the market. The
commercial distribution in the U.S. of any new products developed by the
Company will be dependent upon obtaining the prior approval or clearance of
the FDA, which can take many years and entail significant costs. The Company
has received FDA approval to market the IOGOLD-TM- product and has applied
for 510(k) clearance for a Pd(103)-based brachytherapy seed. No assurances can
be made that any such approval will be obtained on a timely basis or at all.
In countries where the Company's products are not currently approved, the use
or sale of the Company's products may require approval by government agencies
comparable to the FDA. The process of obtaining such approvals may be
lengthy, expensive and uncertain. There can be no assurance that the
necessary approvals for the marketing of the Company's products in other
markets will be obtained on a timely basis or at all. The Company is also
required to adhere to applicable FDA regulations for current Good
Manufacturing Practices ("GMP"), including extensive record keeping and
reporting and periodic inspections of its manufacturing facilities. Similar
requirements are imposed by governmental agencies in other countries.
The Company's manufacturing operations involve the manufacturing and
processing of radioactive materials, which are subject to stringent
regulation. The Company operates under a license issued by the California
Department of Health which is renewable every eight years. The Company has
already applied for such license and expects renewal in due course.
California is one of the "Agreement States" which are so named because the
U.S. Nuclear Regulatory Commission (the "NRC") has granted such states
regulatory authority over radioactive material manufacturers provided such
states have regulatory standards meeting or exceeding the standards imposed
by the NRC. The users of the Company's IOGOLD-TM- product will be required
to possess licenses issued by the state in which they reside (if such states
are Agreement States) or the NRC. Use licenses are also required by some of
the foreign jurisdictions in which the Company may seek to market its
products. There can be no assurance that current licenses held by the
Company for its manufacturing operations will remain in force or that
additional licenses required for the Company's operations will be issued.
There also can be no assurance that the Company's customers will receive or
retain the radioactive materials licenses required to possess and use the
Company's products, including IOGOLD-TM-, or that delays in the granting of
such licenses will not hinder the Company's ability to market its products.
Furthermore, regulation of the Company's radioactive materials manufacturing
processes involves the imposition of financial requirements related to public
safety and decommissioning, and there are high costs and regulatory
uncertainties associated with the disposal of radioactive waste generated by
the Company's manufacturing operations. There can be no assurance that the
imposition of such requirements and the costs and regulatory restrictions
associated with disposal of waste will not adversely affect the Company's
business, operating results and financial condition.
Any failure to obtain and maintain regulatory approvals, licenses and
permits could significantly delay the Company's marketing efforts.
Furthermore, changes in or interpretations of existing regulations, or the
adoption of new restrictive regulations, could adversely affect either the
obtaining or timing of future regulatory approvals. Failure to comply with
applicable regulatory requirements could result in, among other things,
significant fines, suspension of approvals, seizures or recalls of products,
operating restrictions or criminal prosecution and could materially adversely
affect the Company's business, operating results and financial condition.
NEED FOR FUTURE CAPITAL
The Company's capital requirements have been and are expected to
continue to be significant. The Company plans to use its existing cash
resources to fund expansion of its production capacity in connection with the
production of the IOGOLD-TM- product and to set up a manufacturing capability
for the production of ion implantation devices pursuant to the Company's
manufacturing and supply agreement with RadioMed. Although management
believes the Company's existing capital resources, available credit and
future operating cash flows, will be sufficient to fund the Company's planned
expansion
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over the next 24 months, there can be no assurance that such sources will be
sufficient to fund its planned expansion. The Company may also require
further capital for the purchase of complementary businesses, technologies or
products and for additional investment in RadioMed. The Company's capital
requirements will depend on numerous factors, including the time and cost
involved in expanding production capacity, the cost involved in protecting
the proprietary rights of the Company and the time and expense involved in
obtaining required regulatory approval to market IOGOLD-TM- in new markets or
similar approvals for new products the Company may develop.
INTELLECTUAL PROPERTY RIGHTS; DEPENDENCE ON TRADE SECRETS
The Company's success will depend, in part, on its ability to obtain,
assert and defend patent rights, protect trade secrets and operate without
infringing the proprietary rights of others. The Company holds rights to an
issued U.S. patent on a radioisotope-based device for site localization
during biopsy procedures. On August 1, 1997, the Company filed for a U.S.
patent on a radioactive brachytherapy source using multiple markers. There
can be no assurance that rights under patents held by or licensed to the
Company will provide it with competitive advantages or that others will not
independently develop similar products or design around or infringe the
patents or other proprietary rights owned by or licensed to the Company. In
addition, there can be no assurance that any patent obtained or licensed by
the Company will be held to be valid and enforceable if challenged by another
party.
There can be no assurance that patents have not been issued or will not
be issued in the future that conflict with the Company's patent rights or
prevent the Company from marketing its products. Such conflicts could result
in a rejection of the Company's or its licensors' patent applications or the
invalidation of patents, which could have a material adverse effect on the
Company's business, operating results and financial condition. In the event
of such conflicts, or in the event the Company believes that competitive
products infringe patents to which the Company holds rights, the Company may
pursue patent infringement litigation or interference proceedings against, or
may be required to defend against litigation or proceedings involving,
holders of such conflicting patents or competing products. There can be no
assurance that the Company will be successful in any such litigation or
proceeding, and the results and cost of such litigation or proceeding may
materially adversely affect the Company's business, operating results and
financial condition. In addition, if patents that contain dominating or
conflicting claims have been or are subsequently issued to others, and such
claims are ultimately determined to be valid, the Company may be required to
obtain licenses under patents or other proprietary rights of others. No
assurance can be given that any licenses required under any such patents or
proprietary rights would be made available on terms acceptable to the
Company, if at all. If the Company does not obtain such licenses, it could
encounter delays or could find that the development, manufacture or sale of
products requiring such licenses is foreclosed.
The Company relies to a significant degree on trade secrets, proprietary
know-how and technological advances that are either not patentable or that
the Company chooses not to patent. The Company seeks to protect non-patented
proprietary information, in part, by confidentiality agreements with
suppliers, employees and consultants. 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 and proprietary
know-how will not otherwise become known or be independently discovered by
others. The disclosure to third parties of proprietary non-patented
information could have a material adverse effect on the Company's business,
operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is largely dependent on the personal efforts
of key technical and senior management personnel, principally L. Michael
Cutrer, its President and Chief Executive Officer. The Company does not have
an employment agreement with Mr. Cutrer, nor does it currently have a key-man
life insurance policy on the life of Mr. Cutrer. The Company believes that
its future success will depend in large part upon its ability to attract and
retain highly-skilled technical, managerial and marketing personnel and is
likely to require the expansion of its management level personnel.
Competition for radiation source industry personnel can be intense, and the
availability of capable personnel may be limited; thus, their services could
be difficult to obtain or replace. There can be no assurance that the
Company will be successful in attracting and retaining the personnel it
requires to develop and market new and enhanced products and to conduct its
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operations successfully. Any inability to attract and retain such personnel
could have a material adverse effect on the Company's business, operating
results and financial condition.
RAPID TECHNOLOGICAL CHANGE
The markets for the Company's products are characterized by ongoing
technological developments, evolving industry standards and rapid changes in
customer requirements. The Company's success depends on its ability to
continue to enhance its existing product lines, to develop and introduce in a
timely manner new products that take advantage of technological advances and
to respond promptly to customers' requirements. There can be no assurance
that the Company's current level and scope of research and development
spending will be adequate, that the Company will be successful in developing
and marketing enhancements to its existing products or new products on a
timely basis, or that its new products will adequately address the changing
needs of the marketplace. Failure by the Company in any of these areas could
materially and adversely affect the Company's business, operating results and
financial condition.
LIMITED NUMBER OF SUPPLIERS
The Company is dependent upon a limited number of outside unaffiliated
suppliers for its radioisotopes. The Company's principal suppliers are
Nordion International, Inc. and the Los Alamos National Laboratory. The
Company also utilizes overseas isotope manufacturers. To date, the Company
has generally been able to obtain the required radioisotopes for its products
as needed. The Company believes that it will be able to continue to obtain
required radioisotopes from these or other sources, although there can be no
assurance thereof. The delay or unavailability of radioisotopes could have a
material adverse effect on the Company's production and sales levels and
consequently upon its business, operating results and financial condition.
PRODUCTS LIABILITY; INSURANCE COVERAGE
The Company's business is subject to product liability risks inherent in
the testing, manufacturing and marketing of products containing
radioisotopes. To date, no product liability claims have been asserted
against the Company. However, there can be no assurance that such claims will
not arise in the future based on past, present or future services or products
offered by the Company. The Company maintains product liability and general
liability insurance. The Company's product liability and general liability
policy is provided on a claims made basis and is subject to annual renewal.
There can be no assurance that liability claims will not exceed the scope of
coverage or limits of such policies or that such insurance will continue to
be available on commercially reasonable terms or at all. If the Company does
not or cannot maintain sufficient liability insurance, its ability to market
its products may be significantly impaired. In addition, product liability
claims, as well as negative publicity arising out of such claims, could have
a material adverse effect on the business, operating results and financial
condition of the Company.
HAZARDOUS MATERIALS
The Company's manufacturing processes and research and development
efforts involve the controlled use of hazardous materials. Although the
Company believes that its safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any damages that result, and any such
liability could have a material adverse effect on the Company's business,
operating results and financial condition.
UNCERTAINTY RELATED TO HEALTH CARE REFORM
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. The Company
anticipates that Congress, state legislatures and the private sector will
continue to review and assess alternative health care delivery and payment
systems. Potential approaches that have been considered include
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<PAGE>
mandated basic health care benefits, controls on health care spending through
limitations on the growth of private purchasing groups, price controls and
other fundamental changes to the health care delivery system. Legislative
debate is expected to continue in the future, and market forces are expected
to demand reduced costs. The Company cannot predict what impact the adoption
of any federal or state health care reform measures, future private sector
reform or market forces may have on its business, operating results and
financial condition.
YEAR 2000 COMPLIANCE
While Year 2000 considerations are not expected to materially impact the
Company's internal operations, they may have an effect on some of the
Company's customers and suppliers, and thus may indirectly affect the
Company. It is not possible to quantify the aggregate cost to the Company
with respect to customers and suppliers with Year 2000 problems, although the
Company does not anticipate it will have a material adverse impact on its
business.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently occupies approximately 16,200 square feet of
office, manufacturing, engineering, warehouse, and research and development
laboratories in North Hollywood, California. The property is subject to a
three-year lease that expires on December 31, 1998, which the Company has the
option to extend under the terms of the existing lease.
ITEM 3. LEGAL PROCEEDINGS
In June 1996, an action was commenced in the United States District
Court for the Eastern District of Virginia entitled BEST INDUSTRIES, INC. V.
CIS BIO INTERNATIONAL, INC. ET AL., Civil Action 96-737-A. In addition to
naming CIS Bio International, its subsidiary CIS-US, Inc. and certain
individual officers and directors of those companies, the complaint also
named the Company and L. Michael Cutrer as defendants. CIS Bio
International, Inc. is a customer of the Company. The complaint sought
equitable relief, ordinary damages of $50 million and punitive damages of up
to $10 million, on the basis of various allegations with respect to the
alleged misappropriation and misuse by the defendants of certain purported
trade secrets of the plaintiff, the alleged tortious interference with the
plaintiff's business relations and the alleged tortious interference with the
plaintiff's business relations and the alleged defamation of plaintiff's
character and professional standing. The purported trade secrets which the
plaintiff claims to have been misappropriated and misused relate to the
I(125) brachytherapy sources the Company has developed. The Company filed an
answer to the complaint denying any liability to the plaintiff with respect
to any of the allegations contained in the complaint. The plaintiff filed a
motion to voluntarily dismiss the case, without prejudice, which motion was
granted on December 13, 1996, subject to payment of certain costs and
attorneys' fees to the Company. Upon non-payment of the assessed costs and
expense by the plaintiff, the case was dismissed with prejudice by order
dated January 27, 1997. The plaintiff has filed notices of appeal of the
court's dismissal, the first of which was filed on January 29, 1997, and the
Company filed a notice of appeal on March 7, 1997. In its appeal, the
Plaintiff has requested various forms of relief, including the reinstatement
of the plaintiff's case. Oral argument for the appeal was held on December
3, 1997 but the court has yet to issue its decision. The Company believes
the allegations contained in the original complaint were without merit and,
if the case is reinstated by the court or refiled by the Plaintiff, the
Company intends to vigorously defend such action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ended October 31, 1997.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
Irwin J. Gruverman 64 Chairman and Director
L. Michael Cutrer 42 Chief Executive Officer,
President and Director
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock is traded on the Nasdaq Electronic
Bulletin Board (the "EBB") under the symbol "NASI." The following table sets
forth the high and low closing prices for the Common Stock during the periods
indicated. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
The Common Stock first traded publicly on the EBB on March 6, 1996, at a
price of $1.36 per share. Prior to such time, the Common Stock traded on the
Vancouver Stock Exchange.
Fiscal 1996(1) High Low
-------------- ------ -----
First Quarter $1.64 $1.28
Second Quarter $1.68 $1.04
Third Quarter $1.27 $0.75
Fourth Quarter $1.38 $0.56
Fiscal 1997
-------------
First Quarter $1.88 $1.25
Second Quarter $4.00 $1.63
Third Quarter $8.13 $3.63
Fourth Quarter $25.75 $7.63
- --------------
(1) All amounts are stated in U.S. Dollars and, where the price quoted reflects
trading prices on the Vancouver Stock Exchange, have been translated on
the basis of the noon buying rate in New York City for cable transfers in
foreign currencies as certified for customs purposes by the Federal Reserve
Bank of New York.
As of January 16, 1998, the Company had approximately 60 record holders
of the Company's Common Stock and approximately 983 beneficial owners of the
Company's Common Stock.
The Company has never paid cash dividends on its Common Stock and does
not expect to declare or pay any cash dividends in the foreseeable future.
Pursuant to its agreements with Mentor, Mentor has the right to purchase $2
million of Preferred Stock, which will carry a cumulative dividend of 8%.
(b) Subsequent to the end of the 1997 fiscal year, on November 13, 1997,
the Company consummated a private placement of 800,000 shares of its Common
Stock, to certain institutional investors (all of whom were accredited
investors), at $18.00 per share. The offering price represented a discount of
approximately 8% to the $19.50 closing price of the Common Stock on November 6,
1997, the date of pricing of the private placement. The net proceeds of the
private placement to the Company were approximately $13.3 million. CIBC
Oppenheimer Corp. acted as the Company's
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placement agent in connection with the sale and received a commission of
approximately $1,008,000 (7% of the gross proceeds), plus warrants to
purchase an additional 64,000 shares of Common Stock at an exercise price of
$21.60 per share. The offering was exempt from registration under Section
4(2) of the Securities Act as a transaction not involving a public offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
consolidated financial statements contained herein and the notes thereto.
FISCAL YEAR ENDING OCTOBER 31, 1997 COMPARED WITH FISCAL YEAR ENDING
OCTOBER 31, 1996
Net sales increased to $3,381,400 for the 1997 fiscal year from
$3,063,300 for the 1996 fiscal year, an increase of approximately 10%, as a
result of continued sales efforts by the Company in its core business line of
products in both domestic and foreign markets. During the 1997 fiscal year,
the Company faced increased competitive forces which impacted sales efforts,
reducing net income to $276,200, or $0.08 per share compared to net earnings
of $413,100, or $0.14 per share, in the 1996 fiscal year.
Cost of goods sold increased to $1,844,200 in the 1997 fiscal year from
$1,534,200 in the 1996 fiscal year, an increase of approximately 20%. This
increase was partially due to an increase in net sales and partially due to
reduced margins resulting from competitive market conditions. Gross margin
decreased to approximately 45% during the 1997 fiscal year from approximately
50% in the 1996 fiscal year as a result of these competitive pressures.
General and administrative expenses increased to $1,094,600 in the 1997
fiscal year from $870,100 in the 1996 fiscal year, an increase of
approximately 26%. This increase in general and administrative expenses was
primarily a result of the Company's revenue growth, as well as increased
professional and promotional expenses.
FISCAL YEAR ENDING OCTOBER 31, 1996 COMPARED WITH FISCAL YEAR ENDING
OCTOBER 31, 1995.
Net sales increased to $3,063,300 for the 1996 fiscal year from
$1,843,100 for the 1995 fiscal year, an increase of approximately 66%, as a
result of the Company's continued sales efforts in both domestic and foreign
markets. Net income increased to $413,100, or $0.14 per share, in the 1996
fiscal year, from net income of $131,700, or $0.04 per share, in the 1995
fiscal year, an increase of approximately 214%.
Cost of goods sold increased to $1,534,200 in the 1996 fiscal year from
$929,000 in the 1995 fiscal year, an increase of approximately 65%. This
increase was generally consistent with the increase in net sales during the
period. During the 1996 fiscal year, gross margins remained at approximately
50%.
General and administrative expenses increased to $870,100 in the 1996
fiscal year, from $722,800 in the 1995 fiscal year an increase of
approximately 20%. This increase in general and administrative expenses was
primarily a result of necessary staff additions and one-time professional
fees. As a function of net sales, general and administrative expenses
decreased significantly.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1997, the Company had cash and short-term deposits
aggregating approximately $1,595,900, compared with $866,000 at October 31,
1996. Subsequent to the end of the fiscal year, the Company raised net
proceeds of approximately $13.3 million through a private placement of Common
Stock to accredited institutional investors, raising the Company's cash and
short-term deposits to approximately $14,869,000 on a pro forma basis. To
date, the Company's short-term liquidity needs have generally consisted of
operating capital to finance growth in trade accounts receivable and
inventories. The Company has satisfied these needs primarily through a
combination of private and public equity financings and from cash generated
by operations. The Company has no long-term debt and has not had, or had the
need
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for, a line of credit or similar arrangement with a bank. Management
believes that its existing cash resources will be sufficient to fund its
planned expansion over the next 24 months, although additional funding may be
required to fund the acquisition of complementary businesses, technologies or
products, or for additional investment in RadioMed.
For the fiscal year ended October 31, 1997, cash flow from operations
generated approximately $124,800 compared to $555,000 for the comparable 1996
period. Cash flow in investing activities used approximately $680,900 in
the 1997 fiscal year compared to $175,000 in the 1996 fiscal year. The
increased use of cash for investing activities in the current period resulted
from equipment purchases, building expansion and the purchase of certain
interest-bearing investments. Financing activities during the 1997 fiscal
year generated $1,279,300 from the exercise of stock options and warrants and
the sale of additional shares of Common Stock. There were no financing
activities during the 1996 fiscal year.
The following Unaudited Condensed Pro Forma Balance Sheet presents the
financial position of the Company as if the private placement had been
consummated on October 31, 1997. It should be read in conjunction with the
consolidated financial statements and related notes thereto.
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
31-Oct-97
Pro Forma
ASSETS Actual as Adjusted(1)
----------- --------------
Cash and cash equivalents $ 1,595,900 $14,869,000
Total current assets 2,571,000 15,844,200
Total long term assets 1,102,100 1,102,100
----------- --------------
Total assets $ 3,673,100 $16,946,300
=========== ==============
LIABILITIES AND STOCKHOLDERS EQUITY
Total liabilities $ 444,800 $ 444,800
Stockholders' equity
Preferred stock, par value $.01 - -
per share; authorized 2,000,000
shares, no shares issued
Common stock, par value $.01 per
share; authorized 10,000,000
shares, 3,450,701 issued and
outstanding; 4,250,701 issued and
outstanding Pro Forma as
Adjusted 34,500 42,500
Additional paid-in capital 3,514,700 16,779,900
Accumulated deficit (320,900) (320,900)
--------- ----------
Total stockholders' equity 3,228,300 16,501,500
--------- ----------
Total liabilities and
stockholders' equity $ 3,673,100 $16,946,300
========= ==========
___________________
(1) reflects the sale of 800,000 shares of common stock at $18 per share.
The net proceeds of the private placement were approximately $13.3 million.
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SEASONALITY
The Company's business is not significantly impacted by seasonal
fluctuations. However, the first quarter of each fiscal year has
traditionally seen relatively slower demand associated with the holiday
season.
IMPACT OF INFLATION
The impact of inflation on the Company's operations is not significant.
ITEM 7. FINANCIAL STATEMENTS
Page
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statement of Changes in Stockholders' Equity . . . . . . . . . F-4
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
North American Scientific, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and
of cash flows present fairly, in all material respects, the financial
position of North American Scientific, Inc. and its subsidiary at October 31,
1997 and 1996, and the results of their operations and their cash flows for
each of the two years in the period ended October 31, 1997, in conformity
with generally accepted accounting principles. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Costa Mesa, California
January 19, 1998
F-1
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
------
October 31,
---------------
1997 1996
---- ----
Current assets:
Cash and cash equivalents (Note 1) $1,595,900 $866,000
Investments (Note 1) 26,900 26,200
Accounts receivable, less allowance for doubtful
accounts of $8,500 and nil, respectively 430,000 683,200
Inventories (Notes 1 and 2) 378,500 144,800
Income taxes receivable 106,100 -
Prepaid expenses and other current assets 33,600 22,500
---------- ---------
Total current assets 2,571,000 1,742,700
Note receivable (Note 3) 500,000 -
Equipment and leasehold improvements, net (Notes 1 and 4) 346,100 215,900
Deposits and other assets 256,000 41,600
---------- ---------
Total assets $3,673,100 $2,000,200
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 363,900 $177,300
Accrued expenses 80,900 139,100
Income taxes payable - 155,400
---------- ---------
Total current liabilities 444,800 471,800
---------- ---------
Commitments (Note 5)
Stockholders' equity (Note 6):
Preferred stock, par value $.01 per share; authorized
2,000,000 shares, no shares issued - -
Common stock, par value $.01 per share; authorized
10,000,000 shares; 1997 - 3,450,701 issued and
outstanding; 1996 - 2,983,201 shares issued and
outstanding 34,500 29,800
Additional paid-in capital 3,514,700 2,105,100
Accumulated deficit (320,900) (597,100)
Cumulative translation adjustment - (9,400)
---------- ---------
Total stockholders' equity 3,228,300 1,528,400
---------- ---------
Total liabilities and stockholders' equity $3,673,100 $2,000,200
---------- ---------
---------- ---------
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended
October 31,
-----------
1997 1996
---------- ---------
Net sales $3,381,400 $3,063,300
Cost of goods sold 1,844,200 1,534,200
---------- ---------
Gross profit 1,537,200 1,529,100
Research and development expenses 71,800 15,000
General and administrative expenses 1,094,600 870,100
---------- ---------
Income from operations 370,800 644,000
Interest and other income 50,000 20,100
---------- ---------
Income before provision for income taxes 420,800 664,100
Provision for income taxes (Note 8) 144,600 251,000
---------- ---------
Net income for year $ 276,200 $ 413,100
---------- ---------
---------- ---------
Earnings per share:
Net income per share $ .08 $ .14
---------- ---------
---------- ---------
Weighted average number of common shares
outstanding (Note 1) 3,526,943 2,983,201
---------- ---------
---------- ---------
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
-----------------------------------------------------------
<TABLE>
<CAPTION>
Additional Cumulative Total
Number Common Paid-in Accumulated Translation Stockholders'
of Shares Stock Capital Deficit Adjustment Equity
--------- -------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1995 2,983,201 $29,800 $2,105,100 ($1,010,200) ($8,200) $1,116,500
Net income - - - 413,100 - 413,100
Foreign currency translation
adjustment - - - - (1,200) (1,200)
--------- -------- ---------- ------------- ----------- -------------
Balance at October 31, 1996 2,983,201 29,800 2,105,100 (597,100) (9,400) 1,528,400
Issuance of common stock 250,000 2,500 967,700 - - 970,200
Issuance of warrants (Note 6) - - 135,000 - - 135,000
Common stock issued upon
exercise of stock options 117,500 1,200 145,400 - - 146,600
Common stock issued upon
exercise of warrants 100,000 1,000 161,500 - - 162,500
Net income - - - 276,200 - 276,200
Foreign currency translation
adjustment - - - - 9,400 9,400
--------- -------- ---------- ------------- ----------- -------------
Balance at October 31, 1997 3,450,701 $34,500 $3,514,700 $(320,900) - $3,228,300
--------- -------- ---------- ------------- ----------- -------------
--------- -------- ---------- ------------- ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended October 31,
------------------------
1997 1996
---------- -----------
Cash flows from operating activities:
Net income $276,200 $ 413,100
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 52,700 47,800
Issuance of warrants in exchange for
professional services 27,000 -
Changes in assets and liabilities:
Accounts receivable 253,200 (194,900)
Inventories (233,700) 3,300
Income taxes receivable (106,100) -
Prepaid expenses and other current assets (11,100) (9,100)
Deposits and other assets (106,400) (2,300)
Accounts payable 186,600 135,100
Accrued expenses (58,200) 61,000
Income taxes payable (155,400) 101,000
---------- -----------
Total adjustments (151,400) 141,900
---------- -----------
Net cash provided by operating activities 124,800 555,000
---------- -----------
Cash flows used in investing activities:
Purchase of fixed assets (180,200) (175,000)
Note receivable (500,000) -
Investments (700) -
---------- -----------
Net cash used for investing activities (680,900) (175,000)
---------- -----------
Cash flows from financing activities:
Issuance of common shares for cash 1,279,300 -
Effect of foreign exchange on cash 6,700 (5,000)
---------- -----------
Net increase in cash and cash equivalents 729,900 375,000
Cash and cash equivalents, beginning of year 866,000 491,000
---------- -----------
Cash and cash equivalents, end of year $1,595,900 $866,000
---------- -----------
---------- -----------
Supplemental disclosure of cash flow information:
Interest paid $ 1,100 $ 1,000
---------- -----------
---------- -----------
Income taxes paid $406,800 $150,000
---------- -----------
---------- -----------
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:
North American Scientific, Inc., manufactures and markets a line of low-level
radiation sources and reference standards for medical, scientific and
industrial uses. They are routinely utilized by a variety of fields,
including environmental study and control, medical research and nuclear
medicine, biotechnology, industrial research and manufacturing, aerospace and
nuclear plant monitoring. References to the "Company" include both the
parent company and its subsidiary.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the reporting period. Actual
results could differ from those estimates.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market as determined under the
first-in, first-out method. Costs include materials, labor and manufacturing
overhead.
INVESTMENTS
Investments consist of highly liquid interest bearing deposits having
maturities in excess of three months and are carried at cost which
approximates market.
F-6
<PAGE>
NOTE 1: (Continued)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation is
computed using the straight-line method as follows:
Furniture, fixtures and equipment 3-7 years
Leasehold improvements Term of the lease
Maintenance and repair costs are expensed as incurred, while improvements are
capitalized. Gains or losses resulting from the disposition of assets are
included in income.
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery
of the asset's carrying value unlikely. An impairment loss would be
recognized when the sum of the expected future undiscounted net cash flows is
less than the carrying amount of the asset. No such impairment losses have
been recognized by the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes the recorded amounts of financial assets and liabilities
approximates fair values as of October 31, 1997 and 1996 except for the note
receivable for which the Company can not reasonably estimate such value.
STOCK OPTION PLAN
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation("SFAS 123"). SFAS 123 establishes a "fair value" method of
accounting for the value of grants under stock based compensation plans. As
permitted under SFAS 123, the Company has elected to continue to account for
stock options using the intrinsic value method as prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock issued to Employees.
Accordingly, the Company has provided the pro forma effect on its results of
operations as if the fair value method of measuring compensation expense
related to the employee stock option plan was utilized as described in SFAS
123.
NET INCOME PER COMMON SHARE
Net income per common share is computed using the weighted average number of
common and common equivalent shares outstanding during each year.
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
(SFAS 128) was issued in February 1997 and must be adopted by the Company
starting with the quarter ending January 31, 1998. Early adoption is not
permitted but all prior year earnings per share data must be restated upon
adoption. SFAS 128 simplifies the calculation of earnings per share data by
replacing primary earnings per share with basic earnings per share which uses
weighted average shares outstanding and does not include any dilutive
securities in the denominator of the calculation. The Company expects no
material impact on its financial statements upon adoption.
F-7
<PAGE>
NOTE 1: (Continued)
INCOME TAXES
The Company accounts for income taxes utilizing an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns. In estimating future
tax consequences, the Company generally considers all expected future events
other than enactments of changes in the tax law or rates.
DIVERSIFICATION OF CREDIT RISK
The Company's financial instruments that are subject to concentrations of
credit risk consist primarily of cash equivalents and accounts receivable
which are not collateralized. The Company's policy is to invest its cash
with highly rated financial institutions in order to limit the amount of
credit exposure. The Company's customers are financially sound corporations
operating in a variety of industries. The Company's credit losses have been
within management's estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME.
The Company anticipates adopting this standard on November 1, 1998 and does
not expect that adoption will have any impact on the financial position or
results of operations of the Company. In June 1997, the FASB issued SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
which the Company is not required to adopt until fiscal 1999.
NOTE 2 - INVENTORIES:
Inventories consist principally of raw materials at October 31, 1997 and
1996.
NOTE 3 - NOTE RECEIVABLE:
In October 1997, the Company purchased a $500,000 secured subordinated
convertible note (the Note) from RadioMed Corporation (RadioMed), a company
founded in 1997. RadioMed is in the business of ion implantation and the
application of such in medical products. The Note bears interest at 10% per
annum and matures on October 7, 2007.
The Note may be converted at the Company's election at any time prior to the
maturity date into Series A Preferred Stock of RadioMed at a price of $500
per share subject to adjustment. However, the Note will be automatically
converted into such shares upon the consummation of a public offering by
RadioMed or at the maturity date. The preferred stock is convertible into
common stock at the Company's election at the same rate. Interest is not due
until the earlier of conversion of the Note or the maturity date.
F-8
<PAGE>
NOTE 3: (Continued)
The Note is secured by a first lien on RadioMed's physical assets and
proprietary technology as defined in the security agreement; however, the
Note is subordinated to the payment of all senior indebtedness of RadioMed.
The Company entered into an exclusive supply agreement with RadioMed whereby
the Company will supply 100% of RadioMed's North American requirements for
radioactive ion implantation products for so long as the Company holds at
least 50% of the original value of the Note or equivalent dollar value in
stock and for one year thereafter.
NOTE 4 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements consist of the following:
October 31,
----------------
1997 1996
---- ----
Furniture, fixtures and equipment $ 467,200 $ 292,200
Leasehold improvements 167,900 162,700
----------- ---------
635,100 454,900
Less: Accumulated depreciation and amortization (289,000) (239,000)
----------- ---------
$ 346,100 $ 215,900
----------- ---------
----------- ---------
NOTE 5 - COMMITMENTS AND CONTINGENCIES:
The Company leases office space under a non-cancelable operating lease
agreement. Future minimum lease payments are subject to annual adjustment
for increases in the Consumer Price Index.
At October 31, 1997, future minimum rental payments under all operating
leases are as follows:
1998 $97,200
1999 16,200
-------
$113,400
-------
-------
Total rent expense for the years ended October 31, 1997 and 1996 was $97,200
and $89,800, respectively.
The Company is subject to legal proceedings and claims that arise in the
normal course of business. The Company believes these proceedings will not
have a material adverse effect on the financial position or results of
operations of the Company.
F-9
<PAGE>
NOTE 6 - STOCKHOLDERS' EQUITY:
COMMON STOCK
The holders of shares of common stock are entitled to one vote for each share
held of record on all matters on which stockholders are entitled or permitted
to vote and are entitled to receive such dividends as may lawfully be
declared by the Board of Directors out of funds legally available therefor
and to share pro rata in any other distributions to the holders of common
stock. There are no conversion rights, redemption or sinking fund provisions
or fixed dividend rights with respect to the common stock and the holders
have no preemptive rights.
PREFERRED STOCK
The Company has authorized the issuance of 2,000,000 shares of preferred
stock; however, no shares have been issued. The designations, rights, and
preferences of any preferred stock that may be issued will be established by
the Board of Directors at or before the time of such issuance.
STOCK OPTIONS
Options to purchase shares of the Company's common stock have been granted to
certain employees and non-employee directors. These options were granted at
an exercise price equivalent to their fair market value at the date of grant.
These options are immediately exercisable while other options vest over a
period ranging from two to four years. The options expire between two and
ten years from the date of grant. These options are subject to cancellation
in the event of termination of employment. Options for 224,375 shares were
exercisable as of October 31, 1997.
The following table summarizes option activity through October 31, 1997:
Options Exercise price
Balance at October 31, 1995 269,400 1.07 - 1.68
Granted 300,500 1.00 - 1.42
Cancelled or expired (202,400) 1.29 - 1.49
Exercised - -
-------- -----------
Balance at October 31, 1996 367,500 1.00 - 1.42
Granted 250,500 1.05 - 2.94
Canceled or expired - -
Exercised (117,500) 1.00 - 1.65
-------- -----------
Balance at October 31, 1997 500,500 1.00 - 2.94
-------- -----------
-------- -----------
F-10
<PAGE>
NOTE 6: (Continued)
STOCK OPTIONS (Continued)
Had compensation cost for the Company' option plans been determined based on
the fair value at the grant dates , as prescribed by SFAS No. 123, net income
and net income per share would have been as follows:
Year Ended October 31,
------------------------
1997 1996
--------- ---------
Net Income:
As reported $ 276,200 $ 413,100
Pro forma 99,800 371,200
Net Income Per Share:
As reported $ .08 $ .14
Pro forma .03 .12
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes method with the following assumptions used for grants
during the applicable period: no dividend yield for both periods; weighted
average risk free interest rate of 6.40% in 1997 and 6.38% in 1996; an
expected volatility of the market price of the stock of 80% and a weighted
average expected option term of 5 years for both periods.
Because the determination of the fair value of all options granted includes
an expected volatility factor in addition to the other 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 reported net income or future years.
MENTOR AGREEMENT
In June 1997, the Company entered into an exclusive worldwide distribution
agreement with Mentor Corporation (Mentor) to market and sell certain
brachytherapy sources for the treatment of prostate cancer. Under the terms
of the five year agreement, Mentor is responsible for sales and marketing
activities.
Pursuant to the agreement, Mentor purchased 250,000 shares of the Company's
common stock at $4.00 per share (the fair market value of the common stock at
the time of the agreement) and, upon the clearance by the FDA of a certain
product, may purchase $2,000,000 of preferred stock. At the Company's sole
discretion, the Mentor preferred stock, when issued, may be redeemed by the
Company at any time within five years after the date of issuance at par value
plus any accrued and unpaid dividends. If the Company decides not to redeem
this stock, Mentor may convert the preferred stock, after five years from the
date of issuance, into common stock at a conversion price of $6.00 per share,
subject to adjustment for certain dilutive events.
F-11
<PAGE>
NOTE 6: (Continued)
COMMON STOCK WARRANTS
In fiscal 1997, the Company granted 150,000 warrants to a third party in
connection with a contract to provide investment banking services on behalf
of the Company over a five year term. The warrants permit the holder to
purchase a total of 150,000 shares of the Company's common stock at $1.63 per
share (the fair market value of the Company's common stock at the date of the
agreement). The holder exercised 100,000 of such warrants in fiscal 1997.
The fair value of the warrants of $135,000 at the grant date is reflected as
other assets and additional paid-in capital and is being amortized over the
term of the agreement.
NOTE 7 - SALES TO MAJOR CUSTOMERS:
Revenues from two customers each accounted for more than 10% of the Company's
consolidated revenues, as follows:
1997 1996
---- ----
Customer A 41% 42%
Customer B 30% 23%
--- ---
71% 65%
--- ---
--- ---
NOTE 8 - INCOME TAXES:
The provision for income taxes is as follows:
1997 1996
---- ----
Federal $130,200 $210,400
State 14,400 40,600
-------- --------
$144,600 $251,000
-------- --------
-------- --------
There are no significant temporary differences that would give rise to the
recognition of a deferred tax asset or liability. Accordingly, the Company
has not recorded a deferred tax provision.
A reconciliation of tax expense computed at the U.S. federal statutory rate
is as follows:
Year Ended October 31,
-------------------------------
1997 1996
------------- --------------
Federal tax provision at U.S. statutory rate $143,100 34% $225,800 34%
State taxes, net of federal benefit 9,500 4 26,800 4
Amortization of assets and other expenses
deductible for income tax purposes (10,800) (4) - -
Other, net 2,800 - (1,600) -
-------- --- -------- ---
$144,600 34% $251,000 38%
-------- --- -------- ---
-------- --- -------- ---
F-12
<PAGE>
NOTE 9 - SUBSEQUENT EVENT:
In November 1997, the Company completed a private placement of 800,000 shares
of its common stock to certain institutional investors. The net proceeds to
the Company from the sale were approximately $13.3 million.
F-13
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes or disagreements with accountants on
accounting or financial disclosure matters during the Company's fiscal years
ended October 3, 1997 and 1996.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS
The information concerning directors of the Company required under this
Item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A to be filed with the Commission not
later than 120 days after the close of the Company's fiscal year ended
October 31, 1997.
EXECUTIVE OFFICERS
The information concerning executive officers of the Company required
under this Item is provided under Item 4A.
18
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The information required under this Item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A to be filed with the Commission not later than 120 days after the close
of the Company's fiscal year ended October 31, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A to be filed with the Commission not later than 120 days after the close
of the Company's fiscal year ended October 31, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A to be filed with the Commission not later than 120 days after the close
of the Company's fiscal year ended October 31, 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBITS DESCRIPTION OF DOCUMENTS
3(i) Certificate of Incorporation of the Registrant,
incorporated by reference to Exhibit 3(i) of the
Registrant's Registration Statement on Form 10-SB,
filed August 22, 1995.
3(i)(a) Certificate of Domestication of the Registrant,
incorporated by reference to Exhibit 3(i)(a) of the
Registrant's Registration Statement on Form 10-SB,
filed August 22, 1995.
3(ii) Bylaws of the Registrant, incorporated by reference
to Exhibit 3(ii) of the Registrant's Registration
Statement on Form 10-SB, filed August 22, 1995.
4.1 Certificate of Incorporation of the Registrant,
incorporated by reference to Exhibit 4.1 of the
Registrant's Registration Statement on Form 10-SB,
filed August 22, 1995.
10.1 Agreement dated June 9, 1995 between the Registrant and
CIS-US, incorporated by reference to Exhibit 10.1 of the
Registrant's Registration Statement on Form 10-SB, filed
August 22, 1995.
10.2 Lease Agreement dated November 30, 1995 between Registrant
and Abraham Stricks.
10.3 North American Scientific, Inc. Amended and Restated 1996
Stock Option Plan, incorporated by reference to Exhibit
10.3 of the Registrant's Registration Statement on
Form 10-KSB filed January 21, 1997.
10.4 Agreement dated as of December 11, 1996 between the
Registrant and M.H. Meyerson & Co., Inc., incorporated by
reference to Exhibit 10.4 of the Registrant's Registration
Statement on Form 10-KSB filed January 21, 1997.
19
<PAGE>
10.4 Stock Purchase Agreement dated as of June 16, 1997 between
the Registrant and Mentor Corporation, incorporated by
reference to Exhibit 10.1 of the Registrant's Form 10-QSB,
filed September 15, 1997.
10.5 Exclusive Marketing and Distribution Agreement dated as of
June 16, 1997 between the Registrant and Mentor Corporation,
incorporated by reference to Exhibit 10.2 of the
Registrant's Form 10-QSB, filed September 15, 1997.
10.6 Exclusive Manufacturing and Supply Agreement dated as of
October 7, 1997 between the Registrant and RadioMed
Corporation, incorporated by reference to Exhibit 10.1 of
the Registrant's Form 8-K, filed October 9, 1997.
10.7 Note Purchase Agreement between the Registrant and
RadioMed Corporation, dated as of October 7, 1997,
incorporated by reference to Exhibit 10.2 of the
Registrant's Form 8-K, filed October 9, 1997.
10.8 Stock Purchase Agreement dated as of November 10, 1997
among the Registrant and the investors identified therein,
incorporated by reference to Exhibit 10.1 of the
Registrant's Form 8-K, filed November 24, 1997.
10.9 Placement Agent's Warrant Agreement dated as of November
13, 1997 between the Registrant and CIBC Oppenheimer Corp.,
incorporated by reference to Exhibit 10.2 of the
Registrant's Form 8-K, filed November 24, 1997.
11.1 Statement Regarding Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant, incorporated by reference
to Exhibit 21 of the Registrant's Registration Statement
on Form 10-SB, filed August 22, 1995.
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
(i) On October 9, 1997, the Registrant filed a report to disclose the
execution of a note purchase agreement and an exclusive manufacturing
and supply agreement between the Registrant and RadioMed Corporation.
(ii) Subsequent to the end of the 1997 fiscal year, on November 24,
1997 the Registrant filed a report to disclose consummation of the
Registrant's private placement of 800,000 shares of Common Stock.
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NORTH AMERICAN SCIENTIFIC, INC.
Date: January 28, 1998
By: /s/ L. Michael Cutrer
----------------------
L. Michael Cutrer
Its: President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
NAME TITLE DATE
---- ----- ------
/s/ Irwin J. Gruverman Chairman of the Board January 28, 1998
------------------------ and Director
(Irwin J. Gruverman)
/s/ L. Michael Cutrer President, Chief January 28, 1998
------------------------ Executive Officer and
(L. Michael Cutrer) Director(Principal
Executive, Financial
and Accounting Officer
/s/ Larry Berkin Director January 27, 1998
-------------------
(Larry Berkin)
Director January __, 1998
-----------------------
(Dr. Allan M. Green)
/s/ Michael C. Lee Director January 27, 1998
---------------
(Michael C. Lee)
<PAGE>
EXHIBIT 10.2
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--GROSS
(Do not use this form for Multi-Tenant Property)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
NOVEMBER 30, 1995, is made by and between ABRAHAM STRIKS ("LESSOR")
AND NORTH AMERICAN SCIENTIFIC, INC., A CALIFORNIA 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 by the street address of 7435-7445 GREENBUSH AVENUE, NORTH
HOLLYWOOD located in the County of LOS ANGELES, State of CALIFORNIA and
generally described as (describe briefly the nature of the property) AN
INDUSTRIAL BUILDING CONTAINING APPROXIMATELY 16,200 SQUARE FEET OF FLOOR
AREA ("PREMISES"). (See paragraph 2 for further provisions.)
1.3 TERM: -3- years and -1- months ("ORIGINAL TERM")
commencing DECEMBER 1, 1995 ("COMMENCEMENT DATE") and ending DECEMBER 31,
1998 ("EXPIRATION DATE"). (See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: NONE ("Early Possession Date").
(See Paragraphs 3.2 and 3.3 for further provisions.)
1.5 BASE RENT: $ 8,100.00 per month ("BASE RENT"), payable on
the FIRST day of each month commencing MARCH 1, 1996. RENT FOR THE MONTHS OF
DECEMBER 1995, JANUARY 1996 AND FEBRUARY 1996 SHALL BE DUE ON THE FIRST DAY
OF EACH MONTH THEREOF IN THE AMOUNT OF $6,522.00 PER MONTH.
/ / 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: $__________________________________
as Base Rent for the period _________________________________________________
_____________________________________________________________________________.
1.7 SECURITY DEPOSIT: $ 4,615.00 ("SECURITY DEPOSIT"). (See
Paragraph 5 for further provisions.)
1.8 PERMITTED USE: ____________________________________________________
1.9 INSURING PARTY: Lessor is the "INSURING PARTY." $ 1,970.00 is the
"BASE PREMIUM." (See Paragraph 8 for further provisions.)
1.10 REAL ESTATE BROKERS: The following real estate brokers (collectively,
the "BROKERS") and brokerage relationships exist in this transaction and are
consented to by the Parties (check applicable boxes):
___________________________________________________________________ represents
/ / Lessor exclusively ("LESSOR'S BROKER"); / / both Lessor and Lessee, and
___________________________________________________________________ represents
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by ________________________________________________________________
____________________ ("GUARANTOR"). (See Paragraph 37 for further provisions.)
1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 50 through _______ and Exhibits_______________________________
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 square footage set forth in this Lease, or
that may have been used in calculating rental, is an
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approximation which Lessor and Lessee agree is reasonable and the rental
based thereon is not subject to revision whether or not the actual square
footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, heating, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commence Date, Lessor shall,
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.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement 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. If the Premises do not comply with said warranty, Lessor
shall, 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 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 Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.
2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
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, however, shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is
specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease, or
the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to pay
rent or perform any other obligation of Lessee under the terms of this Lease
until Lessor delivers possession of the Premises to Lessee. If possession of
the Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days thereafter, cancel this Lease, in which event the Parties
shall be discharged from all obligations hereunder; provided, however, that if
such written notice by Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease shall terminate and be of no further
force or effect. Except as may be otherwise provided, and regardless of when
the term actually commences, if possession is not tendered to Lessee when
required by this Lease and Lessee does not terminate this Lease, as aforesaid,
the period free of the obligation to pay Base Rent, if any, 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 acts, changes or
omissions of Lessee.
4. RENT.
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4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rent and charges 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 the calendar month involved. Payment of Base Rent and other charges
shall be made to Lessor at its address stated herein or to such other persons or
at such other addresses as Lessor may from time to time designate in writing to
Lessee.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), 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, cost, expense,
loss or damage (including attorneys' fees) 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 moneys with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall; upon written request from Lessor, deposit
additional moneys with Lessor sufficient to maintain the same ratio between the
Security Deposit and the Base Rent as those amounts are specified in the Basic
Provisions. Lessor shall not be required to keep all or any part of the
Security Deposit separate from its general accounts, Lessor shall, at the
expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed in
writing by Lessor, no part of the Security Deposit shall be considered to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties. Lessor
hereby agrees to not unreasonably withhold or delay its consent to any written
request by Lessee, Lessees assignees or subtenants, and by prospective assignees
and subtenants of the Lessee, its assignees and subtenants, for a modification
of said permitted purpose for which the premises may be used or occupied, so
long as the same will not impair the structural integrity of the improvements on
the Premises, the mechanical or electrical systems therein, is not significantly
more burdensome to the Premises and the improvements thereon, and is otherwise
permissible pursuant to this Paragraph 6. If Lessor elects to withhold such
consent, Lessor shall within five (5) business days give a written notification
of same, which notice shall include an explanation of Lessor's reasonable
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, material or waste whose
presence, nature, quantity and/or intensity of existence, use, manufacture,
disposal, chemical transportation, spill, release or effect, 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 liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3). "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. Reportable Use shall
also include Lessees being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course of Lessee's business permitted on the Premises, so long as such
use is not a Reportable Use and does not expose the Premises or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor to
any liability therefor. In addition, Lessor may (but without any obligation to
do so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises
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and the environment against damage, contamination or injury and/or liability
therefrom or therefor, including, but not limited to, the installation (and
removal on or before Lease expiration or earlier termination) of reasonably
necessary protective modifications to the Premises (such as concrete
encasements) and/or the deposit of an additional Security Deposit under
Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance, or a condition involving or resulting from
same, has come to be located in, on, under or about the Premises, other than as
previously consented to by Lessor, Lessee shall give written notice of such fact
to Lessor. Lessee shall also immediately give Lessor a copy of any statement,
report, notice, registration, application, permit, business plan, license,
claim, action or proceeding given to, or received from, any governmental
authority or private party, or persons entering or occupying the Premises,
concerning the presence, spill, release, discharge of, or exposure to, any
Hazardous Substance or contamination in, on, or about the Premises, including
but not limited to all such documents as may be involved in any Reportable Uses
involving the Premises.
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 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 (including consultant's and attorney's fees and testing), removal,
remediation, restoration and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier 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 or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "APPLICABLE LAW," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. Lessee
shall, within five (5) days after receipt of Lessor's written request, provide
Lessor with copies of all documents and information, including, but not limited
to, permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law 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 failure by Lessee or the
Premises to comply with any Applicable Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the
case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as
to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.)
7.2 (Lessor's obligations to repair), 9 (damage and destruction), and
14 (condemnation), Lessor shall, at Lessor's sole cost and expense and at all
times, keep the Premises in good order, condition and repair,
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including, without limiting the generality of the foregoing, all equipment or
facilities serving the Premises, such as plumbing, heating, air conditioning,
ventilating, electrical, lighting facilities, boilers, walls (exterior),
windows and doors, plate glass, skylights, driveways, parking lots, fences,
retaining walls, sidewalks and parkways located in, on, about, or adjacent to
the Premises, but excluding foundations, the exterior roof and the structural
aspects of the Premises. 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 of
any contamination of, and for the maintenance, security and/or monitoring of,
the Premises, the elements surrounding same, or neighboring properties, that
was caused or materially contributed to by Lessee, or pertaining to or
involving any Hazardous Substance and/or storage tank brought onto the
Premises by or for Lessee or under its control.
7.2 LESSOR'S OBLIGATIONS. Upon receipt of written notice of the need
for such repairs, Lessor shall, at Lessor's expense, keep the foundations,
exterior roof and structural aspects of the Premises in good order, condition
and repair, Lessor shall not, however, be obligated to paint the interior
surface of exterior walls. Lessor shall not, in any event, have any
obligation to make any repairs until Lessor receives written notice of the
need for such repairs. 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. Lessee and Lessor expressly waive the benefit of
any statute now or hereafter in effect to the extent it is inconsistent with
the terms of this Lease with respect to, or which affords Lessee the right to
make repairs at the expense of Lessor or to terminate this Lease by reason
of, any needed repairs.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all carpeting, window
coverings, air lines, power panels, electrical distribution, security, fire
protection systems, communication systems, lighting fixtures, heating,
ventilating, and air conditioning equipment, plumbing, and fencing in, on or
about 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 from that which are provided by Lessor under the
terms of this Lease, 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 as defined in Paragraph 7.4(a).
(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. All consents given by Lessor, whether by virtue of
Paragraph 7.3(a) or by subsequent specific consent, shall be deemed
conditioned upon: (i) Lessee's acquiring all applicable permits required by
governmental authorities, (ii) the furnishing of copies of such permits
together with a copy of the plans and specifications for the Alternation or
Utility Installation to Lessor prior to commencement of the work thereon, and
(iii) the compliance by lessee with all conditions of said permits in a
prompt and expeditious manner. Any alterations or Utility Installations by
Lessee during the term of this Lease shall be done in a good and workmanlike
manner, with good and sufficient materials, and in compliance with all
Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor
with as-built plans and specifications therefor. Lessor may (but without
obligation to do so) condition its consent to any requested Alteration or
Utility Installation that costs $10,000 or more upon Lessee's providing
Lessor with a lien and completion bond in an amount equal to one and
one-half times
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the estimated cost of such Alteration or Utility Installation and/or upon
Lessee's posting an additional Security Deposit with Lessor under Paragraph
36 hereof.
(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
mechanics' 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 in or on the Premises as provided by
law. If Lessee shall, in good faith, contest the validity of any such lien,
claim or demand, then Lessee shall, at its sole expense defend 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 against the Lessor or the Premises. If Lessor shall require, Lessee
shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal
to one and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal or
become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. 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 of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date,
with all of the improvements, parts and surfaces thereof clean and free of
debris and in good operating order, condition and state of repair, ordinary
wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease.
Except as otherwise agreed or specified in writing by Lessor, the Premises,
as surrendered, shall include the Utility Installations. The obligation of
Lessee shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment,
and Alterations and/or Utility Installations, as well as the removal of any
storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or ground water contaminated by Lessee, all
as may then be required by Applicable Law and/or good service practice.
Lessee's Trade Fixtures shall remain the property of Lessee and shall be
removed by Lessee subject to its obligation to repair and restore the
Premises per this Lease.
8. INSURANCE; INDEMNITY
8.1 PAYMENT OF PREMIUM INCREASES.
(a) Lessee shall pay to Lessor any insurance cost increase
("INSURANCE COST INCREASE") occurring during the term of this Lease. "INSURANCE
COST INCREASE" is defined as any increase in the actual cost of the insurance
required under Paragraph 8.2(b), 8.3(a) and 8.3(b). ("REQUIRED INSURANCE"),
over and above the Base Premium, as hereinafter defined, calculated on an annual
basis. "INSURANCE COST INCREASE" shall include, but not limited to, increases
resulting from the nature of Lessee's occupancy, any act or omission of Lessee,
requirements of the holder of a mortgage or deed of trust covering the Premises,
increased valuation of the Premises, and/or premium rate increases, if the
parties insert a dollar amount in Paragraph 1.9, such amount shall be considered
the "BASE PREMIUM." In lieu thereof, if the Premises have been previously
occupied, the "BASE PREMIUM" shall be the annual premium applicable to the most
recent occupancy. If the Premises have never been occupied, the "BASE PREMIUM"
shall be the lowest annual premium reasonably obtainable for the Required
Insurance as of the commencement of the Original Term, assuming the most nominal
use possible of the Premises. In no event, however, shall Lessee be responsible
for any portion of cost attributable to liability insurance coverage in excess
of $1,000,000 procured under Paragraph 8.2(b) (Liability Insurance Carried By
Lessor).
(b) Lessee shall pay any such Insurance Cost Increase to Lessor
within thirty (30) days after receipt by Lessee of a copy of the premium
statement or other reasonable evidence of the amount due. If the insurance
policies
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maintained hereunder cover other property besides the Premises, Lessor shall
also deliver to Lessee a statement of the amount of such Insurance Cost
Increases attributable only to the Premises showing in reasonable detail the
manner in which such amount was computed. Premiums for policy periods
commencing prior to, or extending beyond, the term of this Lease shall be
prorated to coincide with the corresponding Commencement or Expiration of the
Lease term.
8.2 LIABILITY INSURANCE
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor (as an additional insured) against claims for
bodily injury, personal injury and property damage based upon, involving 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 limit coverage in an amount not less than $1,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises"
Endorsement and contain the "Amendment of the Pollution Exclusion" 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 required by this Lease or as
carried by Lessee shall not, however, limit the liability of Lessee nor relieve
Losses of any obligation hereunder. All insurance to be 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. In the event Lessor is the Insuring Party,
Lessor shall also maintain liability insurance described in Paragraph 8.2(a)
above, in addition to, and 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 and to the holders of any mortgages, deeds
of trust or ground leases on the Premises ("LENDER(S)"), insuring loss or damage
to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, such latter amount is less than full
replacement cost. Lessee Owned Alterations and Utility Installations shall be
insured by Lessee under Paragraph 8.4. 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
unless required by a Lender), including coverage for any additional costs
resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
of any undamaged sections of the Premises required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of loss, but not including plate glass insurance.
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.
(b) RENTAL VALUE. Lessor shall, in addition, 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 Lender(s), insuring the loss of the full rental and
other charges payable by Lessee to Lessor under this Lease for one (1) year
(including all real estate taxes, insurance costs, and any scheduled rental
increases). 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 rental
revenues 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 rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period.
(c) ADJACENT PREMISES. It the Premises are part of a larger building, or
if the Premises are part of a group of buildings owned by Lessor which are
adjacent to the Premises, the Lessee shall pay for any increase in the premiums
for the property insurance of such building or buildings if said increase is
caused by Lessee's acts, omissions, use or occupancy of the Premises.
(d) TENANT'S IMPROVEMENTS. Since Lessor is the Insuring Party, the Lessor
shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
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8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, Lessee Owned Alterations and Utility
Installations in, on, or about the Premises similar in coverage to that carried
by the Insuring Party under Paragraph 8.3. Such insurance shall be used by
Lessee for the 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 personal property or the restoration of Lessee
Owned Alterations and Utility Installations. Lessee shall be the Insuring Party
with respect to the insurance required by this Paragraph 8.4 and shall provide
Lessor with written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed 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, or such other rating as may be required by a Lender having a
lien on the Premises, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done anything which shall
invalidate the insurance policies referred to in this Paragraph 8. Lessee shall
cause to be delivered to Lessor certified copies of, or certificates evidencing
the existence and amounts of, the insurance, and with the additional insureds,
required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or
subject to modification except after thirty (30) days prior written notice to
Lessor. Lessee shall at least thirty (30) days prior to the expiration of such
policies, furnish Lessor with 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.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relive the
other, and waive their entire right to recover damages (whether in contract or
in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 8. The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by any deductibles applicable thereto.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, 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,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought
against Lessor by reason of any of the foregoing matters, Lessee upon notice
from Lessor shall defend the same at Lessee's expense by counsel reasonably
satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense.
Lessor need not have first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. 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 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, air conditioning 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, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom.
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, the repair cost of which damage or destruction is less than 50%
of the then Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
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(c) "INSURED LOSS" shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility Installations,
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 building codes, ordinances or
laws, 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. 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 as
and when required to complete said repairs. In the event, however, the shortage
in proceeds 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 to 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 Lessor does not receive such
funds or assurance within said period, Lessor may nevertheless elect by written
notice to Lessee within ten (10) days thereafter to 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. If in
such case Lessor does not so elect, then this Lease shall terminate sixty (60)
days following the occurrence of the damage or destruction. Unless otherwise
agreed, Lessee shall in no event have any right to reimbursement from Lessor for
any funds contributed by Lessee to repair any such damage or destruction.
Premises Partial Damage due to flood or earthquake shall be subject to Paragraph
9.3 rather than Paragraph 9.2, 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 and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said 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 and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified In Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term 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,
at Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, 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, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("EXERCISE PERIOD"), (i) exercising
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such option and (ii) providing Lessor with any shortage in insurance proceeds
(or adequate assurance thereof) needed to make the repairs. If Lessee duly
exercises such option during said Exercise Period and provides Lessor with
funds (or adequate assurance thereof) to cover any shortage in insurance
proceeds, Lessor shall, at Lessor's 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 said Exercise Period, then Lessor may at Lessor's option terminate
this Lease as of the expiration of said sixty (60) day period following the
occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within ten (10) days after the expiration of the Exercise
Period, notwithstanding any term or provision in the grant of option to the
contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 9.2 (Partial Damage
- -Insured), whether or not Lessor or Lessee repairs or restores the Premises, the
Base Rent, Real Property Taxes, insurance premiums, and other charges, if any,
payable by Lessee hereunder for the period during which such damage, its repair
or the restoration continues (not to exceed the period for which rental value
insurance is required under Paragraph 8.3(b)), shall be abated in proportion to
the degree to which Lessee's use of the Premises is impaired. Except for
abatement of Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, as aforesaid, all other obligations of Lessee hereunder shall
be performed by Lessee, and Lessee shall have no claim against Lessor for any
damage suffered by reason of any such repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of 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 to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
such notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after receipt of such notice, this Lease shall
continue in full force and effect. "COMMENCE" as used in this Paragraph 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 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under 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 investigate
and remediate such investigation 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 the giving of such notice. In the event Lessor elects
to give such notice of Lessor's intention to terminate this Lease, Lessee shall
have the right within ten (10) days after the receipt of such notice to give
written notice to Lessor of Lessee's commitment to pay for the investigation and
remediation of such Hazardous Substance Condition totally at Lessee's expense
and without reimbursement from Lessor except to the extent of an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with the funds required of Lessee or a satisfactory
assurance thereof within thirty (30) days following Lessee's said 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 and the required funds are available. If Lessee does not give such
notice and provide the required funds or assurance thereof within the times
specified above, this Lease shall terminate as of the date specified in Lessor's
notice of termination. If a Hazardous Substance Condition occurs for which
Lessee is not legally responsible, there shall be abatement of Lessee's
obligations under this Lease to the same extent as provided in Paragraph 9.6(a)
for a period of not to exceed twelve (12) months.
9.8 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this 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 as has
not been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 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 statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
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10.1 (a) PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes as
defined in Paragraph 10.2, applicable to the Premises; provided, however, that
Lessee shall pay, in addition to rent, the amount, if any, by which Real
Property Taxes applicable to the Premises increase over the fiscal tax year
during which the Commencement Date Occurs ("TAX INCREASE"). Subject to
Paragraph 10.1(b), payment of any such Tax Increase shall be made by Lessee
within thirty (30) days after receipt of Lessor's written statement setting
forth the amount due and the computation thereof. Lessee shall promptly furnish
Lessor with satisfactory evidence that such taxes have been paid. If any such
taxes to be paid by Lessee shall cover any period of time prior to or after the
expiration or earlier termination of the term hereof, Lessee's share of such
taxes shall be equitably prorated to cover only the period of time within the
tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for
any overpayment after such proration.
(b) ADVANCE PAYMENT. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, at
Lessor's option, to estimate the current Real Property Taxes applicable to the
Premises, and to require such current year's Tax Increase to be paid in advance
to Lessor by Lessee, either: (i) In a lump sum amount equal to the amount 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 that equal
monthly amount which, over the number of months remaining before the month in
which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated Tax Increase to be paid. When the actual amount of
the applicable Tax Increase is known, the amount of such equal monthly advance
payment shall be adjusted as required to provide the fund needed to pay the
applicable Tax Increase before delinquency. If the amounts paid to Lessor by
Lessee under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Tax Increase as the same becomes due, Lessee
shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary
to pay such obligation. 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 the obligations of Lessee
under this Lease, then any balance of funds paid to Lessor under the provisions
of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at
the option of Lessor, be treated as an additional Security Deposit under
Paragraph 5.
(c) ADDITIONAL IMPROVEMENTS. Notwithstanding Paragraph 10.1(a) hereof,
Lessee shall pay to Lessor upon demand therefor the entirety of any In Real
Property Taxes assessed by reason of Alterations or Utility Installations placed
upon the Premises by Lessee or at Lessee's request.
10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. 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, or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this Lease, or any modification, amendment of transfer thereof, and whether or
not contemplated by the Parties.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
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 contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal 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 within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property or, at Lessor's option, as provided in Paragraph
10.1(b).
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 with other premises.
12. ASSIGNMENT AND SUBLETTING.
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12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis,
of twenty-five percent (25%) 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,
refinancing, 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, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of the execution
by Lessor 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, at whichever time said Net Worth of
Lessee was or is greater, shall be considered an assignment of this Lease by
Lessee to which Lessor may reasonably withhold its consent. "NET WORTH OF
LESSEE" for purposes of this Lease shall be the net worth of Lessee (excluding
any guarantors) established under generally accepted accounting principles
consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written 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 unconsented to assignment or subletting as a noncurable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent to
fair market rental value or one hundred ten percent (110%) of the Base Rent then
in effect, whichever is greater. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and market value
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (110%) of the price
previously in effect, whichever is greater, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to require
that the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(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 Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any 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 any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or to any subsequent or
succesive assignment or subletting by the sublessee. However, Lessor may
consent to any subsequent sublettings and assignments of the sublease or any
amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
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this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(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 subleasee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the current monthly Base Rent,
whichever is greater, as reasonable consideration for Lessor's considering and
processing the request for consent. Lessee agrees to provide Lessor with such
other or additional information and/or documentation as may be reasonably
requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, 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 in writing.
(g) The occurrence of a transaction described in Paragraph 12.1 (c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased to an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
amount required to establish such Security Deposit a condition to Lessor's
consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment structure to the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment structure for property similar to the Premises as then constituted.
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 rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligation under this Lease;
provided, however, that until a Breach (as defined in Paragraph 13.1) shall
occur in the performance of Lessee's obligations under this Lease, Lessee may,
except as otherwise provided in this Lease, receive, collect and enjoy the rents
accruing under such sublease. Lessor shall not, by reason of this or any other
assignment of such sublease to Lessor, nor by reason of the collection of the
rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rent, and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to such Breach exists and notwithstanding any notice from or claim
from Lessee to the contrary. Lessee shall have no right or claim against said
sublessee, or, until the Breach has been cured, against Lessor, for any such
rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to 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 other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under
a sublease shall also require the consent of Lessor herein.
(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, it 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.
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13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said Default. A "DEFAULT" is defined as
a failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A
"BREACH" is defined as the occurrence of any one or more of the following
Defaults, and where a grace period for cure after notice is specified herein,
the failure by Lessee to cure such Default prior to the expiration of the
applicable grace period, shall entitle Lessor to pursue the remedies set forth
in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure
by Lessee to provide Lessor with reasonable written evidence (in duly executed
form, if applicable) of (i) compliance with applicable law per Paragraph 6.3,
(ii) the inspection, maintenance and service contracts required under Paragraph
7.1(b), (iii) the recession of an unauthorized assignment or subletting per
Paragraph 12. 1 (b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the
subordination or non-subordination of this Lease per Paragraph 30, (vi) the
guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of 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 by or on behalf of Lessor 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,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; 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 of this Lease by Lessee 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 by
lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's 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 no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder 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 breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with 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 affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), 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 to Lessor upon invoice therefor. If
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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 under this Lease by Lessee to be made only by cashier's check. In
the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1,
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, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee: (i) the worth at the
time of the award of 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
likely 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 the leasing commission paid by Lessor 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 prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under subparagraphs 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1 (b), (c) or (d). In such
case, the applicable grace period under subparagraphs 13.1 (b), (c) or (d) and
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, 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 in effect (in
California under California Civil Code Section 1951.4) after Lessees Breach and
abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability 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 IN EVENT OF BREACH. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, 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 to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, 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,
and recoverable by Lessor as additional rent due under this Lease,
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
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or
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Lessor's designee within five (5) days after such amount shall be due, then,
without any requirement for notice to Lessee, Lessee shall pay to Lessor a
late charge equal to six percent (6%) of such overdue amount. The parties
hereby agree that such late charge represents a fair and reasonable estimate
of the costs Lessor will incur by reason of late payment by Lessee.
Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising 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 Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable
quarterly in advance.
13.5 BREACH BY LESSOR. 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 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by the holders of any ground lease, mortgage or deed of trust covering the
Premises 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 beeh performed; provided, however, that if the nature of Lessor's obligation
is such that more than thirty (30) days after such notice are reasonably
required for its performance, then Lessor shall not be in breach of this Lease
if performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
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 (all of which are herein called "CONDEMNATION"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of the Premises, or more than twenty-five percent (25%) of the
land area 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 the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible
for the payment of any amount in excess of such net severance damages required
to complete such repair.
15. BROKER'S FEE.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this
Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to
said Brokers jointly, or in such separate shares as they may mutually designate
in writing, a fee as set forth in a separate written agreement between Lessor
and said Brokers (or in the event there is no separate written agreement between
Lessor and said Brokers, the sum of $_________) for brokerage services rendered
by said Brokers to Lessor in this transaction.
15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor
further agrees that: (a) if Lessee exercises any Option (as defined in
Paragraph 39.1) or any Option subsequently granted which is substantially
similar to an Option granted to Lessee in this Lease, or (b) if Lessee acquires
any rights to the Premises or other premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or (c) if Lessee remains in possession of the
Premises, with the consent of Lessor, after the expiration of the term of this
Lease after having failed to exercise an Option, or (d) if said Brokers are the
procuring cause of any other lease or sale entered into between the Parties
pertaining to the Premises and/or any adjacent property in which Lessor has an
interest, or (e) if Base Rent is increased, whether by agreement or operation of
an escalation clause herein, then as to any of said transactions, Lessor shall
pay said Brokers a fee in accordance with the schedule of said Brokers in effect
at the time of the execution of this Lease.
15.4 Any buyer or transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a
third party beneficiary of the provisions of this Paragraph 15 to the extent of
its interest in any commission arising from this Lease and may enforce that
right directly against Lessor and its successors.
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15.5 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 named in Paragraph 1.10) in connection with the negotiation of this Lease
and/or the consummation of the transaction contemplated hereby, and that no
broker or other person, firm or entity other than said named Brokers is entitled
to any commission or finder's fee in connection with said transaction. 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.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. TENANCY STATEMENT.
16.1 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 "TENANCY STATEMENT" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors 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. LESSOR'S LIABILITY. 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 in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. 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.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. 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.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
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 thereto or with respect to any default or breach
hereof by either Party.
23. NOTICES.
23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messervger or courier service) 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 Paragaph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different
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address for notice purposes, except that upon Lessee's taking possession of
the Premises, the Premises shall constitute Lessee's address for the purpose
of mailing or delivering notices to Lessee. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently
transmitted to such party or parties at such addresses as Lessor may from
time to time hereafter designate by written notice to Lessee.
23.2 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 guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received
on a 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. Regardless of Lessor's knowledge of a Default or Breach at the time
of accepting rent, the acceptance of rent by Lessor shall not be a waiver of
any preceding Default or Breach by Lessee of any provision hereof, other than
the failure of Lessee to pay the particular rent so accepted. Any payment
given Lessor 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.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
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. All provisions of this Lease to be observed
or performed by Lessee are both covenants and conditions.
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 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 by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duly,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, 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 owner shall not: (i) be liable
for any act or omission of any prior lessor or
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<PAGE>
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 assurance (a "NON-DISTURBANCE AGREEMENT") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
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 such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. ATTORNEY'S FEES. If any Party or Broker brings an action or
proceeding to enforce the terms hereof or declare rights hereunder, the
Prevailing Party (as hereafter defined) or Broker in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorney's 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 attorney's fee award shall not be
computed in accordance with any court fee schedule, but shall be such as to
fully reimburse all attorney's fees reasonably incurred. Lessor shall be
entitled to attomey's 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 for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any
time place on or about the Premises or building any ordinary "For Sale" signs
and Lessor may at any time during the last one hundred twenty (120) days of the
term hereof place on or about the Premises any ordinary "For Lease" signs. All
such activities of Lessor shall be without abatement of rent or liability to
Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.
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 hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election 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.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever 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 actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor an amount
Initials _________
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<PAGE>
of money (in addition to the Security Deposit held under Paragraph 5)
reasonably calculated by Lessor to represent the cost Lessor will incur in
considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee
without interest. Lessor's consent to any act, assignment of this Lease or
subletting of the Premises by Lessee 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.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. 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.
37. GUARANTOR.
37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11,
the form of the guaranty to be executed by each such Guarantor shall be in the
form most recently published by the American Industrial Real Estate Association,
and each said Guarantor shall have the same obligations as Lessee under this
Lease, including but not limited to the obligation to provide the Tenancy
Statement and information called for by Paragraph 16.
37.2 It shall constitute a Defauft of the Lessee under this Lease if any
such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a)
evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises
and the observance 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 of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor, or the right of first refusal to
purchase other property of Lessor, or the right of first offer to purchase other
property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in
any manner, by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding any
provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of Default under Paragraph 13.1, whether or not the Defaults
are cured, during the twelve (12) month period immediately preceding the
exercise of the Option.
Initials _________
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<PAGE>
(b) The period of time within which an Option may be exercised shall not be
extended or enlarged by reason of Lessee's inability to exercise an Option
because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall terminate
and be of no further force or effect, notwithstanding Lessee's due and timely
exercise of the Option, if, after such exercise and during the term of this
Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a
period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of Default under Paragraph 13.1 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 part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, 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 under the
provisions of this Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general
or limited partnership, 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. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor 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 Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed 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. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. 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 an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if
more than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
49. The Lease dated August 14, 1990 and any extensions and amendments
thereof, for the premises located at 7435 Greenbush Avenue, North Hollywood, is
hereby terminated.
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
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<PAGE>
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME
THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO
THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS
OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR
THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES
SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER
THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD
BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Initials _________
_________
Executed at _________________________ Executed at ___________________________
on __________________________________ on ____________________________________
by LESSOR: by LESSEE:
Abraham Striks North American Scientific, Inc.
_____________________________________ _______________________________________
_____________________________________ _______________________________________
By /s/ Abraham Striks By /s/ L. Michael Cutrer
__________________________________ ___________________________________
Name Printed: Abraham Striks Name Printed: L. Michael Cutrer
__________________________________ ___________________________________
Title: Title: President
_______________________________ ________________________________
By __________________________________ By ____________________________________
Name Printed: _______________________ Name Printed: _________________________
Title: ______________________________ Title: ________________________________
Address: 12156 Sherman Way Address: 7435 Greenbush Avenue
____________________________ ______________________________
North Hollywood, CA 91605 North Hollywood, CA 91605
_____________________________________ _______________________________________
Tel. No. (818) 983-2007 Tel No. (818) 503-9201
_____________________________________ _______________________________________
Fax No. (818) 983-2891 Fax No.
_____________________________________ _______________________________________
Page 22
<PAGE>
Paragraph 50
A. OPTION(S) TO EXTEND:
Lessor hereby grants to Lessee the option to extend the term of this Lease
for 3 additional 12 month period(s) commencing when the prior term expires upon
each and all of the following terms and conditions:
(i) Lessee gives to Lessor, and Lessor actually receives on a date which
is prior to the date that the option period would commence (if exercised) by at
least 1 and not more than 9 months, a written notice of the exercise of the
option(s) to end this Lease for said additional term(s), time being of essence.
If said notification of the exercise of said option(s) is (are) not so given and
received, the option(s) shall automatically expire; said option(s) may (if more
than one) only be exercised consecutively;
(ii) The provisions of paragraph 39, including the provision relating to
default of Lessee set forth in paragraph 39.4 of this Lease are conditions of
this Option;
(iii) All of the terms and conditions of this Lease except where
specifically modified by this option shall apply;
(iv) The monthly rent for each month of the option period shall be
calculated as follows, using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
| | I. COST OF LIVING ADJUSTMENT(S) (COL)
(a) On (Fill in COL Adjustment Date(s): JANUARY 1, 1999 the monthly
rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be
adjusted by the change, if any, from the Base Month specified below, in the
Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department
of Labor for (select one): | | CPI W (Urban Wage Earners and Clerical Workers)
or | | CPI U (All Urban Consumers), for (Fill in Urban Area): LOS ANGELES
All Items (1982-1984 = 100), herein referred to as "C.P.I."
(b) The monthly rent payable in accordance with paragraph AI(a) of this
Addendum shall be calculated as follows: the Base Rent set forth in paragraph
1.5 of the attached Lease, shall be multiplied by a fraction the numerator of
which shall be the C.P.I. of the calendar month 2 (two) months prior to the
month(s) specified in paragraph AI(a) above during which the adjustment is to
take effect, and the denominator of which shall be the C.P.I. of the calendar
month which is two (2) months prior to (select one): the first month of
the term of this Lease as set forth in paragraph 1.3 ("Base Month") or
(Fill in Other "Base Month"): _____________. The sum so calculated shall
constitute the new monthly rent hereunder, but in no event, shall any such
new monthly rent be less than the rent payable for the month immediately
preceding the date for rent adjustment.
(c) In the event the compilation and/or publication of the C.P.I. shall be
transferred to any other governmental department or bureau or agency or shall be
discontinued, then the index most nearly the same as the C.P.I. 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 arbitrators shall be binding upon the
parties. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
| | II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV)
<PAGE>
(a) On (Fill in MRV Adjustment Date(s): _______________________________
_____________________________________________________________________________
the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be adjusted to the 'Market Rental Value" of the property as follows:
1) Four months prior to the Market Rental Value (MRV) Adjustment
Date(s) described above, Lessor and Lessee shall meet to establish an agreed
upon new MRV for the specified term. If agreement cannot be reached, then:
Initials: __________ Initials: _______
__________ _______
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC. Exhibit 11.1
CALCULATION OF EARNINGS PER COMMON SHARE
YEAR ENDED YEAR ENDED
OCT. 31, 1997 OCT. 31, 1996
PRIMARY EARNINGS PER SHARE
- --------------------------
Common shares outstanding at beginning of year 2,983,201 2,983,201
Exercise of stock options and warrants and
issuance of shares 152,875
Common stock equivalents, net of treasury
stock purchase 390,867 -
---------- ----------
Weighted average number of shares outstanding 3,526,943 2,983,201
========== ==========
Net income $ 276,200 $ 413,100
Net income per share $ 0.08 $ 0.14
========== ==========
The fully dilutive effect of common equivalent shares on the calculation of
fully diluted earnings per share for the years ended October 31, 1997 and
1996 was not material.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the registration statements on Form S-3 (Nos.
333-41165, and 333-37341) and in the registration statements on Form S-8
(Nos. 333-14373, and 333-25973) of North American Scientific, Inc. of our
report dated January 19, 1998, appearing on page F-1 of this Form 10-KSB.
/s/ Price Waterhouse LLP
Costa Mesa, California
January 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 1,595,900
<SECURITIES> 0
<RECEIVABLES> 438,500
<ALLOWANCES> (8,500)
<INVENTORY> 378,500
<CURRENT-ASSETS> 2,571,000
<PP&E> 635,100
<DEPRECIATION> (289,000)
<TOTAL-ASSETS> 3,673,100
<CURRENT-LIABILITIES> 444,800
<BONDS> 0
0
0
<COMMON> 34,500
<OTHER-SE> 3,193,800
<TOTAL-LIABILITY-AND-EQUITY> 3,673,100
<SALES> 3,381,400
<TOTAL-REVENUES> 3,431,400
<CGS> 1,844,200
<TOTAL-COSTS> 1,094,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,100
<INCOME-PRETAX> 420,800
<INCOME-TAX> 144,600
<INCOME-CONTINUING> 276,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 276,200
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
