-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G6hgRyjhfQ+dpDa6PkoM5K19oXY5SxLvEfiO84mj0bm/AVkDqTj5sCztWHS/ysTp huJPX+XDnr/AWh5grip9kg== 0000891618-01-000257.txt : 20010402 0000891618-01-000257.hdr.sgml : 20010402 ACCESSION NUMBER: 0000891618-01-000257 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOLECULAR DEVICES CORP CENTRAL INDEX KEY: 0001003113 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 942914362 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27316 FILM NUMBER: 1587702 BUSINESS ADDRESS: STREET 1: 1311 ORLEANS DR CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087471700 10-K 1 f70069e10-k.txt FORM 10-K FISCAL YEAR ENDED DECEMBER 31, 2000 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 ---------------- FORM 10-K ---------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 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 0-27316 MOLECULAR DEVICES CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2914362 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 1311 ORLEANS DRIVE SUNNYVALE, CALIFORNIA 94089 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (408) 747-1700 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: TITLE OF EACH CLASS COMMON STOCK, $.001 PAR VALUE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 26, 2001, based upon the last sale price reported for such date on the Nasdaq National Market, was $492,137,237*. The number of outstanding shares of the Registrant's Common Stock as of March 26, 2001 was 16,528,829. DOCUMENTS INCORPORATED BY REFERENCE Specified portions of the Proxy Statement for Registrant's 2001 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K Report. - ---------- * Excludes approximately 5,712,626 shares of common stock held by directors, officers and holders of 5% or more of the Registrant's outstanding Common Stock at March 26, 2001. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant. ================================================================================ 2 TABLE OF CONTENTS MOLECULAR DEVICES CORPORATION PART I Item 1. Business................................................................................... 3 The Company................................................................................ 3 Industry Background........................................................................ 3 The Molecular Devices Solution............................................................. 4 Strategy................................................................................... 5 Our Products............................................................................... 6 Drug Discovery Products.................................................................... 6 Life Sciences Research Products............................................................ 8 Software and Customer Service.............................................................. 10 Research and Development................................................................... 10 Marketing and Customers.................................................................... 10 Manufacturing.............................................................................. 11 Patents and Proprietary Technologies....................................................... 11 Competition................................................................................ 11 Government Regulations..................................................................... 12 Employees.................................................................................. 12 Business Risks............................................................................. 12 Item 2. Properties................................................................................. 20 Item 3. Legal Proceedings.......................................................................... 20 Item 4. Submission of Matters to a Vote of Security Holders........................................ 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 21 Item 6. Selected Consolidated Financial Data....................................................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 23 Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................. 26 Item 8. Financial Statements and Supplementary Data................................................ 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 27 PART III Item 10. Directors and Executive Officers of the Registrant......................................... 28 Item 11. Executive Compensation..................................................................... 28 Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 28 Item 13. Certain Relationships and Related Transactions............................................. 28 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 29 (a) Documents Filed with Report (b) Reports on Form 8-K (c) Exhibits (d) Financial Statement Schedules
2 3 PART 1 ITEM 1. BUSINESS THE COMPANY Except for the historical information contained herein, the following discussion contains "forward-looking" statements. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements. Words such as "believes," "anticipates," "plans," "predicts," "expects," "estimates," "intends," "will," "continue," "may," "potential," "should" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by these forward-looking statements, including, among others, those discussed in this section under "Business Risk" as well as under "Qualitative and Quantitative Disclosures about Market Risk" and the risks detailed from time to time in the Company's SEC reports, including this Annual Report on Form 10-K for the year ended December 31, 2000. We are a leading supplier of high-performance bioanalytical measurement systems that accelerate and improve drug discovery and other life sciences research. Our systems and consumables enable pharmaceutical and biotechnology companies to leverage advances in genomics and combinatorial chemistry by facilitating the high-throughput and cost-effective identification and evaluation of drug candidates. Our instrument systems are based on our advanced core technologies that integrate our expertise in engineering, molecular and cell biology, and chemistry. We enable our customers to improve research productivity and effectiveness, which ultimately accelerates the complex process of discovering and developing new drugs. INDUSTRY BACKGROUND Life sciences research, particularly drug discovery, is currently undergoing a revolution as a result of two converging trends. The worldwide effort to sequence the human genome is beginning to identify a large number of previously unknown natural molecules that play a role in disease and thus are likely targets for new therapeutic products. Until recently, only a few hundred disease targets were available to drug discovery researchers. In 2000, researchers completed the sequencing of the human genome; the estimated 30,000 genes that were revealed suggest the existence of thousands of previously unknown drug targets. At the same time, advances in combinatorial chemistry have provided chemists with techniques that allow them to synthesize a greater number of and diversity of compounds than ever before. Pharmaceutical companies previously maintained "libraries" of hundreds of thousands of compounds to test against disease targets to determine their potential as drugs; now, drug researchers have access to millions of such compounds. The identification of disease targets and synthesis of chemical compounds are key first steps in the drug discovery process. After this, researchers undertake additional steps to determine which compounds are the most promising drug candidates prior to entering clinical development. Among the most important downstream steps in the drug discovery process are assay development, drug candidate screening and lead optimization. Assay Development. Once a disease target has been identified, researchers must develop a test, or assay, to determine whether a particular compound has a desired effect on the target. Most assays involve creating a biochemical reaction that takes place in a microplate, which is a plate containing an array of small wells that are similar to miniature test tubes. The plate is inserted into a microplate reader, which measures the light absorbed or emitted by the sample in each well. Depending upon its underlying technology, the reader detects light in the form of absorption, fluorescence or luminescence. The type of assay developed depends upon the characteristics of the disease target and the type of information the researcher is seeking. Two major categories of assays are biochemical assays and cell-based assays. A cell-based assay measures how a target on or inside a living cell responds to a compound; in a biochemical assay, the target is isolated from the cell environment. Because they mimic the target's natural function, cell-based assays are often considered particularly valuable in predicting how well a compound is likely to function as a drug. Drug Candidate Screening. Once an assay has been developed, it is performed repeatedly to test the effects of a variety of compounds on the disease target, a process known as screening. Primary screening identifies "hits," or compounds that exhibit significant activity against a target; secondary screening gathers more information on the hits to confirm and characterize their activity. Because drug companies now have a rapidly increasing number of compounds to test, they are interested in high-throughput screening, or HTS, to reduce the amount of time that is required for primary and secondary screening. Traditional bioanalytical - ------------ Many of our product names mentioned throughout this document are our trademarks and service marks. Other trademarks, trade names and service marks referred to in this report are the property of their respective owners. 3 4 instruments and methods were not designed for high-throughput screening, which has contributed to the current bottleneck at this stage of the drug discovery process. Lead Optimization. Compounds that emerge from the secondary screening process, now called "leads," are next subjected to successive rounds of additional testing and chemical manipulations to make them even more suitable as drug candidates. This process, known as lead optimization, involves a variety of tests, such as cell-based assays, that yield a higher level of biological information than screening assays. As drug companies generate increasing numbers of leads, bottlenecks have emerged in this stage, resulting in demand for more efficient lead optimization tools. After optimization, a lead compound must pass a lengthy and expensive set of pre-clinical and clinical trials before becoming a drug. Because of the resources required to conduct such trials, the cost of failure is high; thus, companies are interested in tools which allow more accurate assessment of a compound's probability of success as early as possible in the drug discovery process. To reduce the length and cost of the drug discovery process, researchers increasingly need tools that speed up the above steps and increase the value of the information generated by them. Traditional bioanalytical instruments and methods do not adequately address these needs because of several limitations, including: - Low sensitivity. One way to increase the speed of drug development is to conduct assays in high-density microplates, such that many samples can be analyzed in one equipment run. Microplates are now made in standard formats with either 96, 384 or 1,536 wells; the more wells there are, the smaller the sample volume in each well. Reading very small-volume samples requires a higher level of sensitivity than is available in most traditional detection equipment. - Lack of automation. Throughput is often enhanced by incorporating automation into the drug discovery process. Some assays which provide high levels of information, such as live cell-based assays, require a particularly high degree of automation to run efficiently. For example, gaining certain kinetic data from a live cell assay, which is valuable in lead optimization, requires integrated liquid handling equipment so that compounds can be added to the cells and the detector can read the result of the assay almost instantaneously. Traditionally, many bioanalytical instruments have not been designed to integrate easily with automation equipment. - Assay Complexity. Many assays in use today are performed in a complex, multi-step process and are expensive, time-consuming and difficult to adapt to a high-throughput mode of operation. Thus, researchers are interested in assay formats that yield as much information as traditional assays but follow simplified protocols. The proliferation in disease targets and chemical compounds coupled with the limitations of traditional technologies have created bottlenecks at each of the downstream steps of the drug discovery process which our products are specifically designed to address. THE MOLECULAR DEVICES SOLUTION We offer a full range of high-performance bioanalytical systems that address the sensitivity, automation and assay complexity challenges currently faced by researchers. Our major products possess levels of detection sensitivity that enable the analysis of high-density microplates, thereby increasing throughput. These products also include, or are easily integrated with, automation equipment to further enhance throughput and allow complex assays to be performed with high efficiency. Additionally, we develop novel assays which simplify the process of obtaining key information about the activity of drug candidates; in particular, we are an industry leader in providing technologies for performing information-rich live cell assays in high-throughput mode. We group our product offerings into two categories based on the markets that are primarily served by each. Our Drug Discovery products include three major families of high-throughput instrument and reagent systems: our Fluorometric Imaging Plate Reader, or FLIPR, system, our Chemiluminescence Imaging Plate Reader, or CLIPR, system, and our multimode Analyst and Acquest systems. In each of these systems, our high-performance instrumentation is complemented by reagent kits that enable researchers to perform popular assays with higher throughput than can be achieved using conventional technologies. Our Drug Discovery product family also includes our Cytosensor system, which enables more detailed investigations of cell physiology. Together, our Drug Discovery products provide a wide array of solutions for both biochemical and cell-based research in the high-throughput screening and lead optimization market segments. Our Life Sciences Research products include our Maxline family of microplate readers, our Skatron liquid handling systems and our Threshold system. Maxline microplate readers primarily address the assay development market and offer the assay development 4 5 scientist eight differentiated instruments that include a wide range of innovative and flexible feature sets. We are widely perceived as a leader in microplate reader technology, and we believe that we have been the first to offer a number of innovative features into the premium end of the microplate reader market. Skatron liquid handling systems facilitate assays by dispensing liquids into microplates and washing microplate wells, a key step in many of the most widely used laboratory tests. Finally, our Threshold system is aimed at the biopharmaceutical manufacturing and quality control process, and we believe that the Threshold system is the only commercially available fully integrated system that rapidly and reproducibly detects potential contaminants with picogram level sensitivity. STRATEGY Our objective is to be the world's leading provider of innovative bioanalytical systems and related consumable products for drug discovery and life sciences research. We focus on providing comprehensive solutions that accelerate and improve the critical downstream drug discovery processes of assay development, drug candidate screening and lead optimization. Key elements of our strategy include: - MAINTAIN AND ADVANCE OUR TECHNOLOGICAL LEADERSHIP. Since our first product introduction in 1987, we have consistently developed innovative, technologically advanced tools to facilitate and enhance life sciences research. In the past, we have often been the first company among our competitors to introduce a new technology to the market. We continue to invest in new products as well as in enhancements to our existing products, thereby sustaining or increasing our technological edge over competitors. Maintaining and advancing our track record of innovation will be a key element of our future success, particularly as the needs of drug discovery customers change due to advances in genomics, proteomics, combinatorial chemistry and other disciplines. To accomplish this, we have invested as much as 21%, and we intend to invest a significant portion, of our revenues in research and development to build upon our leading-edge technological expertise and customer application knowledge. - INCREASE RECURRING REVENUE FROM OUR CONSUMABLE PRODUCTS. In order to increase the value of our existing products and enhance our market position, we dedicate a significant portion of our research and development efforts to introducing reagent kits that are optimized for use on our instruments. We have historically developed and produced reagent kits for our Threshold systems, and we now offer several kits for performing important assays on our Drug Discovery instruments. We focus our reagent development efforts in areas where we can provide enabling technologies; for example, our FLIPR Calcium Assay Kit allows customers to perform the most popular FLIPR assay using fewer steps than is required by the standard protocol. Other kits we have recently introduced expand the applications for our instruments into entirely new areas that are of significant interest to our customers, such as ion channel research. These products allow us to offer complete assay systems (instruments and reagents) to our customers, to increase our market share and to create a recurring revenue stream to balance the inherent variability of our instrument revenue. - EXPAND WORLDWIDE DISTRIBUTION AND SUPPORT. We maintain strong sales and support organizations in North America, Europe and Japan and a network of selected distribution partners to address regions that we do not serve directly. We intend to enhance our market presence by expanding our existing direct sales offices, opening new offices in attractive markets and forming additional distribution relationships in new regions. We believe that building a direct field presence in additional key markets will allow us to realize the full potential of these markets in terms of increased sales, closer customer relationships and improved competitive positioning. - ACQUIRE COMPLEMENTARY BUSINESSES AND TECHNOLOGIES. We intend to continue to seek businesses and technologies that will enhance our ability to provide complete, innovative solutions to drug discovery and life sciences research customers. As we identify these opportunities, we intend to seek acquisitions, partnerships and licensing arrangements with companies that meet our selection criteria. We will focus on acquisitions that allow us to gain access to novel technologies, broaden our product offerings to existing customers and extend our reach to new customers. For example, in 1998 we acquired the underlying technology for CLIPR, and in 1999 we acquired a complementary product line through our acquisition of Skatron Instruments AS. In 2000 we merged with LJL BioSystems, a leading provider of high-throughput systems that complemented our existing products and contributed significantly to our ability to provide the complete range of solutions that we currently offer. In addition to pursuing acquisitions, we intend to continue to seek partnerships and licensing arrangements to supplement our in-house research and development efforts and add complementary products to our existing offerings. In 2000, we made investments in two companies, Essen Instruments and Argonex, Inc., the parent company of Upstate Biotechnology. Essen is a company founded by the inventors of FLIPR which is developing technologies of significant interest to the drug discovery market, such as high-throughput cell electrophysiology systems. Upstate is a leading provider of cell signaling enzymes such as protein kinases, which are key components in some of the most frequently used assays in drug discovery. 5 6 OUR PRODUCTS Our products include a wide range of solutions for the Drug Discovery and Life Sciences Research markets.
DATE US LIST PRICE PRIMARY DRUG PRODUCT INTRODUCED RANGE DISCOVERY APPLICATION ------- ---------- ------------------- ---------------------- DRUG DISCOVERY FLIPR(96) 1999 $314,500 - $404,500 HTS/Lead Optimization FLIPR(384) 1998 $364,500 - $454,500 HTS/Lead Optimization CLIPR 1999 $344,500 - $390,000 HTS/Lead Optimization Analyst HT 1998 $105,000 - $120,000 HTS Analyst AD 1999 $ 76,000 - $ 94,500 Assay Development Acquest 1998 $135,000 - $150,000 HTS FLIPR Calcium Assay Kit 2000 $ 2,125 - $ 2,500 HTS FLIPR Membrane Potential Assay Kit 2000 $ 2,125 - $ 2,500 HTS CLIPR Luciferase Assay Kit 2000 $ 425 - $ 500 HTS HEFP Assay Kits 2000 $ 850 - $ 950 HTS Cytosensor 1992 $ 59,500 - $ 99,500 HTS LIFE SCIENCES RESEARCH Emax 1988 $ 5,000 - $ 6,795 Assay Development Vmax 1987 $ 6,000 - $ 8,285 Assay Development VERSAmax 1998 $ 8,825 - $ 12,800 Assay Development SPECTRAmax 340 PC 1998 $ 12,895 - $ 16,870 Assay Development SPECTRAmax 190 1998 $ 17,525 - $ 27,500 Assay Development SPECTRAmax PLUS(384) 2000 $ 23,000 - $ 30,950 Assay Development/HTS SPECTRAmax GEMINI XS 2000 $ 30,775 - $ 38,750 Assay Development/HTS SPECTRAmax LMax 2000 $ 25,000 - $ 31,000 Assay Development Skatron Liquid Handling Systems 1999 $ 5,990 - $ 39,500 Assay Development/HTS Threshold Instrument 1989 $49,500 Quality Control Threshold Reagent Kits 1989 $ 7,735 - $ 9,450 Quality Control
DRUG DISCOVERY PRODUCTS Our Drug Discovery systems, which represented 51% of our total revenues in 2000, 46% of our total revenues in 1999 and 40% of our total revenues in 1998, are used to perform both biochemical and cell-based assays and are primarily targeted toward high-throughput screening and lead optimization. FLIPR System Our FLIPR system satisfies a key demand from pharmaceutical companies for live cell analysis at a high-throughput rate. Many therapeutic drugs are targeted to cell membrane receptors: special proteins that function as control switches for cell activity and are triggered by the specific binding of soluble natural substances to relay messages to the cell via "signal transduction" mechanisms. Therapeutic drugs which act on receptors either mimic or block the action of the natural receptor-specific substance. The therapeutic potential of such drugs is, therefore, most appropriately studied using live cell systems. These studies are inherently challenging, but a high value is placed upon them by the pharmaceutical industry and the research community. Our FLIPR was the first instrument to enable high-throughput screening of live cells with high information content on cellular activation. The primary applications for our FLIPR system are the measurement of intracellular calcium ion flux and membrane potential change, both of which provide critical information on the activation of cells by test compounds. In our FLIPR system, cells, along with appropriate fluorescent dyes, are maintained in microplates in a thermally-controlled compartment together with compound-addition plates. Fluorescence activity is evaluated before, during, and after delivery of compounds to the wells to evaluate the effect of compounds on the cells. Laser light provides excitation illumination to the wells and fluorescence from the cells on the bottom of the wells is quantified with an electronic camera. During the reading cycle, a built-in pipettor transfers compound samples from the compound-addition plate to the cell plate and the reaction is continuously monitored by an ultrasensitive charge coupled device, a CCD camera, at intervals of less than one second. This strategy allows for real-time 6 7 monitoring of cells before and after compound addition, thus allowing the measurement of rapid non-linear, response kinetics. Our FLIPR system's limited depth-of-field fluorometry optical design is patented. We currently offer two primary products based on our FLIPR technology platform. - FLIPR(384). This product, introduced in 1998, was the second generation FLIPR product. It combines all of the benefits of the original FLIPR along with new automation capabilities and the ability to analyze samples in 384 well microplates, as well as 96 well microplates. FLIPR(384) can screen as many as 50,000 samples daily, and offers optional integrated plate stacker and washer accessories which can dramatically reduce the need for human intervention during sample processing. In addition, the instrument also incorporates interfaces that enable it to integrate into automated screening lines. - FLIPR(96). This product is built on same chassis as the FLIPR(384) and is capable of all of the automation benefits of the FLIPR(384). The primary differentiation is that FLIPR(96) is not 384 well compatible, and therefore is targeted at lower throughput applications in lead optimization. We also offer an upgrade package for the FLIPR(96) that enables 384 well capability. CLIPR System Our Chemiluminescence Imaging Plate Reader, or CLIPR, system was developed based on telecentric lens luminometer technology licensed from Affymax Research Institute in 1998. We introduced this system in the third quarter of 1999. It satisfies a key demand from pharmaceutical companies for live cell analysis at an ultra high-throughput rate using luminescence technology. This allows customers to perform popular assays, such as those involving reporter genes, at unprecedented speeds. CLIPR's applications also include non-cell-based assays such as SPA, which is among the most frequently-performed tests in the drug discovery market. These applications complement those of our FLIPR, Analyst and Acquest systems, offering solutions for a wide range of biochemical and cell-based assays. The system combines an ultra sensitive CCD camera with proprietary wide field optics to achieve ultra high-throughput by simultaneously imaging all of the wells on a microplate. As a result of the simultaneous imaging, CLIPR is compatible with any microwell plate format including 96, 384, 1536 and beyond. Our CLIPR system can be integrated with a linear track robot, used in workstation mode with an optional light-tight plate stacker module, or used in a stand-alone mode. CLIPR can support the analysis of over 200,000 samples in an eight-hour day. Analyst and Acquest Systems Our Analyst and Acquest systems complement our other drug discovery offerings by providing industry-leading flexibility and throughput for a wide range of biochemical assays. These systems each feature seven different readout modalities, allowing customers to choose the one that is optimal for the particular screen they are performing. One of these readout modalities, fluorescence polarization, has become popular in recent years because it enables assays to be performed with greatly simplified protocols. We were pioneers in developing the market for fluorescence polarization, and our proprietary High Efficiency Fluorescence Polarization (HEFP(TM)) technology is incorporated into the Analyst and Acquest systems. Our HEFP technology enables miniaturized biochemical assays to be performed in a single step, a significant advantage over traditional biochemical assays. Analyst and Acquest provide several important customer benefits, including: increased throughput, improved analytical performance and flexibility (especially in higher density formats), lower reagent costs and compatibility with automation equipment. Analyst HT, launched in 1998, performs up to 70,000 screens per day. In 1998 we also introduced the ultra-high-throughput Acquest, capable of reading microplates in 96-, 384- and 1,536-well formats and running up to 200,000 assays per day. In 1999 we launched Analyst AD, which was designed specifically for assay development and is fully compatible with Analyst HT. 7 8 Cytosensor System We developed the Cytosensor system to provide a fast, reliable, single assay system to investigate multiple cellular functions in numerous cell types. Our Cytosensor system incorporates our core Light Addressable Potentiometric Sensor, or LAPS, technology, a detection system capable of measuring a wide variety of chemical reactions as they occur on the surface of a silicon based sensor, into a patented system that permits researchers to conduct microphysiometry, the study of cellular metabolism, without destroying the cells. Cellular metabolism is the most fundamental and essential of all physiological processes, and allows for the monitoring of cell activation, stimulation, growth, toxicity and other biochemical events crucial to the development of new therapeutics. We believe that the primary applications of the Cytosensor system are receptor characterization, orphan receptor identification, human cell pharmacological profiling and in vitro toxicology. We offer a 4-chamber Cytosensor system targeting customers with relatively low throughput requirements and an 8-chamber system for customers who require higher throughput. Drug Discovery Reagents We are expanding our reagent business by focusing on the internal development of proprietary reagent kits optimized for our Drug Discovery instruments. We have historically developed and produced reagent kits for our Threshold systems, and in 1999 we began to sell consumables for our installed base of Drug Discovery instruments with the introduction of kits for performing important assays on FLIPR, CLIPR, Analyst and Acquest. Our reagent business is supported by a reagent development and marketing team, in-house organic chemistry labs and significant reagent production capacity. Our current Drug Discovery reagent offerings include: - FLIPR Calcium Assay Kit. This product was released in 2000, and has begun to revolutionize the way FLIPR calcium assays are performed. The kit's unique feature is that it enables researchers to eliminate a step in the assay protocol, thereby saving up to 15 minutes of processing time for each 384 well plate. This kit has the potential to significantly increase throughput, reduce costs and increase screening efficiency. - FLIPR Membrane Potential Assay Kit. Based on a similar time-saving methodology as the Calcium Assay Kit, this product allows researchers to measure changes in the electrical potential of live cell membranes, a key indicator of ion channel activity. Ion channels are implicated in many major diseases and are therefore a target of great interest to drug discovery customers. - CLIPR Luciferase Assay Kit. This is optimized for 1536 well plates used with the CLIPR system and targeted at reporter gene assay applications. - HEFP Assay Kits. Our HEFP reagent kits, optimized for use on our Analyst and Acquest systems, include STX-1, TKXtra Explorer, and cAMP. LIFE SCIENCES RESEARCH PRODUCTS Our Life Sciences Research products, which represented 49% of total revenues in 2000, 54% of total revenues in 1999 and 60% of total revenues in 1998, encompass our Maxline and Threshold product lines. The Maxline family of products consists primarily of advanced microplate readers. Microplate readers have become one of the most fundamental tools used in life sciences research by addressing the increasing need for the acquisition and processing of large quantities of biochemical and biological data. Microplate readers provide scientists the benefit of high-throughput analysis in a standardized, multi-sample format. Because of the productivity gains using a multi-sample format, microplates have largely replaced test tubes and cuvettes for many life sciences applications. A microplate is a disposable plastic vessel that is used with a microplate reader to measure light. The basic principles of microplate readers are that light from an appropriate source is directed to a wavelength selection device, such as a monochromator, and its intensity is measured before and after passing through each of the sample wells of a microplate. Application of a mathematical formula to the light intensity measurements of each microplate well provides a measure of the sample present in the well. The measurement, known as optical density, relative fluorescence, or luminescence, is proportional to the concentration of the substance that is being measured. Historically, the standard microplate was comprised of 96 individual wells. As cost and throughput have become increasingly important, however, the industry has begun to move to higher density plates including 384 wells and 1536 wells. We believe that this trend towards miniaturization will continue to be a significant factor affecting the microplate reader market in the future. 8 9 Maxline Our Maxline strategy has been to continue to introduce new products that include first-of-a-kind features, as well as to offer varying feature sets and price points to address different market segments. We have historically focused on the premium end of the microplate reader market through offering products with advanced capabilities. Some of the first-of-a-kind features that we have pioneered include the first reader and software capable of kinetic analysis, the first monochromator-based reader that enabled continuous wavelength selection and the first reader capable of performance comparable to a spectrophotometer. In each case, we believe that the innovation helped expand the utility of microplate readers and, more broadly, the available market for microplate readers. Our Maxline family currently includes the following primary products: - Emax. This product is aimed at the market for traditional microplate readers that do not require kinetic capability. We introduced it to provide a reader for customers in academia and other customers with restricted capital budgets. - Vmax. This was the first microplate reader to offer kinetic read capability and is designed to address the needs of biochemists. - VERSAmax. The VERSAmax is our low cost variable wavelength offering that provides kinetic capability and temperature control. - SPECTRAmax 340PC. This product is a visible range microplate spectrophotometer, offering tunability and the additional capability of our patented PathCheck Sensor technology, which corrects common variability problems across wells of microplates. - SPECTRAmax 190. The predecessor to this product was the world's first microplate reader that incorporated a monochromator for continuous wavelength selection. Wavelength selection provides for enhanced convenience and flexibility in assay design. In addition, the SPECTRAmax 190 also includes our patented PathCheck Sensor technology. - SPECTRAmax PLUS(384). The SPECTRAmax PLUS, introduced in 1997, was our first microplate reader aimed at the spectrophotometer market. It was the industry's first microplate reader that was able to combine the high-throughput of a microplate reader with the performance of a cuvette based spectrophotometer as a result of our patented PathCheck Sensor technology. The SPECTRAmax PLUS was also the first microplate reader with the ability to read wavelengths as short as 190 nanometers and as long as 1,000 nanometers, the equivalent range to a spectrophotometer. The SPECTRAmax PLUS(384), introduced in 2000, addresses the needs of the high-throughput screening market by adding 384-well plate compatibility. - SPECTRAmax GEMINI XS. SPECTRAmax GEMINI, introduced in late 1998, was the world's first dual-scanning microplate spectrofluorometer. By incorporating two scanning monochromators, the SPECTRAmax GEMINI allows the user to automatically optimize the instrument setting for the particular assay characteristics as well as for every fluorophore that is in use today. GEMINI also was our first microplate reader capable of multi-mode operation, in that the product is capable of fluorescence, luminescence and time-resolved fluorescence measurements. The GEMINI XS (Extra Sensitive), introduced in 2000, extends the GEMINI franchise by significantly improving sensitivity and adding well scanning capability which allows researchers to perform more complex cell based assays. - SPECTRAmax LMax. SPECTRAmax LMax, introduced in 2000, is our first reader to offer customers sensitive luminescence detection in a bench-top instrument. Skatron We acquired a line of liquid handling systems, primarily washers, through our acquisition of Skatron in 1999. Washers are used to dispense and remove fluid from microwell plates and are used as an integral step during the course of many assays. The Skatron products bring a complete line of state-of-the-art microwell plate washers and other related tools, including cell harvesters, to the Life Sciences Research product family. These products include a variety of cell and plate washers that offer 96, 384 and 1536 well washing capabilities. 9 10 Threshold System Our Threshold system is comprised of a detection instrument and proprietary reagents. Our Threshold system incorporates our LAPS technology to quantitate a variety of biomolecules such as DNA, proteins and mRNA rapidly and accurately. The demand for systems which can quantitate contaminants in the manufacturing and quality control of bioengineered products is in response to the growing number of biopharmaceutical therapeutics both entering clinical trials and receiving regulatory approval for commercial sale. The Threshold system emerged from a need by biopharmaceutical companies for more sensitive and reproducible methods to detect contaminants in biopharmaceuticals during the manufacturing and quality control process. Traditional detection methods, such as DNA hybridization, can be slow, difficult to use in a manner that provides reproducible and transferable results, and often require the use of radioactive materials for detection. We believe that the Threshold system is the only commercially available, fully-integrated system capable of rapidly and accurately quantitating DNA with picogram level sensitivity. The Threshold family of products includes a workstation, software and consumable reagent kits. SOFTWARE AND CUSTOMER SERVICE In addition to instruments and consumable products, we also offer software products and support services. All of our instrument products are used with internally designed and developed software which are sold as an integral part of the instrument system. We believe that our software is an important differentiator for our instrument products relative to the competition based on its ease-of-use and advanced data analysis capabilities. Our service and support offerings include field service, customer support, applications assistance and training through an organization of factory-trained and educated service and application support personnel around the world. We offer services to our installed base of customers on both a contract and time and materials basis and we offer a variety of post-warranty contract options for all our instrument offerings that customers may purchase. Our installed base provides us with stable, recurring after-market service and support revenue, as well as product upgrade and replacement opportunities. RESEARCH AND DEVELOPMENT Our research and development team included 82 full time employees as of December 31, 2000. Our combined operations have typically invested 17% to 21% of our revenues in research and development, which has resulted in a track record of technological innovation. Over 76% of our revenues in 2000 were derived from products that we introduced in the last three years. Our research and development expenditures were approximately $16.8 million in 2000, $14.1 million in 1999 and $11.2 million in 1998. Our research and development activities are focused on: - broadening our technology solution, including development of new proprietary reagent kits; - providing more sensitive quantitative evaluation of biological events; - providing greater throughput capability, especially with smaller sample volumes; and - developing increasingly sophisticated data management and analysis capability. MARKETING AND CUSTOMERS Our sales and marketing organization included 137 full time employees in North America, Europe and Japan as of December 31, 2000. We distribute our products primarily through direct sales representatives in North America. We have subsidiaries in the United Kingdom, Germany and Japan responsible for selling and servicing our products. Our direct sales effort is supported by a team of service, technical and applications specialists employed by us. We also sell our products through international distributors, most of which enter into distribution agreements with us that provide for exclusive distribution arrangements and minimum purchase targets. Such agreements also generally prohibit the distributors from designing, manufacturing, promoting or selling any products that are competitive with our products. 10 11 Our customers include leading pharmaceutical and biotechnology companies as well as medical centers, universities, government research laboratories and other institutions throughout the world. No single customer accounted for more than 5% of our total 2000 revenues. In 2000, sales to customers outside the United States accounted for 37% of total revenues and total sales denominated in foreign currencies accounted for 20% of total revenues. We anticipate that international sales will account for an increasing percentage of revenues in the future. We expect to continue expanding our international operations in order to take advantage of increasing international market opportunities resulting from worldwide growth in the life sciences industry. MANUFACTURING We manufacture our products at our facilities in Sunnyvale, California and Norway. Our California facility is ISO 9001 certified. We manufacture our own components where we believe it adds significant value, but we rely on suppliers for the manufacture of selected components and subassemblies, which are manufactured to our specifications. We conduct all final testing and inspection of our products. We have established a quality control program, including a set of standard manufacturing and documentation procedures intended to ensure that, where required, our instruments are manufactured in accordance with Good Manufacturing Practices. PATENTS AND PROPRIETARY TECHNOLOGIES We protect our proprietary rights from unauthorized use by third parties to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. Patents and other proprietary rights are an essential element of our business. Our policy is to file patent applications and to protect technology, inventions and improvements to inventions that are commercially important to the development of our business. As of December 31, 2000, we were maintaining 40 U.S. patents and other corresponding foreign patents based on our discoveries that have been issued or allowed. In addition, as of that date, we had 55 patent applications pending in the United States and had filed several corresponding foreign patent applications. We are a party to various license agreements that give us rights to use certain technologies. We pay royalties to the parties from which we licensed or acquired the core technologies. We also rely on trade secret, employee and third-party nondisclosure agreements and other protective measures to protect our intellectual property rights pertaining to our products and technology. COMPETITION The market for life sciences instrumentation is highly competitive, and we expect competition to increase. We compete for the allocation of customer capital funds with many other companies marketing capital equipment, including those not directly competitive with any of our products. Some of our products also compete directly with similar products from other companies. The life sciences research market is characterized by intense competition among a number of companies, including Bio-Tek Instruments, Packard BioScience, PerkinElmer, Tecan and Thermo BioAnalysis, that offer, or may in the future offer, products with performance capabilities generally similar to those offered by our products. We expect that competition is likely to increase in the future, as several current and potential competitors have the technological and financial ability to enter the microplate reader market. Our Maxline products are generally priced at a premium to other microplate readers. We compete in the microplate reader market primarily on the basis of performance and productivity. Many companies, research institutions and government organizations that might otherwise be customers for our products employ methods for bioanalytical analysis that are internally developed. The drug discovery market is also characterized by intense competition among a number of companies, including AP Biotech, Applied Biosystems, Aurora Biosciences, Cellomics, Packard BioScience, and PerkinElmer, that offer, or may in the future offer, products with performance capabilities generally similar to those offered by our products. We believe that the primary competitive factors in the market for our products are throughput, quantitative accuracy, breadth of applications, ease-of-use, productivity enhancement, quality, support and price/performance. We believe that we compete favorably with respect to these factors. Many of our competitors have significantly greater financial, technical, marketing, sales and other resources than we do. In addition to competing with us with respect to product sales, these companies and institutions compete with us in recruiting and retaining highly qualified scientific and management personnel. 11 12 GOVERNMENT REGULATION In the United States, the development, manufacturing, distribution, labeling and advertising of products intended for use in the diagnosis of disease or other conditions is extensively regulated by the U.S. Food and Drug Administration, known as the FDA. These products generally require FDA clearance before they may be marketed, and also are subject to postmarket manufacturing, reporting and labeling requirements. With the exception of certain of our Maxline microplate readers, none of our products is intended for use in the diagnosis of disease or other conditions, and, therefore, they are not currently subject to FDA regulation. The Maxline readers intended for diagnostic uses are the subject of an FDA marketing clearance. If we were to offer any of our other products for diagnostic uses, those products would become subject to FDA regulation. EMPLOYEES As of December 31, 2000, we employed 332 persons full time, including 82 in research and development, 81 in manufacturing, 137 in marketing and sales and 32 in general administration and finance. Of these employees, 56 hold Ph.D. or other advanced degrees. None of our employees is covered by collective bargaining agreements, and we consider relations with our employees to be good. BUSINESS RISKS Our business faces significant risks and the risks described below may not be the only risks we face. Additional risks that we do not know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could be harmed and the trading price of our common stock could decline. VARIATIONS IN THE AMOUNT OF TIME IT TAKES FOR US TO SELL OUR PRODUCTS AND COLLECT ACCOUNTS RECEIVABLE AND THE TIMING OF CUSTOMER ORDERS MAY CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE. The timing of capital equipment purchases by customers is expected to be uneven and difficult to predict. Our products represent major capital purchases for our customers. The list prices for our instruments range from $5,000 to $494,500. Accordingly, our customers generally take a relatively long time to evaluate our products, and a significant portion of our revenues is typically derived from sales of a small number of relatively high-priced products. Purchases are generally made by purchase orders and not long-term contracts. Delays in receipt of anticipated orders for our relatively high priced products could lead to substantial variability from quarter to quarter. Furthermore, we have historically received purchase orders and made a significant portion of each quarter's product shipments near the end of the quarter. If that pattern continues, even short delays in the receipt of orders or shipment of products at the end of a quarter could have a materially adverse affect on results of operations for that quarter. We expend significant resources educating and providing information to our prospective customers regarding the uses and benefits of our products. Because of the number of factors influencing the sales process, the period between our initial contact with a customer and the time when we recognize revenues from that customer, if ever, varies widely. Our sales cycles typically range from three to six months, but can be much longer. During these cycles, we commit substantial resources to our sales efforts in advance of receiving any revenues, and we may never receive any revenues from a customer despite our sales efforts. The relatively high purchase price for a customer order contributes to collection delays that result in working capital volatility. While the terms of most of our purchase orders require payment within 30 days of product shipment, in the past we have experienced significant collection delays. We cannot predict whether we will continue to experience similar or more severe delays. The capital spending policies of our customers have a significant effect on the demand for our products. Those policies are based on a wide variety of factors, including resources available to make purchases, spending priorities, and policies regarding capital expenditures during industry downturns or recessionary periods. Any decrease in capital spending by our customers resulting from any of these factors could harm our business. 12 13 WE DEPEND ON ORDERS THAT ARE RECEIVED AND SHIPPED IN THE SAME QUARTER AND THEREFORE HAVE LIMITED VISIBILITY OF FUTURE PRODUCT SHIPMENTS. Our net sales in any given quarter depend upon a combination of orders received in that quarter for shipment in that quarter and shipments from backlog. Our products are typically shipped within 30 to 90 days of purchase order receipt. As a result, we do not believe that the amount of backlog at any particular date is indicative of our future level of sales. Our backlog at the beginning of each quarter does not include all product sales needed to achieve expected revenues for that quarter. Consequently, we are dependent on obtaining orders for products to be shipped in the same quarter that the order is received. Moreover, customers may reschedule shipments, and production difficulties could delay shipments. Accordingly, we have limited visibility of future product shipments, and our results of operations are subject to significant variability from quarter to quarter. MANY OF OUR CURRENT AND POTENTIAL COMPETITORS HAVE SIGNIFICANTLY GREATER RESOURCES THAN WE DO, AND INCREASED COMPETITION COULD IMPAIR SALES OF OUR PRODUCTS. We operate in a highly competitive industry and face competition from companies that design, manufacture and market instruments for use in the life sciences research industry, from genomic, pharmaceutical, biotechnology and diagnostic companies and from academic and research institutions and government or other publicly-funded agencies, both in the United States and abroad. We may not be able to compete effectively with all of these competitors. Many of these companies and institutions have greater financial, engineering, manufacturing, marketing and customer support resources than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which could impair sales of our products. Moreover, there has been significant merger and acquisition activity among our competitors and potential competitors. These transactions by our competitors and potential competitors may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs. Many of our customers and potential customers are large companies that require global support and service, which may be easier for our larger competitors to provide. We believe that competition within the markets we serve is primarily driven by the need for innovative products that address the needs of customers. We attempt to counter competition by seeking to develop new products and provide quality products and services that meet customers' needs. We cannot assure you, however, that we will be able to successfully develop new products or that our existing or new products and services will adequately meet our customers' needs. Rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition and frequent new product and service introductions characterize the markets for our products. To remain competitive, we will be required to develop new products and periodically enhance our existing products in a timely manner. We are facing increased competition as new companies entering the market with new technologies compete, or will compete, with our products and future products. We cannot assure you that one or more of our competitors will not succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products or future products, or that would render our technologies and products obsolete or uneconomical. Our future success will depend in large part on our ability to maintain a competitive position with respect to our current and future technologies, which we may not be able to do. In addition, delays in the launch of our new products may result in loss of market share due to our customers' purchases of competitors' products during any delay. IF WE ARE NOT SUCCESSFUL IN DEVELOPING NEW AND ENHANCED PRODUCTS, WE MAY LOSE MARKET SHARE TO OUR COMPETITORS. The life sciences instrumentation market is characterized by rapid technological change and frequent new product introductions. Over 76% of our revenues in 2000 were derived from the sale of products that were introduced in the last three years, and our future success will depend on our ability to enhance our current products and to develop and introduce, on a timely basis, new products that address the evolving needs of our customers. We may experience difficulties or delays in our development efforts with respect to new products, and we may not ultimately be successful in developing them. Any significant delay in releasing new systems could adversely affect our reputation, give a competitor a first-to-market advantage or cause a competitor to achieve greater market share. In addition, our future success depends on our continued ability to develop new applications for our existing products. If we are not able to complete the development of these applications, or if we experience difficulties or delays, we may lose our current customers and may not be able to attract new customers, which could seriously harm our business and our future growth prospects. 13 14 WE MUST EXPEND A SIGNIFICANT AMOUNT OF TIME AND RESOURCES TO DEVELOP NEW PRODUCTS AND IF THESE PRODUCTS DO NOT ACHIEVE COMMERCIAL ACCEPTANCE, OUR OPERATING RESULTS MAY SUFFER. We expect to spend a significant amount of time and resources to develop new products and refine existing products. In light of the long product development cycles inherent in our industry, these expenditures will be made well in advance of the prospect of deriving revenues from the sale of new products. Our ability to commercially introduce and successfully market new products is subject to a wide variety of challenges during this development cycle that could delay introduction of these products. In addition, since our customers are not obligated by long-term contracts to purchase our products, our anticipated product orders may not materialize, or orders that do materialize may be canceled. As a result, if we do not achieve market acceptance of new products, our operating results will suffer. We cannot predict whether new products that we expect to introduce will achieve commercial acceptance. Our products are generally priced higher than competitive products, which may impair commercial acceptance. IF WE DELIVER PRODUCTS WITH DEFECTS, OUR CREDIBILITY WILL BE HARMED AND THE SALES AND MARKET ACCEPTANCE OF OUR PRODUCTS WILL DECREASE. Our products are complex and sometimes have contained errors, defects and bugs when introduced. If we deliver products with errors, defects or bugs, our credibility and the market acceptance and sales of our products would be harmed. Further, if our products contain errors, defects or bugs, we may be required to expend significant capital and resources to alleviate such problems. Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers. We have agreed to indemnify our customers in some circumstances against liability arising from defects in our products. In the event of a successful product liability claim, we could be obligated to pay damages significantly in excess of our product liability insurance limits. MOST OF OUR CURRENT AND POTENTIAL CUSTOMERS ARE FROM THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES AND ARE SUBJECT TO RISKS FACED BY THOSE INDUSTRIES. We derive a significant portion of our revenues from sales to pharmaceutical and biotechnology companies. We expect that sales to pharmaceutical and biotechnology companies will continue to be a primary source of revenues for the foreseeable future. As a result, we are subject to risks and uncertainties that affect the pharmaceutical and biotechnology industries, such as pricing pressures as third-party payors continue challenging the pricing of medical products and services, government regulation and uncertainty of technological change, and reduction and delays in research and development expenditures by companies in these industries. In addition, our future revenues may be adversely affected by the ongoing consolidation in the pharmaceutical and biotechnology industries, which will reduce the number of our potential customers. Furthermore, we cannot assure you that the pharmaceutical and biotechnology companies that are our customers will not develop their own competing products or in-house capabilities. OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH MAY CAUSE US TO ENGAGE IN COSTLY LITIGATION AND, IF WE ARE NOT SUCCESSFUL, COULD ALSO CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT US FROM SELLING OUR PRODUCTS. Third parties may assert infringement or other intellectual property claims against us. We may have to pay substantial damages, including treble damages, for past infringement if it is ultimately determined that our products infringe a third party's proprietary rights. Further, any legal action against us could, in addition to subjecting us to potential liability for damages, prohibit us from selling our products before we obtain a license to do so from the party owning the intellectual property, which, if available at all, may require us to pay substantial royalties. Even if these claims are without merit, defending a lawsuit takes significant time, may be expensive and may divert management attention from other business concerns. There may be third-party patents that may relate to our technology or potential products. Any public announcements related to litigation or interference proceedings initiated or threatened against us could cause our stock price to decline. We believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. If we become involved in litigation, it could consume a substantial portion of our managerial and financial resources. 14 15 WE MAY NEED TO INITIATE LAWSUITS TO PROTECT OR ENFORCE OUR PATENTS, WHICH WOULD BE EXPENSIVE AND, IF WE LOSE, MAY CAUSE US TO LOSE SOME OF OUR INTELLECTUAL PROPERTY RIGHTS, WHICH WOULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET. We rely on patents to protect a large part of our intellectual property and our competitive position. In order to protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings. Litigation may be necessary to: - - assert claims of infringement; - - enforce our patents; - - protect our trade secrets or know-how; or - - determine the enforceability, scope and validity of the proprietary rights of others. Lawsuits could be expensive, take significant time and divert management's attention from other business concerns. They would put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. We may also provoke third parties to assert claims against us. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in our industry are generally uncertain. We cannot assure you that we will prevail in any of these suits or that the damages or other remedies awarded, if any, will be commercially valuable. During the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors perceive any of these results to be negative, our stock price could decline. THE RIGHTS WE RELY UPON TO PROTECT OUR INTELLECTUAL PROPERTY UNDERLYING OUR PRODUCTS MAY NOT BE ADEQUATE, WHICH COULD ENABLE THIRD PARTIES TO USE OUR TECHNOLOGY AND WOULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET. Our success will depend in part on our ability to obtain commercially valuable patent claims and to protect our intellectual property. Our patent position is generally uncertain and involves complex legal and factual questions. Legal standards relating to the validity and scope of claims in our technology field are still evolving. Therefore, the degree of future protection for our proprietary rights is uncertain. The risks and uncertainties that we face with respect to our patents and other proprietary rights include the following: - - the pending patent applications we have filed or to which we have exclusive rights may not result in issued patents or may take longer than we expect to result in issued patents; - - the claims of any patents which are issued may not provide meaningful protection; - - we may not be able to develop additional proprietary technologies that are patentable; - - the patents licensed or issued to us or our customers may not provide a competitive advantage; - - other companies may challenge patents licensed or issued to us or our customers; - - patents issued to other companies may harm our ability to do business; - - other companies may independently develop similar or alternative technologies or duplicate our technologies; and - - other companies may design around technologies we have licensed or developed. In addition to patents, we rely on a combination of trade secrets, nondisclosure agreements and other contractual provisions and technical measures to protect our intellectual property rights. Nevertheless, these measures may not be adequate to safeguard the technology underlying our products. If they do not protect our rights, third parties could use our technology, and our ability to compete in the market would be reduced. In addition, employees, consultants and others who participate in the development of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach. We 15 16 also may not be able to effectively protect our intellectual property rights in some foreign countries. For a variety of reasons, we may decide not to file for patent, copyright or trademark protection or prosecute potential infringements of our patents. We also realize that our trade secrets may become known through other means not currently foreseen by us. Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or alternative technologies or products that are equal or superior to our technology and products without infringing on any of our intellectual property rights or design around our proprietary technologies. WE OBTAIN SOME OF THE COMPONENTS AND SUBASSEMBLIES INCLUDED IN OUR SYSTEMS FROM A SINGLE SOURCE OR A LIMITED GROUP OF SUPPLIERS, AND THE PARTIAL OR COMPLETE LOSS OF ONE OF THESE SUPPLIERS COULD CAUSE PRODUCTION DELAYS AND A SUBSTANTIAL LOSS OF REVENUES. We rely on outside vendors to manufacture many components and subassemblies. Certain components, subassemblies and services necessary for the manufacture of our systems are obtained from a sole supplier or limited group of suppliers, some of which are our competitors. Additional components, such as optical, electronic and pneumatic devices, are currently purchased in configurations specific to our requirements and, together with certain other components, such as computers, are integrated into our products. We maintain only a limited number of long-term supply agreements with our suppliers. Our reliance on a sole or a limited group of suppliers involves several risks, including the following: - - we may be unable to obtain an adequate supply of required components; - - we have reduced control over pricing and the timely delivery of components and subassemblies; and - - our suppliers may be unable to develop technologically advanced products to support our growth and development of new systems. For example, we relied primarily on a single supplier of disposable plastic tips used with our FLIPR(384) system for most of 2000, and we experienced delays and customer dissatisfaction due to our supplier's inability to deliver an adequate supply of tips. We now have an alternative supplier for the disposable plastic tips but we cannot predict whether we will encounter additional similar delays in the future. Our current supplier and known potential alternative suppliers of disposable plastic tips used with our FLIPR(384) system are our competitors. Because the manufacturing of certain of these components and subassemblies involves extremely complex processes and requires long lead times, we may experience delays or shortages caused by suppliers. We believe that alternative sources could be obtained and qualified, if necessary, for most sole and limited source parts. However, if we were forced to seek alternative sources of supply or to manufacture such components or subassemblies internally, we may be forced to redesign our systems, which could prevent us from shipping our systems to customers on a timely basis. Some of our suppliers have relatively limited financial and other resources. Any inability to obtain adequate deliveries, or any other circumstance that would restrict our ability to ship our products, could damage relationships with current and prospective customers and could harm our business. WE MAY ENCOUNTER MANUFACTURING AND ASSEMBLY PROBLEMS OR DELAYS, WHICH COULD RESULT IN LOST REVENUES. We assemble our systems in our manufacturing facilities located in Sunnyvale, California and Norway. Our manufacturing and assembly processes are highly complex and require sophisticated, costly equipment and specially designed facilities. As a result, any prolonged disruption in the operations of our manufacturing facilities could seriously harm our ability to satisfy our customer order deadlines. As a result of the electricity crisis in California, our Sunnyvale manufacturing facility periodically runs the risk of a partial or complete power failure. If we cannot deliver our systems in a timely manner, our revenues will likely suffer. Our product sales depend in part upon manufacturing yields. We currently have limited manufacturing capacity and experience variability in manufacturing yields. We are currently manufacturing high-throughput instruments in-house, in limited volumes and with largely manual assembly. If demand for our high-throughput instruments increases, we will either need to expand our in-house manufacturing capabilities or outsource to other manufacturers. If we fail to deliver our products in a timely manner, our relationships with our customers could be seriously harmed, and revenues would decline. As we develop new products, we must transition the manufacture of a new product from the development stage to commercial manufacturing. We cannot predict whether we will be able to complete these transitions on a timely basis and with commercially 16 17 reasonable costs. We cannot assure you that manufacturing or quality control problems will not arise as we attempt to scale-up our production for any future new products or that we can scale-up manufacturing and quality control in a timely manner or at commercially reasonable costs. If we are unable to consistently manufacture our products on a timely basis because of these or other factors, our product sales will decline. WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH. We expect to continue to experience significant growth in the number of our employees and customers and the scope of our operations, including as a result of potential acquisition. This growth may continue to place a significant strain on our management and operations. Our ability to manage this growth will depend upon our ability to broaden our management team and our ability to attract, hire and retain skilled employees. Our success will also depend on the ability of our officers and key employees to continue to implement and improve our operational and other systems, to manage multiple, concurrent customer relationships and to hire, train and manage our employees. Our future success is heavily dependent upon growth and acceptance of new products. If we cannot scale our business appropriately or otherwise adapt to anticipated growth and new product introductions, a key part of our strategy may not be successful. WE RELY UPON DISTRIBUTORS FOR PRODUCT SALES AND SUPPORT OUTSIDE NORTH AMERICA. In 2000, approximately 17% of our sales were made through distributors. We often rely upon distributors to provide customer support to the ultimate end users of our products. As a result, our success depends on the continued sales and customer support efforts of our network of distributors. The use of distributors involves certain risks, including risks that distributors will not effectively sell or support our products, that they will be unable to satisfy financial obligations to us and that they will cease operations. Any reduction, delay or loss of orders from our significant distributors could harm our revenues. We also do not currently have distributors in a number of significant international markets that we have targeted and will need to establish additional international distribution relationships. In January 2001, we acquired our Japanese distributor, Nihon Molecular Devices. As a result, we will be providing direct sales and service support to customers in this substantial market. There can be no assurance that we will engage qualified distributors in a timely manner, and the failure to do so could have a materially adverse affect on our business, financial condition and results of operations. IF WE CHOOSE TO ACQUIRE NEW AND COMPLEMENTARY BUSINESSES, PRODUCTS OR TECHNOLOGIES INSTEAD OF DEVELOPING THEM OURSELVES, WE MAY BE UNABLE TO COMPLETE THESE ACQUISITIONS OR MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE AN ACQUIRED BUSINESS OR TECHNOLOGY IN A COST-EFFECTIVE AND NON-DISRUPTIVE MANNER. Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. To this end, from time to time we have acquired complementary businesses, products, or technologies instead of developing them ourselves and may choose to do so in the future. We do not know if we will be able to complete any acquisitions, or whether we will be able to successfully integrate any acquired business, operate it profitably or retain its key employees. Integrating any business, product or technology we acquire could be expensive and time consuming, disrupt our ongoing business and distract our management. In addition, in order to finance any acquisitions, we might need to raise additional funds through public or private equity or debt financings. In that event, we could be forced to obtain financing on terms that are not favorable to us and, in the case of equity financing, that may result in dilution to our shareholders. If we are unable to integrate any acquired entities, products or technologies effectively, our business will suffer. In addition, any amortization of goodwill or other assets or charges resulting from the costs of acquisitions could harm our business and operating results. WE DEPEND ON OUR KEY PERSONNEL, THE LOSS OF WHOM WOULD IMPAIR OUR ABILITY TO COMPETE. We are highly dependent on the principal members of our management, engineering and scientific staff. The loss of the service of any of these persons could seriously harm our product development and commercialization efforts. In addition, research, product development and commercialization will require additional skilled personnel in areas such as chemistry and biology, software engineering and electronic engineering. Our corporate headquarters is located in Sunnyvale, California, where demand for personnel with these skills is extremely high and is likely to remain high. As a result, competition for and retention of personnel, particularly for employees with technical expertise, is intense and the turnover rate for qualified personnel is high. If we are unable to hire, train and retain a sufficient number of qualified employees, our ability to conduct and expand our business could be seriously reduced. The inability to retain and hire qualified personnel could also hinder the planned expansion of our business. 17 18 WE ARE DEPENDENT ON INTERNATIONAL SALES AND OPERATIONS, WHICH EXPOSES US TO FOREIGN CURRENCY EXCHANGE RATE, POLITICAL AND ECONOMIC RISKS. We maintain facilities in Norway, the United Kingdom, Germany and Japan, and sales to customers outside the United States accounted for approximately 37% our revenues in 2000. We anticipate that international sales will continue to account for a significant portion of our revenues. All of our sales to international distributors are denominated in U.S. dollars. All of our direct sales in the United Kingdom, Germany, France and Canada are denominated in local currencies and totaled $19.2 million (20% of total revenues) in 2000. In early 2001, we acquired our Japanese distributor and, as a result, our future direct sales there will be denominated in local currency. To the extent that our sales and operating expenses are denominated in foreign currencies, our operating results may be adversely affected by changes in exchange rates. Historically, foreign exchange gains and losses have been immaterial to our results of operations. However, we cannot predict whether these gains and losses will continue to be immaterial, particularly as we increase our direct sales outside North America. Owing to the number of currencies involved, the substantial volatility of currency exchange rates, and our constantly changing currency exposures, we cannot predict the effect of exchange rate fluctuations on our future operating results. We do not currently engage in foreign currency hedging transactions. Our reliance on international sales and operations exposes us to foreign political and economic risks, including: - - political, social and economic instability; - - trade restrictions and changes in tariffs; - - import and export license requirements and restrictions; - - difficulties in staffing and managing international operations; - - disruptions in international transport or delivery; - - difficulties in collecting receivables; and - - potentially adverse tax consequences. If any of these risks materialize, our international sales could decrease and our foreign operations could suffer. OUR OPERATING RESULTS FLUCTUATE AND ANY FAILURE TO MEET FINANCIAL EXPECTATIONS MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A DECLINE IN OUR STOCK PRICE. We typically experience a decrease in the level of sales in the first calendar quarter as compared to the fourth quarter of the preceding year because of budgetary and capital equipment purchasing patterns in the life sciences industry. Our quarterly operating results have fluctuated in the past, and we expect they will fluctuate in the future as a result of many factors, some of which are outside of our control. In particular, if sales levels in a particular quarter do not meet expectations, we may not be able to adjust operating expenses sufficiently quickly to compensate for the shortfall, and our results of operations for that quarter may be seriously harmed. We manufacture our products based on forecasted orders rather than to outstanding orders. Our manufacturing procedures may in certain instances create a risk of excess or inadequate inventory levels if orders do not match forecasts. In addition, our expense levels are based, in part, on expected future sales, and we generally cannot quickly adjust operating expenses. For example, research and development and general and administrative expenses are not affected directly by variations in revenues. It is possible that in some future quarter or quarters, our operating results will be below the expectations of securities analysts or investors. In this event, the market price of our common stock may fall abruptly and significantly. Because our revenues and operating results are difficult to predict, we believe that period-to-period comparisons of our results of operations are not a good indication of our future performance. 18 19 OUR STOCK PRICE IS VOLATILE, WHICH COULD CAUSE STOCKHOLDERS TO LOSE A SUBSTANTIAL PART OF THEIR INVESTMENT IN OUR STOCK. The stock market in general, and the stock prices of technology companies in particular, have recently experienced volatility which has often been unrelated to the operating performance of any particular company or companies. During 2000, our stock price ranged from $39.69 to $113.13. Our stock price could decline regardless of our actual operating performance, and stockholders could lose a substantial part of their investment as a result of industry or market-based fluctuations. In the past, our stock has traded relatively thinly. If a more active public market for our stock is not sustained, it may be difficult for stockholders to resell shares of our common stock. Because we do not anticipate paying cash dividends on our common stock for the foreseeable future, stockholders will not be able to receive a return on their shares unless they sell them. THE MARKET PRICE OF OUR COMMON STOCK WILL LIKELY FLUCTUATE IN RESPONSE TO A NUMBER OF FACTORS, INCLUDING THE FOLLOWING: - - our failure to meet the performance estimates of securities analysts; - - changes in financial estimates of our revenues and operating results or buy/sell recommendations by securities analysts; - - the timing of announcements by us or our competitors of significant products, contracts or acquisitions or publicity regarding actual or potential results or performance thereof; and - - general stock market conditions, other economic or external factors. PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER, WHICH COULD LIMIT THE PRICE INVESTORS MIGHT BE WILLING TO PAY IN THE FUTURE FOR OUR COMMON STOCK. Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing an acquisition, merger in which we are not the surviving company or changes in our management. For example, our certificate of incorporation gives our board of directors the authority to issue shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control, as the terms of the preferred stock that might be issued could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction without the approval of the holders of the outstanding shares of preferred stock. The issuance of preferred stock could also have a dilutive effect on our stockholders. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of the outstanding voting stock, from consummating a merger or combination involving us. These provisions could limit the price that investors might be willing to pay in the future for our common stock. RISKS RELATING TO THE MERGER IF WE DO NOT SUCCESSFULLY INTEGRATE THE COMPANIES INTO A SINGLE BUSINESS AND REALIZE THE EXPECTED BENEFITS OF THE MERGER, WE WILL HAVE INCURRED SIGNIFICANT COSTS WHICH MAY HARM OUR BUSINESS. Molecular Devices expects to incur costs from integrating LJL BioSystems' operations, products and personnel. These costs may be substantial and may include costs for: - - employee redeployment, relocation or severance; - - conversion of information systems; - - reorganization or closures of facilities; and - - relocation or disposition of excess equipment. We do not know whether Molecular Devices will be successful in these integration efforts and cannot assure you that we will realize the expected benefits of the merger. IF CUSTOMER RELATIONSHIPS OR STRATEGIC PARTNERSHIPS ARE DISRUPTED BY THE MERGER, OUR SALES COULD DECLINE OR WE COULD LOSE CUSTOMERS. Customers of Molecular Devices and LJL BioSystems may not continue their current buying patterns following the merger. Any significant delay or reduction in orders for Molecular Devices' or LJL BioSystems' products could have a materially adverse affect on the combined company's business, financial condition and results of operations. Customers may defer purchasing decisions as they evaluate the likelihood of successful integration of Molecular Devices' and LJL BioSystems' products and the combined company's future product strategy. Customers may also consider purchasing products of competitors. In addition, by increasing the breadth of Molecular Devices' and LJL BioSystems' business, the merger may make it more difficult for the combined company to enter into or maintain relationships, including relationships with customers or partners. IF WE ARE NOT SUCCESSFUL IN INTEGRATING OUR ORGANIZATIONS, WE WILL NOT BE ABLE TO OPERATE EFFICIENTLY AFTER THE MERGER. Achieving the benefits of the merger will also depend in part on the successful integration of Molecular Devices' and LJL BioSystems' operations and personnel in a timely and efficient manner. For example, such integration requires coordination of different development, engineering, sales, marketing, manufacturing and administrative teams. This, too, will be difficult and unpredictable because of possible cultural conflicts and different opinions on technical decisions, product roadmaps and other decisions. If we cannot successfully integrate our operations and personnel, we will not realize the expected benefits of the merger and/or business results of operations may be seriously harmed. INTEGRATING OUR COMPANIES MAY DIVERT MANAGEMENT'S ATTENTION AWAY FROM OUR OPERATIONS. Successful integration of Molecular Devices' and LJL BioSystems' operations, products and personnel may place a significant burden on our management and our internal resources. The diversion of management attention and any difficulties encountered in the transition and integration process could have a materially adverse affect on the combined company's business, financial condition and operating results. FAILURE TO RETAIN KEY EMPLOYEES COULD DIMINISH THE BENEFITS OF THE MERGER. The successful combination of Molecular Devices and LJL BioSystems will depend in part on the retention of key personnel. We cannot assure you that the combined company will be able to retain key management, technical, sales, customer support and other personnel, or that the anticipated benefits of their expertise, experience and capabilities will be realized. IF WE DO NOT SUCCESSFULLY MANUFACTURE, PROMOTE, SELL AND SERVICE OUR PRODUCTS, AND INTEGRATE OUR TECHNOLOGIES TO DEVELOP NEW PRODUCTS, WE MAY LOSE CUSTOMERS AND FAIL TO ACHIEVE OUR FINANCIAL OBJECTIVES. Achieving the benefits of the merger will depend in part on our ability to continue to successfully manufacture, promote, sell and service our products, and integrate our technologies to develop new products and product features, in a timely and efficient manner. In order to provide enhanced and more valuable products to our customers after the merger, we will need to integrate our development organizations. This will be difficult and unpredictable because our products: - - are highly complex; - - involve different technologies; - - have been developed independently; and - - were designed without regard to such integration. If we cannot successfully manufacture, promote, sell and service our products and integrate our technologies to provide customers with new products and product features in the future on a timely basis, we may lose customers and our business and results of operations may be seriously harmed. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN OUR FORWARD-LOOKING STATEMENTS. This report contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. When used in this report, you can identify forward-looking statements by terminology such as "anticipates," "plans," "predicts," "expects," "estimates," "intends," "will," "continue," "may," "potential," "should" and the negative of these terms or other comparable terminology. These statements are only predictions. Our actual results could differ materially from those anticipated in our forward-looking statements as a result of many factors, including those set forth here under "Business Risks" and elsewhere in this report. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We assume no duty to update any of the forward-looking statements after the date of this report or to conform these statements to actual results. 19 20 ITEM 2. PROPERTIES We lease four facilities with approximately 138,100 square feet of laboratory, manufacturing and administrative space in Sunnyvale, California. We also lease sales and service offices in the United Kingdom and Germany, and a small manufacturing facility in Norway. We believe that our current facilities will be sufficient for our operations through at least 2002. These properties are described below:
LOCATION OWNERSHIP FACILITIES LEASE EXPIRATION - -------------------------- ------------- ----------------------------------------- ----------------- 1311 Orleans Drive Leased Approximately 60,000 square feet of October 31, 2007 Sunnyvale, CA 94089 office and manufacturing space 1312 Crossman Avenue Subleased Approximately 54,400 square feet of April 30, 2003 Sunnyvale, CA 94089 office and manufacturing space 404 Tasman Drive Leased Approximately 14,100 square feet of January 31, 2001 Sunnyvale, CA 94089 office and manufacturing space 405 Tasman Drive Subleased Approximately 9,600 square feet of August 30, 2002 Sunnyvale, CA 94089 office and manufacturing space Wokingham, England Leased Approximately 4,200 square feet of August 20, 2009 office space Munich, Germany Leased Approximately 3,500 square feet of October 31, 2001 office space Oslo, Norway Leased Approximately 17,500 square feet of December 12, 2001 office and manufacturing space
ITEM 3. LEGAL PROCEEDINGS We are not currently a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 20 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the Nasdaq National Market under the symbol "MDCC." The prices per share reflected on the table below represent the range of high and low closing sales prices of the common stock on the Nasdaq National Market, for the period indicated.
2000 1999 -------------------- ----------------- HIGH LOW HIGH LOW ------- -------- ------ ------- First Quarter......... 113 1/8 42 3/8 31 20 1/2 Second Quarter........ 77 3/4 39 11/16 37 1/2 21 3/4 Third Quarter......... 110 7/16 55 1/2 41 1/2 26 1/18 Fourth Quarter........ 99 1/4 48 7/8 52 27 17/18
Historically, we have not paid cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. Any future cash dividends will be determined by the Board of Directors. As of March 26, 2001, there were approximately 5,235 stockholders of record of Molecular Devices. On March 26, 2001, the last sale price reported on the Nasdaq National Market for our common stock was $45.50 per share. We entered into employment arrangements with each of Joseph D. Keegan, Ph.D., Mr. Timothy A. Harkness and Mr. John S. Senaldi pursuant to which we are obligated to issue to each such officer shares of our common stock in exchange for services rendered. As a result of these arrangements, we issued shares of our common stock to these officers in 2000 on the dates and amounts indicated below in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended.
NUMBER OF SHARES DATE OF ISSUE --------- ------------- Dr. Keegan.......... 3,750 03/30/2000 Mr. Harkness........ 1,250 01/09/2000 1,250 04/09/2000 1,250 07/09/2000 Mr. Senaldi......... 312 02/06/2000 312 05/06/2000 312 08/06/2000
21 22 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected historical financial information for Molecular Devices, certain portions of which are based on, and should be read in conjunction with, our audited consolidated financial statements that are being filed as a part of this report.
YEARS ENDED DECEMBER 31, ------------------------------------------------------- 2000 1999 1998 1997 1996 --------- ------- -------- -------- -------- CONSOLIDATED STATEMENTS OF INCOME DATA: Revenues $ 96,035 $71,902 $ 52,234 $ 43,490 $ 40,211 Cost of revenues 35,583 26,299 20,203 16,745 14,496 --------- ------- -------- -------- -------- Gross margin 60,452 45,603 32,031 26,745 25,715 Operating expenses: Research and development 16,796 14,150 11,158 8,232 6,965 Merger and acquisition expenses 15,181 2,037 876 -- 4,637 Selling, general and administrative 31,906 25,630 19,386 14,028 13,982 --------- ------- -------- -------- -------- Total operating expenses 63,883 41,817 31,420 22,260 25,584 --------- ------- -------- -------- -------- Income (loss) from operations (1) (3,431) 3,786 611 4,485 131 Other income, net 4,912 1,921 2,178 1,448 1,255 --------- ------- -------- -------- -------- Income before income taxes 1,481 5,707 2,789 5,933 1,386 Income tax provision (benefit) 6,415 2,056 956 2,017 (1,386) --------- ------- -------- -------- -------- Net income (loss) $ (4,934) $ 3,651 $ 1,833 $ 3,916 $ 2,772 ========= ======= ======== ======== ======== Basic net income (loss) per share $ (0.32) $ 0.27 $ 0.15 $ 0.35 $ 0.27 ========= ======= ======== ======== ======== Diluted net income (loss) per share $ (0.32) $ 0.26 $ 0.14 $ 0.33 $ 0.25 ========= ======= ======== ======== ======== Shares used in computing basic net income (loss) per share 15,246 13,347 12,407 11,107 10,178 ========= ======= ======== ======== ======== Shares used in computing diluted net income (loss) per share 15,246 14,149 12,965 11,906 10,987 ========= ======= ======== ======== ======== PRO FORMA CONSOLIDATED STATEMENTS OF INCOME DATA(2): Pro forma operating income $ 11,750 $ 5,823 $ 1,487 $ 4,485 $ 4,768 ========= ======= ======== ======== ======== Pro forma net income $ 10,247 $ 4,954 $ 2,409 $ 3,916 $ 3,704 ========= ======= ======== ======== ======== Pro forma diluted net income per share $ 0.62 $ 0.35 $ 0.19 $ 0.33 $ 0.34 ========= ======= ======== ======== ========
DECEMBER 31, ------------------------------------------------------- 2000 1999 1998 1997 1996 --------- ------- -------- -------- -------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments $ 97,091 $36,650 $ 40,030 $ 32,298 $ 24,893 Working capital 138,184 65,748 55,014 42,031 25,135 Total assets 180,033 86,849 72,319 50,752 37,326 Retained earnings (accumulated deficit) (4,833) 101 (3,550) (5,383) (9,297) Total stockholders' equity 163,633 74,304 60,700 44,098 27,125
- ----------------- (1) Our 2000 income from operations included a $15.2 million charge related to direct costs incurred due to the merger with LJL BioSystems, which was accounted for as a pooling of interests. Our 1999 income from operations included a $2.0 million write-off for the acquisition of in-process technology and acquisition costs relating to our acquisition of Skatron Instruments AS. Our 1998 income from operations included an $876,000 write-off for the acquisition of in-process technology and acquisition costs relating to our acquisition of certain technology rights from Affymax Research Institute. Our 1996 income from operations included a $4.6 million write-off for the acquisition of in-process technology and acquisition costs related to our acquisition of NovelTech Systems. (2) We have excluded the impact of the write-offs of in-process technology and acquisition costs in 2000, 1999, 1998 and 1996 described in footnote (1) above, net of tax. 1996 also excluded the tax benefits we realized from the utilization of net operating loss carryforwards and included a provision for taxes at a 38.5% effective rate. 22 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Except for the historical information contained herein, the following discussion contains "forward-looking" statements. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements. Words such as "believes", "anticipates", "plans", "predicts", "expects", "estimates", "intends", "will", "continue", "may", "potential", "should" and similar expressions are intended to identify forward-looking statements. There area number of important factors that could cause our results to differ materially from those indicated by these forward-looking statements, including, among others, those discussed in this section as well as under "Item I. Business--Business Risks" and "Qualitative and Quantitative Disclosures about Market Risk" and the risks detailed from time to time in the Company's SEC reports, including this Annual Report on Form 10-K for they year ended December 31, 2000. We are a leading supplier of high-performance bioanalytical measurement systems, which accelerate and improve drug discovery and other life sciences research. Our systems and consumables enable pharmaceutical and biotechnology companies to leverage advances in genomics and combinatorial chemistry by facilitating the high-throughput and cost-effective identification and evaluation of drug candidates. Molecular Devices instruments systems are based on our advanced core technologies that integrate our expertise in engineering, molecular and cell biology, and chemistry. We enable our customers to improve research productivity and effectiveness, which ultimately accelerates the complex process of discovering and developing new drugs. Molecular Devices acquired all of the outstanding stock of LJL BioSystems in a tax-free, stock-for-stock transaction on August 30, 2000, as a result of which LJL BioSystems became a wholly owned subsidiary of Molecular Devices. The transaction was accounted for under the pooling-of-interests method of accounting and, accordingly, all financial information has been restated to include the operations of LJL BioSystems for all periods presented. Our combined operations have typically invested 17% to 21% of our revenues in research and development, which has resulted in a track record of technological innovation. Over 76% of our revenues in 2000 were derived from products that we introduced in the last three years. We have sold over 15,000 instruments in our history. Our customers include small and large pharmaceutical, biotechnology and industrial companies as well as medical centers, universities, government research laboratories and other institutions throughout the world. No single customer accounted for more than 5% of our consolidated revenues in 2000. We recognize revenue on the sale of our products at the time of shipment and transfer of title to customers and distributors. There are no significant customer acceptance requirements or post shipment obligations on our part. Service contract revenue is deferred at the time of sale and recognized ratably over the period of performance. Total service revenue was less than 5% of total revenues for all periods presented. In 2000, sales to customers outside the United States accounted for 37% of total revenues and total sales denominated in foreign currencies accounted for 20% of total revenues. We typically experience a decrease in the level of sales in the first calendar quarter as compared to the fourth quarter of the preceding year because of budgetary and capital equipment purchasing patterns in the life sciences industry. We expect this trend to continue in future years. 23 24 RESULTS OF OPERATIONS The following table summarizes our consolidated statement of income as a percentage of revenues:
YEARS ENDED DECEMBER 31, ------------------------ 2000 1999 1998 -------- -------- ------ Revenues................................................... 100.0% 100.0% 100.0% Cost of revenues........................................... 37.1 36.6 38.7 ----- ----- ----- Gross margin............................................... 62.9 63.4 61.3 Research and development................................... 17.5 19.7 21.4 Merger and acquisition expenses............................ 15.8 2.8 1.7 Selling, general and administrative........................ 33.2 35.6 37.1 ----- ----- ----- Income (loss) from operations.............................. (3.6) 5.3 1.1 Other income, net.......................................... 5.2 2.7 4.2 ----- ----- ----- Income before income taxes................................. 1.6 8.0 5.3 Income tax provision....................................... 6.7 2.9 1.8 ----- ----- ----- Net income (loss).......................................... (5.1)% 5.1% 3.5% ====== ===== ===== Pro forma net income(1).................................... 10.7 % 6.9% 4.6% ====== ===== =====
- ---------- (1) Excludes the impact of the merger and acquisition expenses recorded in 2000, 1999 and 1998, net of tax. YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 Revenues for 2000 increased by 34% to $96.0 million from $71.9 million in 1999. Revenues for 1999 increased by 38% to $71.9 million from $52.2 million in 1998. This top-line growth was driven by strong contributions from both our Life Sciences Research and Drug Discovery product families in each year. Life Sciences Research revenues increased in 2000 primarily due to the worldwide strength of the SPECTRAmax PLUS (384) and SPECTRAmax Gemini XS, both introduced in the first quarter of 2000, and increased Threshold revenues worldwide. In 1999, the Life Sciences Research revenues increased primarily due to the worldwide strength of the SPECTRAmax Gemini. Drug Discovery growth was driven primarily by the continued worldwide demand for our FLIPR(384) as well as increased sales of LJL BioSystems' Analyst AD and Analyst HT. Gross margin decreased slightly to 62.9% in 2000 from 63.4% in 1999. Gross margin increased to 63.4% in 1999 from 61.3% in 1998. The 1998 to 1999 increase related to increased sales of higher margin products in both the Life Sciences Research and Drug Discovery product families, primarily the SPECTRAmax GEMINI and FLIPR(384) and LJL BioSystems' Analyst HT. Research and development expenses for 2000 increased to $16.8 million from $14.2 million in 1999, an increase of 19%. Research and development expenses for 1999 increased to $14.2 million from $11.2 million in 1998, an increase of 27%. The increased spending for both periods is primarily the result of additional personnel as well as increased expenditures on development activities required to support both the introduction and on-going development of new Life Sciences Research and Drug Discovery products, including new reagent kits optimized for use on our detection systems. We recorded a charge of $15.2 million during the third quarter of 2000 related to the merger with LJL BioSystems, including transition costs, investment banking, legal and other advisory services. We recorded a charge of $2.0 million during the second quarter of 1999 due to the write-off of acquired in-process research and development related to our acquisition of Skatron. We recorded a charge of $876,000 during the third quarter of 1998 due to the write-off of acquired in-process technology and acquisition costs relating to our acquisition of certain technology rights from Affymax Research Institute. The acquired in-process research and development had no alternative future use at the date of acquisition. Selling, general and administrative expenses for 2000 increased to $31.9 million from $25.6 million in 1999, an increase of 24%. Selling, general and administrative expenses for 1999 increased to $25.6 million from $19.4 million in 1998, an increase of 32%. The increased spending for both periods is primarily the result of additional spending on marketing, sales and service related activities (including additional personnel) as we continued our efforts to expand worldwide market coverage and introduce new products. Selling, general and administrative expenses as a percentage of revenues were 33.2% in 2000, 35.6% in 1999 and 37.1% in 1998, reflecting improved operating leverage as our revenue base has grown. 24 25 Other income (net), consisting primarily of interest income, increased by 156% in 2000 to $4.9 million from $1.9 million in 1999 due to an increased average cash balance primarily as a result of the capital raised through our secondary offering in May 2000 and the capital raised by LJL BioSystems' private placement. Other income (net) decreased by 12% in 1999 to $1.9 million from $2.2 million in 1998 due to a decreased average cash balance primarily as a result of the Skatron acquisition. We recorded income tax provisions of $6.4 million in 2000, $2.1 million in 1999 and $1.0 million in 1998. These provisions reflected a 38.5%, 36.0% and 34.3% effective tax rate in 2000, 1999 and 1998, respectively. The effective tax rate for 2000 is calculated on profit before tax excluding the LJL BioSystems merger expenses, which are not deductible for income tax purposes. The lower rates in 1999 and 1998 are primarily due to the realization of net operating loss carryforwards of LJL BioSystems in those years. LIQUIDITY AND CAPITAL RESOURCES We had cash, cash equivalents and short-term investments of $97.1 million at December 31, 2000 compared to $36.6 million at December 31, 1999. Prior to the merger with LJL BioSystems, we had typically financed our operations primarily from cash flows provided by operating activities. However, due to the $15.2 million merger charge in the third quarter of 2000 and LJL BioSystems' operating losses, $7.1 million, $4.4 million and $1.2 million was used in operating activities during 2000, 1999 and 1998, respectively. Net cash used in investing activities was $69.7 million, $5.8 million and $10.5 million in 2000, 1999 and 1998, respectively. The substantial increase in 2000 was primarily due to: (1) $50.7 million of net short-term investment purchases, (2) $11.5 million invested in other assets, primarily a $10.0 million investment in Argonex, Inc. and a $1.1 million strategic equity investment in a privately held company and (3) $7.4 million of capital expenditures, primarily related to our facilities expansion in Sunnyvale, California. The decrease from 1998 to 1999 was primarily due to the maturity of short-term investments, offset by $7.1 million of cash used for the acquisition of Skatron. Net cash provided by financing activities was $87.0 million in 2000, $8.0 million in 1999 and $13.9 million in 1998. The 2000 proceeds were primarily generated by Molecular Devices' public offering in the second quarter of 2000, the LJL BioSystems private placement in the first quarter of 2000, as well as cash proceeds from stock option exercises during the year. The 1999 and 1998 proceeds relate primarily to the private placement by LJL BioSystems in 1999 and LJL BioSystems' initial public offering in 1998, as well as stock option exercises in each of those years. We believe that our existing cash and investment securities and anticipated cash flow from our operations will be sufficient to support our current operating plan for the foreseeable future. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong. Our future capital requirements will depend on many factors, including: - the progress of our research and development; - the number and scope of our research programs; - market acceptance and demand for our products; - the costs that may be involved in enforcing our patent claims and other intellectual property rights; - potential acquisition and technology licensing opportunities; - manufacturing capacity requirements; and - the costs of expanding our sales, marketing and distribution capabilities both in the United States and abroad. We have generated sufficient cash flow to fund our capital requirements primarily through financing activities over the last three years. However, we cannot assure you that we will not require additional financing in the future to support our existing operations or potential acquisition and technology licensing opportunities that may arise. Therefore, we may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Our cash and investments policy emphasizes liquidity and preservation of principal over other portfolio considerations. We select investments that maximize interest income to the extent possible given these two constraints. We satisfy liquidity requirements by investing excess cash in securities with different maturities to match projected cash needs and limit concentration of credit risk by diversifying our investments among a variety of high credit-quality issuers. 25 26 RECENT PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137 and 138, which is effective for us for the year beginning January 1, 2001, establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires a company to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Changes in the fair value of derivatives will be reported currently in earnings or in other comprehensive income, depending on their effectiveness pursuant to SFAS No. 133. As of December 31, 2000, we had not engaged in hedging activities. However, we anticipate engaging in hedging activity in the future, and therefore, expect to be impacted by the pronouncement at such time. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk, including changes in interest rates and foreign currency exchange rates. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. A discussion of our accounting policies for financial instruments and further disclosures relating to financial institutions is included in the Summary of Significant Accounting Policies note in the Notes to Consolidated Financial Statements included in this report. Our interest income is sensitive to changes in the general level of interest rates, primarily U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on our cash equivalents and short-term investments. We invest our excess cash primarily in demand deposits with United States banks and money market accounts and short-term securities. These securities, consisting of $45.3 million of commercial paper and $10.0 million of U.S. government agency securities, are carried at market value, which approximate cost, typically mature or are redeemable within 90 to 360 days, and bear minimal risk. We have not experienced any significant losses on the investments. We are exposed to changes in exchange rates primarily in the United Kingdom, Germany and Canada, where we sell direct in local currencies. All other export sales, with the exception of sales into Canada, are denominated in U.S. dollars and bear no exchange rate risk. However, a strengthening of the U.S. dollar could make our products less competitive in overseas markets. Gains and losses resulting from foreign currency transactions in Canada have historically been immaterial. Translation gains and losses related to our foreign subsidiaries in the United Kingdom, Germany and Norway are accumulated as a separate component of stockholders' equity. Those gains and losses have historically been immaterial. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of Molecular Devices and financial statement schedules are attached to this report as pages 32 through 52. Financial Statements: - Report of Ernst & Young LLP, Independent Auditors - Report of PricewaterhouseCoopers LLP, Independent Auditors - Consolidated Balance Sheets at December 31, 2000 and 1999 - Consolidated Statements of Operations for each of the three years in the period ended December 31, 2000 - Consolidated Statements of Stockholders' Equity for the three years in the period ended December 31, 2000 - Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2000 - Notes to Consolidated Financial Statements 26 27 Financial Statement Schedules: Schedule II -- Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 27 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to Directors and Executive Officers may be found in the sections entitled "Proposal 1 -- Election of Directors," and "Executive Officers of the Company," respectively, appearing in the definitive Proxy Statement to be delivered to stockholders in connection with the solicitation of proxies for our Annual Meeting of Stockholders to be held on May 24, 2001 (the "Proxy Statement"). Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth in the Proxy Statement under the heading "Executive Compensation," which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth in the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management," which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth in the Proxy Statement under the heading "Certain Transactions," which information is incorporated herein by reference. 28 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: 1. Financial Statements -- See Index to Consolidated Financial Statements as Item 8 on page 26 of this report. 2. Financial Statement Schedules -- See Index to Consolidated Financial Statements as Item 8 on page 26 of this report. 3. Exhibits
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 2.1(1) Form of Agreement and Plan of Merger between the Registrant and Molecular Devices Corporation, a California Corporation 2.2(2) Stock and Asset Purchase Agreement, dated as of May 17, 1999, among Molecular Devices Corporation, a Delaware corporation, Helge Skare, Wiel Skare, Steinar Faanes and Sten Skare, each an individual resident in Norway, Skatron Instruments AS, a Norwegian company, and Skatron Instruments, Inc., a Virginia corporation 2.3(2) Escrow Agreement, dated as of May 17, 1999, among Molecular Devices Corporation, a Delaware corporation, Helge Skare, Wiel Skare and Greater Bay Trust Company, as Escrow Agent 2.4(6) Agreement and Plan of Merger and Reorganization dated as of June 7, 2000 by and among Molecular Devices Corporation, Mercury Acquisition Sub, Inc. and LJL BioSystems, Inc. 3.1(1) Amended and Restated Certificate of Incorporation of Registrant 3.2(1) Bylaws of the Registrant 4.1(1) Specimen Certificate of Common Stock of Registrant 10.1(1)* 1988 Stock Option Plan 10.2(1)* Form of Incentive Stock Option under the 1988 Stock Option Plan 10.3(1)* Form of Supplemental Stock Option under the 1988 Stock Option Plan 10.4(1)* 1995 Employee Stock Purchase Plan 10.6(1)* Form of Nonstatutory Stock Option under the 1995 Non-Employee Directors' Stock Option Plan 10.8(1)* Form of Incentive Stock Option under the 1995 Stock Option Plan 10.9(1)* Form of Nonstatutory Stock Option under the 1995 Stock Option Plan 10.10(1)* Form of Early Exercise Stock Purchase Agreement under the 1995 Stock Option Plan 10.11(1)* Form of Indemnity Agreement between the Registrant and its Directors and Executive Officers 10.12(1)* Consulting Agreement dated July 20, 1988 by and between the Registrant and Harden M. McConnell, Ph.D. 10.19(2)* Key Employee Agreement for Joseph D. Keegan dated March 11, 1998, as amended 10.20(3) Exclusive License and Technical Support Agreement dated August 28, 1998 by and between the Registrant and Affymax 10.21(3)* Employee Offer Letter for Tim Harkness 10.22(3)* Employee Offer Letter for Tony Lima 10.23(3)* Employee Offer Letter for John Senaldi 10.24(5)* 1995 Non-Employee Director's Stock Option Plan, as amended 10.25(5)* 1995 Stock Option Plan, as amended 10.26(7)* Employee Offer Letter for Patricia Sharp 10.27(8)* LJL BioSystems 1994 Equity Incentive Plan and Forms of Agreements 10.28(8)* LJL BioSystems 1997 Stock Plan and Forms of Agreements 10.29(8)* LJL BioSystems 1998 Directors' Stock Option Plan and Forms of Agreements
29 30
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10.30(8) Equipment Financing Agreement dated February 16, 1998 between LJL BioSystems and Lease Management Services, Inc. 10.31(9) Lease between the Company and Coptech West 10.32 Sublease Agreement dated September 9, 1999 by and between Medtronic, Inc. and the Registrant 10.33 Lease Agreement dated May 26, 2000 by and between Aetna Life Insurance Company and the Registrant 21.1 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of PricewaterhouseCoopers LLP, Independent Auditors
- ---------- (1) Incorporated by reference to the similarly described exhibit in our Registration Statement on Form S-1 (File No. 33-98926), as amended. (2) Incorporated by reference to the similarly described exhibit in our Form 10-Q Quarterly Report dated June 30, 1998, and filed August 13, 1998. (3) Incorporated by reference to the similarly described exhibit in our Form 10-Q Quarterly Report dated September 30, 1998, and filed November 13, 1998. (4) Incorporated by reference to the similarly described exhibit in our Current Report on Form 8-K filed May 26, 1999. (5) Incorporated by reference to the similarly described exhibit in our Form 10-Q Quarterly Report dated June 30, 1999 and filed August 10, 1999. (6) Incorporated by reference to the similarly described exhibit in our Current Report on Form 8-K filed June 12, 2000. (7) Incorporated by reference to the similarly described exhibit in our Form 10-Q Quarterly Report dated September 30, 2000 and filed on November 13, 2000. (8) Incorporated by reference to the similarly described exhibit filed with LJL BioSystems' Registration Statement on Form S-1 (File No. 333-43529) declared effective on March 12, 1998. (9) Incorporated by reference to the similarly described exhibit filed with LJL BioSystems' Form 10-Q for the quarter ended March 31, 1998. * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 2000. (c) Exhibits See Item 14(a) above. (d) Financial Statement Schedule See Item 14(a) above. 30 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on March 30, 2001. MOLECULAR DEVICES CORPORATION By: /s/ JOSEPH D. KEEGAN, PH.D. -------------------------------------- Joseph D. Keegan, Ph.D. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOSEPH D. KEEGAN, PH.D. President, Chief Executive Officer March 30, 2001 - -------------------------------------------- and Director Joseph D. Keegan, Ph.D. (Principal Executive Officer) /s/ TIMOTHY A. HARKNESS Vice President, Finance and Chief Financial March 30, 2001 - -------------------------------------------- and Officer Timothy A. Harkness (Principal Financial and Accounting Officer) /s/ MOSHE H. ALAFI Director March 30, 2001 - -------------------------------------------- Moshe H. Alafi /s/ DAVID L. ANDERSON Director March 30, 2001 - -------------------------------------------- David L. Anderson /s/ A. BLAINE BOWMAN Director March 30, 2001 - -------------------------------------------- A. Blaine Bowman /s/ PAUL GODDARD, PH.D. Director March 30, 2001 - -------------------------------------------- Paul Goddard, Ph.D. /s/ LEV J. LEYTES Director March 30, 2001 - -------------------------------------------- Lev J. Leytes /s/ ANDRE F. MARION Director March 30, 2001 - -------------------------------------------- Andre F. Marion /s/ HARDEN M. MCCONNELL, PH.D. Director March 30, 2001 - -------------------------------------------- Harden M. McConnell, Ph.D. /s/ J. ALLAN WAITZ, PH.D. Director March 30, 2001 - -------------------------------------------- J. Allan Waitz, Ph.D.
31 32 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Molecular Devices Corporation and Subsidiaries We have audited the accompanying consolidated balance sheets of Molecular Devices Corporation and its subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. In August 2000, the Company merged with LJL BioSystems, Inc. in a transaction which was accounted for as a pooling of interests. We did not audit the consolidated financial statements of LJL BioSystems, Inc., for the years prior to fiscal 2000, which statements reflect total assets of $14.4 million as of December 31, 1999 and total revenues of $9.9 million and $4.4 million and net loss available to common stockholders of $8.1 million and $8.5 million for the years ended December 31, 1999 and 1998, respectively. Those statements were audited by other auditors whose report dated January 25, 2000, except as to Note 11, which is as of February 2, 2000, expressed an unqualified opinion on those statements, has been furnished to us, and our opinion, insofar as it relates to data included for LJL BioSystems, Inc., is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Molecular Devices Corporation and its subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Palo Alto, California January 23, 2001 32 33 REPORT OF PRICEWATERHOUSECOOPERS, INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of LJL BioSystems, Inc. In our opinion, the consolidated balance sheet as of December 31, 1999 and the related consolidated statements of operations, of stockholders' equity and of cash flows for each of the two years in the period ended December 31, 1999 of LJL BioSystems, Inc, and its subsidiary (not presented separately herein) present fairly, in all material respects, the financial position, results of operations and cash flows of LJL BioSystems, Inc. and its subsidiary at December 31, 1999 and for each of the two years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for each of the two years in the period ended December 31, 1999 presents fairly, in all material respects, the information set forth therein when read in conjunction with the consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion. We have not audited the consolidated financial statements and financial statement schedules of LJL BioSystems, Inc. for any period subsequent to December 31, 1999. /s/ PricewaterhouseCoopers LLP San Jose, California January 25, 2000, except as to Note 11, which is as of February 2, 2000 33 34 MOLECULAR DEVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, ------------------------ 2000 1999 --------- -------- ASSETS Current assets: Cash and cash equivalents $ 41,832 $ 32,083 Short-term investments 55,259 4,567 Accounts receivable net of allowance for doubtful accounts of $561 and $452 in 2000 and 1999, respectively 27,561 19,463 Inventories 13,056 10,509 Deferred tax asset 10,816 10,205 Other current assets 5,791 880 --------- -------- Total current assets 154,315 77,707 Equipment and leasehold improvements, net 9,015 3,656 Other assets 16,703 5,486 --------- -------- $ 180,033 $ 86,849 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,902 $ 3,869 Accrued compensation 4,139 3,215 Other accrued liabilities 4,285 3,061 Deferred revenue 2,488 1,532 Current portion of long-term debt 317 282 --------- -------- Total current liabilities 16,131 11,959 Long-term debt, net of current portion 269 586 Commitments Stockholders' equity: Preferred stock, no par value, issuable in series; 3,000,000 shares authorized, no shares issued and outstanding at December 31, 2000 and 1999, respectively -- -- Common stock, $.001 par value; 30,000,000 shares authorized; 16,331,167 and 13,488,821 shares issued and outstanding at December 31, 2000 and 1999, respectively 17 14 Additional paid-in capital 169,820 75,271 Deferred compensation (443) (589) Retained earnings (accumulated deficit) (4,833) 101 Accumulated other comprehensive loss (928) (493) --------- -------- Total stockholders' equity 163,633 74,304 --------- -------- $ 180,033 $ 86,849 ========= ========
See accompanying notes. 34 35 MOLECULAR DEVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ----------------------------------- 2000 1999 1998 -------- ------- ------- REVENUES $ 96,035 $71,902 $52,234 COST OF REVENUES 35,583 26,299 20,203 -------- ------- ------- GROSS MARGIN 60,452 45,603 32,031 -------- ------- ------- OPERATING EXPENSES: Research and development 16,796 14,150 11,158 Merger and acquisition expenses 15,181 2,037 876 Selling, general and administrative 31,906 25,630 19,386 -------- ------- ------- Total operating expenses 63,883 41,817 31,420 -------- ------- ------- Income (loss) from operations (3,431) 3,786 611 Other income, net 4,912 1,921 2,178 -------- ------- ------- Income before income taxes 1,481 5,707 2,789 Income tax provision 6,415 2,056 956 -------- ------- ------- NET INCOME (LOSS) $ (4,934) $ 3,651 $ 1,833 ======== ======= ======= Basic net income (loss) per share $ (0.32) $ 0.27 $ 0.15 ======== ======= ======= Diluted net income (loss) per share $ (0.32) $ 0.26 $ 0.14 ======== ======= =======
See accompanying notes. 35 36 MOLECULAR DEVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Retained Accumulated Common Stock Additional Earnings Other Total --------------------- Paid-In Deferred (Accumulated Comprehensive Stockholders' Shares Amount Capital Compensation Deficit) Loss Equity ---------- ------ ---------- ------------ ------------ ------------- ------------- BALANCE AT DECEMBER 31, 1997 11,806,004 $12 $ 50,572 $ (903) $(5,383) $(200) $ 44,098 Comprehensive income Net income -- -- -- -- 1,833 -- 1,833 Currency translation -- -- -- -- -- (20) (20) --------- Total comprehensive income 1,813 --------- Issuance of shares of common stock in public offering, net 626,400 1 12,820 -- -- -- 12,821 Issuance of shares of common stock for options exercised 176,634 -- 599 -- -- -- 599 Issuance of shares of common stock under Employee Stock Purchase Plan 24,383 -- 373 -- -- -- 373 Tax benefits from employee stock transactions -- -- 477 -- -- -- 477 Deferred stock compensation -- -- 816 (816) -- -- -- Amortization of deferred stock compensation -- -- -- 519 -- -- 519 ----------- --- -------- ------- ------- ----- --------- BALANCE AT DECEMBER 31, 1998 12,633,421 13 65,657 (1,200) (3,550) (220) 60,700 ----------- --- -------- ------- ------- ----- --------- Comprehensive income Net income -- -- -- -- 3,651 -- 3,651 Currency translation -- -- -- -- -- (273) (273) --------- Total comprehensive income 3,378 --------- Issuance of shares of common stock in public offering, net 600,000 1 6,729 -- -- -- 6,730 Issuance of shares of common stock for options exercised 202,397 -- 1,205 -- -- -- 1,205 Issuance of shares of common stock under Employee Stock Purchase Plan 31,755 -- 529 -- -- -- 529 Stock compensation expense -- -- 335 -- -- -- 335 Tax benefits from employee stock transactions -- -- 816 -- -- -- 816 Amortization of deferred stock compensation 21,248 -- -- 611 -- -- 611 ----------- --- -------- ------- ------- ----- --------- BALANCE AT DECEMBER 31, 1999 13,488,821 14 75,271 (589) 101 (493) 74,304 ----------- --- -------- ------- ------- ----- --------- Comprehensive loss Net loss -- -- -- -- (4,934) -- (4,934) Currency translation -- -- -- -- -- (435) (435) --------- Total comprehensive loss (5,369) --------- Issuance of shares of common stock in public offering, net 2,234,000 2 79,341 -- -- -- 79,343 Issuance of shares of common stock for options exercised, net 567,162 1 7,074 -- -- -- 7,075 Issuance of shares of common stock under Employee Stock Purchase Plan 32,748 -- 847 -- -- -- 847 Stock compensation expense -- -- 798 -- -- -- 798 Tax benefits from employee stock transactions -- -- 6,266 -- -- -- 6,266 Deferred stock compensation -- -- 223 (223) -- -- -- Amortization of deferred stock compensation 8,436 -- -- 369 -- -- 369 ---------- --- -------- ------- ------- ----- --------- BALANCE AT DECEMBER 31, 2000 16,331,167 $17 $169,820 $ (443) $(4,833) $(928) $ 163,633 ========== === ======== ======= ======= ===== =========
See accompanying notes. 36 37 MOLECULAR DEVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------------- 2000 1999 1998 --------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (4,934) $ 3,651 $ 1,833 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation 2,077 1,330 1,049 Charge for acquired in-process research and development -- 2,037 -- Amortization of deferred compensation 369 611 519 Stock compensation expense 798 335 -- Amortization of goodwill and developed technology 314 196 -- Income tax benefit realized as a result of employee exercises of stock options 6,266 816 477 (Increase) decrease in assets: Accounts receivable (8,098) (5,361) (4,840) Inventories (2,547) (4,768) (1,480) Deferred tax asset (611) (4,119) (3,052) Other current assets (4,911) 88 (344) Increase (decrease) in liabilities: Accounts payable 1,033 1,125 646 Accrued compensation 924 497 476 Other accrued liabilities 1,224 (839) 3,035 Deferred revenue 956 30 494 --------- -------- -------- Net cash used in operating activities (7,140) (4,371) (1,187) --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (113,113) (7,730) (14,762) Proceeds from sales and maturities of investments 62,421 11,488 6,406 Capital expenditures (7,436) (1,993) (2,014) Acquisition of Skatron Instruments AS, net of cash on hand -- (7,118) -- Other assets (11,531) (472) (102) --------- -------- -------- Net cash used in investing activities (69,659) (5,825) (10,472) --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowing -- 361 785 Repayment of borrowings (282) (429) (161) Issuance of long-term loans receivable to employees -- (33) (190) Issuance of common stock 87,265 8,085 13,483 --------- -------- -------- Net cash provided by financing activities 86,983 7,984 13,917 --------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (435) (225) (36) --------- -------- -------- Net (decrease) increase in cash and cash equivalents 9,749 (2,437) 2,222 Cash and cash equivalents at beginning of year 32,083 34,520 32,298 --------- -------- -------- Cash and cash equivalents at end of year $ 41,832 $ 32,083 $ 34,520 ========= ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 88 $ 90 $ 35 ========= ======== ======== Income taxes $ 4,300 $ 6,070 $ 2,932 ========= ======== ======== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Disposals of fully depreciated equipment and leasehold improvements $ 538 $ 108 $ -- ========= ======== ========
See accompanying notes. 37 38 MOLECULAR DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Molecular Devices Corporation ("Molecular Devices"), a Delaware corporation, is principally involved in the design, development, manufacture, sale and service of bioanalytical measurement systems for life sciences and drug discovery applications. The principal markets for Molecular Devices' products include leading pharmaceutical and biotechnology companies as well as medical centers, universities, government research laboratories and other institutions throughout the world. Molecular Devices acquired all of the outstanding stock of LJL BioSystems, Inc. ("LJL BioSystems") in a tax-free, stock-for-stock transaction on August 30, 2000. LJL BioSystems was also engaged in the design, development, manufacture, sale and service of bioanalytical measurement systems for life sciences and drug discovery applications. Molecular Devices has accounted for the transaction as a pooling of interests, and accordingly, the consolidated financial statements and all financial information have been restated to reflect the combined operations, financial position and cash flows of both companies. (See Note 5) The consolidated financial statements include the accounts of Molecular Devices, its wholly owned foreign subsidiaries in Germany, the United Kingdom and Norway, and LJL BioSystems. All significant intercompany balances and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents Cash equivalents consist of highly liquid investments, principally money market accounts and marketable debt securities, with maturities of three months or less at the time of purchase. Investments Molecular Devices' short-term investments consist of marketable securities classified as "available-for-sale," with maturities of one year or less at the time of purchase. Available-for-sale securities are carried at fair market value, with unrealized gains and losses, net of tax, included in accumulated other comprehensive income in stockholders' equity. Gains and losses on securities sold are based on the specific identification method and are included in the results of operations. Fair values of marketable securities are based on quoted market values at December 31, 2000. At December 31, 2000, the difference between the fair value and amortized cost of marketable securities was not significant. As of December 31, 2000, short-term investments consisted of $10.0 million in federal government securities and $45.3 million of corporate securities maturing within twelve months or less. 38 39 Concentration of Credit Risk Financial instruments, which potentially subject Molecular Devices to concentrations of credit risk, are primarily cash, cash equivalents, short-term investments, loans receivable from employees and accounts receivable. Molecular Devices deposits cash with high credit quality financial institutions. Molecular Devices' cash equivalents and marketable securities are primarily invested in federal government agency obligations and corporate securities that have various maturities during 2001. Molecular Devices sells its products primarily to corporations, academic institutions, government entities and distributors within the drug discovery and life sciences research markets. Molecular Devices performs ongoing credit evaluations of its customers and generally does not require collateral. Molecular Devices maintains reserves for potential credit losses and such losses have been historically within management's expectations. Inventories Inventories are stated on a first-in, first-out basis at the lower of cost or market. Capitalized Software Costs Software development costs incurred subsequent to the establishment of technological feasibility are capitalized in accordance with SFAS No. 86; "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." No amounts have been capitalized to date as costs incurred after the establishment of technological feasibility have not been material. Equipment and Leasehold Improvements Equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets (ranging from three to five years). Leasehold improvements are amortized over the remaining term of the lease or the life of the asset, whichever is shorter. Maintenance and repairs are expensed as incurred. Other Assets Other assets include intangible assets acquired in a purchase business combination (see Note 5) and strategic investments in privately held companies that have been accounted for under the cost method. The goodwill and various intangible assets related to the acquisition of Skatron AS in May 1999 are being amortized over a 15-year period using the straight-line method. At December 31, 2000 and December 31, 1999, gross intangible assets were $4,717,000 and related accumulated amortization was $510,000 and $196,000, respectively. Impairment of Long-Lived Assets Molecular Devices evaluates long-lived assets, including goodwill and investments accounted for under the cost method, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. There were no long-lived assets which were considered to be impaired during any period presented. Income Taxes Income taxes are accounted for under the liability method whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized in the future. 39 40 Foreign Currency Translation Molecular Devices translates the assets and liabilities of its foreign subsidiaries into dollars at the rates of exchange in effect at the end of the period and translates revenues and expenses using rates in effect during the period. Gains and losses from these translations are accumulated as a separate component of stockholders' equity. Gains and losses resulting from foreign currency transactions are immaterial and are included in the statements of operations. Revenue Recognition and Warranty Molecular Devices recognizes product revenue at the time of product shipment and transfer of title either to a customer or to a distributor and provides for estimated warranty expense at the time of sale. There are no significant customer acceptance requirements or post shipment obligations on the part of Molecular Devices. Amounts received prior to completion of the earnings process are recorded as customer deposits or deferred revenue, as appropriate. Service contract revenue is deferred at the time of sale and recognized ratably over the period of performance. Advertising Costs Molecular Devices expenses the cost of advertising as incurred. Molecular Devices incurred advertising costs of approximately $1,452,000, $1,339,000, and $1,079,000 for 2000, 1999, and 1998, respectively. Recent Technical Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133"). This statement, which is effective for the company for the year beginning January 1, 2001, established accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires a company to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Changes in the fair value of derivatives will be reported currently in earnings or in other comprehensive income depending on their effectiveness pursuant to SFAS 133. As of December 31, 2000, Molecular Devices had not engaged in hedging activities. However, Molecular Devices anticipates engaging in hedging activity in the future, and therefore, expects to be impacted by the pronouncement. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, referred to as SAB 101. SAB 101 summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition. The adoption of SAB 101 had no material effect on Molecular Devices' financial position or results of operations. Per Share Data Basic net income per share is computed based on the weighted average number of shares of Molecular Devices' common stock outstanding. Dilutive net income per share is computed based on the weighted average number of shares of Molecular Devices' common stock and other dilutive securities. Dilutive securities consist of the incremental common shares issuable upon the exercise of stock options and warrants (using the treasury stock method). 40 41 Computation of diluted earnings per share is as follows (in thousands except per share amounts):
Years Ended December 31, --------------------------------- 2000 1999 1998 -------- ------- ------- DILUTED Weighted average common shares outstanding for the period 15,246 13,347 12,407 Common equivalent shares assuming exercise of stock options under the treasury stock method -- 802 558 -------- ------- ------- Shares used in per share calculation 15,246 14,149 12,965 ======== ======= ======= Net income (loss) $ (4,934) $ 3,651 $ 1,833 ======== ======= ======= Net income (loss) per share $ (0.32) $ 0.26 $ 0.14 ======== ======= =======
Options to purchase 103,000 and 469,000 shares of common stock at weighted average per share prices of $31.60 and $18.96 were outstanding during 1999 and 1998, respectively, but were not included in the computation of diluted earnings per share for those years as the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would have been anti-dilutive. In 2000, the total number of shares excluded from the calculation of diluted net loss per share was 1,163,000. Such securities, had they been dilutive, would have been included in the computations of diluted net loss per share using the treasury stock method. Stock Based Compensation As permitted by SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," Molecular Devices applies APB Opinion 25 and related Interpretations in accounting for its Stock Option Plans and, accordingly, recognizes no compensation expense for stock option grants with an exercise price equal to the fair market value of the shares at the date of grant. Note 7 to the Consolidated Financial Statements contains a summary of the pro forma effects on reported net income and earnings per share for each of the three years in the period ended December 31, 2000, if Molecular Devices had elected to recognize compensation cost based on the fair value of the options granted as prescribed by SFAS 123. 401(k) Plan Molecular Devices' 401(k) Plan ("Plan") covers substantially all of its U.S. based employees. Under the Plan, eligible employees may contribute up to 25% of their eligible compensation, subject to certain Internal Revenue Service restrictions. Molecular Devices began matching a portion of employee contributions in 1997, up to a maximum of 3% or $2,500, whichever is less, of each employee's eligible compensation. The match is effective December 31 of each year and vests over a period of four years of service. For the years ended December 31, 2000, 1999 and 1998, Molecular Devices provided approximately $270,000, $158,000 and $126,000, respectively, under the Plan. LJL BioSystems maintained the tax deferred LJL BioSystems, Inc. 401(k) Plan, that covered all employees over twenty-one years of age whom became eligible to enroll the first day of the calendar month following their employment date. Employees were allowed to contribute up to 15% of their compensation to the 401(k) Plan on a pre-tax basis, subject to the maximum amount allowable under IRS regulations. Effective November 1, 2001, the plan was discontinued and employee account balances were merged into the Molecular Devices plan. 41 42 Comprehensive Income. Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes unrealized gains or losses from the translation of foreign subsidiaries' financial statements, and unrealized gains and losses on available-for-sale securities, if material. NOTE 2. BALANCE SHEET AMOUNTS
December 31, ----------------------- 2000 1999 -------- -------- (in thousands) Inventories: Raw materials $ 4,909 $ 4,391 Work-in-process 2,227 762 Finished goods and demonstration equipment 5,920 5,356 -------- -------- $ 13,056 $ 10,509 ======== ======== Equipment and leasehold improvements: Machinery and equipment $ 10,492 $ 8,384 Furniture and fixtures 1,552 1,645 Leasehold improvements 5,973 1,055 -------- -------- 18,017 11,084 Less accumulated depreciation (9,002) (7,428) -------- -------- Net equipment and leasehold improvements $ 9,015 $ 3,656 ======== ======== Other current assets: Taxes receivable $ 3,999 $ -- Interest receivable 1,247 241 Other 545 639 -------- -------- $ 5,791 $ 880 ======== ======== Other assets: Equity investments $ 11,108 $ -- Goodwill, net 4,207 4,521 Other 1,388 965 -------- -------- $ 16,703 $ 5,486 ======== ======== Other accrued liabilities: Accrued income tax $ 503 $ -- Warranty accrual 1,429 725 Sales tax payable (196) 306 Accrued merger and acquisition related expenses 968 -- Other 1,581 2,030 -------- -------- $ 4,285 $ 3,061 ======== ========
42 43 NOTE 3. LONG-TERM DEBT In February 1998, LJL BioSystems entered into an equipment financing agreement that provided a $1.3 million line of credit. The initial term of this agreement was through February 16, 1999. Amounts borrowed under this agreement bear interest at 11.08% to 12.16%. The agreement was extended twice with the latest extension expiring on December 31, 1999. At December 31, 2000, LJL BioSystems had an obligation to repay $586,000 under this agreement through 2003. Future principal payments under this line of credit are as follows (in thousands):
Years Ending December 31, ------------------------- 2001 $ 317 2002 243 2003 26 ----- $ 586 =====
NOTE 4. COMMITMENTS Molecular Devices' and LJL BioSystems' facilities are leased under noncancelable operating leases. The leases generally require payment of taxes, insurance and maintenance costs on leased facilities. Minimum annual rental commitments under these noncancelable operating leases for the years ended 2001, 2002, 2003, 2004, 2005, and thereafter, are approximately $2,639,000, $4,284,000, $3,541,000, $3,261,000, $3,386,000 and $7,349,000, respectively. Net rental expense under operating leases related to Molecular Devices' and LJL BioSystems' facilities was approximately $2,486,000, $1,206,000, and $1,045,000, respectively for each of the three years ended December 31, 2000, 1999 and 1998. Molecular Devices has a contractual commitment for the purchase of certain resale products and manufacturing components with two vendors. The minimum purchase commitment is based on a set percentage of our forecasted production, and for 2001, 2002 and 2003, at current prices, is approximately $3,112,000, $660,000 and $660,000, respectively. These purchase commitments are not expected to result in a loss. NOTE 5. ACQUISITIONS AND INVESTMENTS LJL BioSystems On August 30, 2000, Molecular Devices acquired all of LJL BioSystems' outstanding stock in a tax-free, stock-for-stock transaction. LJL BioSystems' stockholders received 0.30 of a share of Molecular Devices' common stock for each share of LJL BioSystems' common stock. Molecular Devices issued approximately 4.5 million shares of common stock to acquire the outstanding LJL BioSystems shares on the closing date. In addition, Molecular Devices assumed outstanding options to acquire LJL BioSystems shares, which were converted into options to acquire approximately 557,000 shares of Molecular Devices' common stock. Molecular Devices has accounted for the transaction as a pooling of interests, and, accordingly, the consolidated financial statements and all financial information have been restated to reflect the combined operations, financial position and cash flows of both companies. During the quarter ended September 30, 2000, Molecular Devices incurred approximately $15,181,000 in merger related expenses, including transition costs, investment banking, legal and other advisory services, which were charged to operations as incurred. As of December 31, 2000, the remaining liability related to these expenses was approximately $968,000, substantially all of which related to transition costs. 43 44 The following table summarizes the separate and combined results of operations of Molecular Devices and LJL BioSystems:
Molecular LJL Pooling Devices BioSystems Adjustments Combined --------------------------------------------------------- (in thousands) Year ended December 31, 2000 Revenues $ 85,926 $ 10,109 (2) $ 0 $ 96,035 Net income (loss) (1,900)(1) (4,977)(2) 1,943(3) (4,934)
Molecular LJL Pooling Devices BioSystems Adjustments Combined --------------------------------------------------------- (in thousands) Year ended December 31, 1999 Revenues $ 61,985 $ 9,917 $ 0 $ 71,902 Net income (loss) 8,505(1) (8,138) 3,284(3) 3,651
Molecular LJL Pooling Devices BioSystems Adjustments Combined --------------------------------------------------------- (in thousands) Year ended December 31, 1998 Revenues $ 47,798 $ 4,436 $ 0 $ 52,234 Net income (loss) 6,781(1) (8,491) 3,543(3) 1,833
- ------------------------ (1) Includes merger and acquisition related expenses (2) LJL results for 2000 are through the date of consummation of the transaction. (3) Represents the tax benefit derived from LJL BioSystems' net loss position. This adjustment is based on the evaluation of a variety of factors including the combined companies' statutory and state tax rates. Argonex, Inc. In December 2000, Molecular Devices acquired an equity interest in Argonex, Inc., the parent company of Upstate Biotechnology, Inc. and Argonex Discovery, Ltd., for $10 million in cash. The companies also announced the launch of a ten-year strategic partnership to provide new consumable reagent kits to the high-throughput screening market. Under the partnership agreement, Molecular Devices will be the exclusive distributor of all kits co-developed by Argonex and Molecular Devices, which will be optimized to perform on Molecular Devices' drug discovery instrumentation platforms. Upstate Biotechnology is a leading supplier of reagents to the drug discovery and life sciences research markets, with particular strength in "cell-signaling" reagents such as kinases. Skatron Instruments AS On May 17, 1999, Molecular Devices acquired all of the outstanding stock of Skatron Instruments AS, a Norwegian company ("Skatron"), and certain assets from Skatron Instruments Inc., a Virginia corporation and wholly-owned subsidiary of Skatron, for a cash payment at closing of $7,118,000 (including $300,000 of acquisition related expenses). Skatron was principally involved in the design, development, manufacture and sale and service of a complete line of microwell plate washers. The acquisition was accounted for as a purchase and the total purchase price was allocated based on an independent appraisal as follows (in thousands): Acquired developed technology and goodwill..................... $ 4,717 Acquired in-process research and development................... 2,037 Net book value of acquired assets and liabilities which Approximate fair value....................................... 364 ------- Total purchase price................................. $ 7,118 =======
The purchase price allocation resulted in a $2,037,000 charge related to the value of acquired in-process research and development in the second quarter of 1999. The value of acquired in-process research and development represents the appraised value of technology in the development stage that had not yet reached economic and technological feasibility. In reaching this determination, Molecular Devices used a present value net income approach and considered, among other factors, the stage of development of each product, the time and resources needed to complete each product, and expected income and associated risks. The developed 44 45 technology, goodwill and other intangibles are being amortized over periods of up to 15 years, the estimated useful lives of these acquired assets. The results of Skatron are included in the consolidated statements of operations from May 18, 1999. Pro forma consolidated results for Molecular Devices had the acquisition been consummated January 1, 1998, excluding the charge for acquired in-process research and development recorded in 1999, are as follows (in thousands, except per share data):
Years ended December 31, 1999 1998 ------- ------- Revenues......................... $72,952 $56,485 Net income....................... $ 4,947 $ 2,006 Diluted net income per share..... $ 0.25 $ 0.10
Other On August 28, 1998, Molecular Devices acquired license rights to a Telecentric Lens Luminometer technology from Affymax Research Institute. Under the agreement, Molecular Devices received the rights to develop, manufacture, market and distribute commercial systems based on this technology in exchange for payment of up-front consideration and continuing royalties to Affymax based on future product sales. The $876,000 write-off of acquired in-process research and development during 1998 represented the entire amount of up-front consideration that was paid to Affymax as well as all related transaction costs associated with this technology license agreement. Based on the stage of development of this technology and the assessment of the time and resources needed to complete product development, Molecular Devices believed that the acquired technology had not yet reached economic or technological feasibility and had no alternative future uses at the time of the agreement. NOTE 6. STOCKHOLDERS' EQUITY In connection with its Series A preferred stock private placement in June 1997, LJL BioSystems issued to a placement agent two warrants to purchase a total of 65,653 shares of its Series A preferred stock (19,695 Molecular Devices equivalent shares) at an exercise price of $5.20 per share ($17.33 Molecular Devices equivalent per share price). The warrants originally were to expire on the earlier of June 6, 2002, the closing of an initial public offering of LJL BioSystems' common stock pursuant to a registration statement under the Securities Act of 1933 or a merger or sale of substantially all of LJL BioSystems' assets, and were exercisable immediately. In March 1998, the terms of the warrants were amended such that the warrants are now exercisable to purchase 65,653 shares of LJL BioSystems' common stock (19,695 Molecular Devices equivalent shares) at an exercise price of $7.00 per share ($23.33 Molecular Devices equivalent per share price) and expire in 2001. Molecular Devices determined that the value of the amended warrants was not material. NOTE 7. EQUITY INCENTIVE PLANS Under Molecular Devices' 1995 Stock Option Plan ("1995 Plan"), a total of 1,750,000 shares of Molecular Devices' common stock have been reserved for issuance as either incentive or nonqualified stock options to officers, directors, employees and consultants of Molecular Devices. Option grants expire in ten years and generally become exercisable in increments over a period of four to five years from the date of grant. Options may be granted with different vesting terms from time to time. In September 1995, Molecular Devices established the 1995 Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). Under the Directors' Plan, Molecular Devices is authorized to grant nonqualified stock options to purchase up to 347,500 shares of common stock at the fair market value of the common shares at the date of grant. Options granted under the Directors' Plan vest and become exercisable in three equal annual installments commencing one year from the date of the grant. LJL BioSystems' stock plans included the 1994 Equity Incentive Plan (the "1994 Plan"), the 1997 Stock Plan (the "1997 Plan"), and the 1998 Directors' Plan (the "Directors' Plan"). Upon closing of the merger, Molecular Devices assumed all outstanding options under these plans, which were converted into options to purchase Molecular Devices common stock. Molecular Devices also assumed the shares available for grant under the 1994 and 1997 Plans to LJL BioSystems' employees. Options granted under the 1994 Plan and 1997 Plan generally vest over a five-year period. The following descriptions describe these plans (adjusted to Molecular Devices equivalent shares). In January 1994, LJL BioSystems adopted the 1994 Plan, under which 149,850 shares were reserved for issuance to employees, directors and consultants of LJL BioSystems, as approved by the Board of Directors. On March 14, 1997, LJL BioSystems reduced 45 46 the number of shares reserved for issuance under the 1994 Plan to 143,775. The 1994 Plan, which expires in 2004, provides for the grant of incentive as well as nonstatutory stock options, stock bonuses, stock appreciation rights and restricted stock purchase rights. In March 1997, LJL BioSystems adopted the 1997 Plan. As amended, 756,225 shares were reserved for issuance to employees, directors and consultants of LJL BioSystems under the 1997 Plan. The 1997 Plan, which expires in 2007, provides for the grant of incentive as well as nonstatutory stock options and restricted stock purchase rights. On December 16, 1997, LJL BioSystems' Board of Directors adopted the 1998 Directors' Plan and reserved 45,000 shares of common stock for issuance under the Plan, which was approved by the stockholders in February 1998. The 1998 Directors' Plan provided for certain automatic grants of nonstatutory stock options to nonemployee directors of LJL BioSystems. Options granted under the 1998 Directors' Plan vested over four years, had a term of ten years and were granted at exercise prices equal to the fair market value of LJL BioSystems' common stock on the date of grant. The 1998 Directors' Plan terminated in connection with the acquisition of LJL BioSystems by Molecular Devices, and there are currently no outstanding options under the 1998 Directors' Plan. The following table summarizes the activity under all of the Molecular Devices' plans and LJL BioSystems' plans on a combined basis:
Weighted Shares Average Available for Options Exercise Future Grant Outstanding Price ------------- ----------- ------- Balance December 31, 1997 1,192,835 1,042,723 $ 6.69 Granted (852,924) 852,924 16.13 Exercised -- (176,634) 3.39 Cancelled 151,484 (151,484) 11.16 --------- --------- Balance December 31, 1998 491,395 1,567,529 11.77 Authorized 1,280,000 -- Granted (757,291) 757,291 23.96 Exercised -- (202,397) 5.96 Cancelled 120,641 (120,641) 16.22 --------- --------- Balance December 31, 1999 1,134,745 2,001,782 16.70 Authorized 242,500 -- Granted (768,034) 765,534 52.49 Exercised -- (577,254) 13.74 Cancelled 342,594 (342,594) 31.19 --------- --------- Balance December 31, 2000 951,805 1,847,468 $ 29.89 ========= =========
As permitted by Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," Molecular Devices applies APB Opinion 25 and related Interpretations in accounting for its stock option plans and, accordingly, recognizes no compensation expense for stock option grants with an exercise price equal to the fair market value of the shares at the date of grant. If Molecular Devices and LJL BioSystems had elected to recognize compensation cost based on the fair value of the options granted at grant date and shares issued under stock purchase plans as prescribed by SFAS 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below (in thousands, except per share amounts):
2000 1999 1998 ------- ----- ------ Net income (loss) as reported ..................... $(4,934) $3,651 $1,833 Pro forma ......................................... (9,365) 1,648 697 Basic net income (loss) per share as reported ..... (0.32) 0.27 0.15 Pro forma ......................................... (0.61) 0.12 0.06 Diluted net income (loss) per share reported .... (0.32) 0.26 0.14 Pro forma ......................................... (0.61) 0.12 0.05
The pro forma net income and net income per share disclosed above is not likely to be representative of the effects on net income and net income per share on a pro forma basis in future years, as subsequent years may include additional grants and years of vesting. 46 47 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
2000 1999 1998 --------------------------------------------- Expected dividend yield............ 0% 0% 0% Expected stock price volatility.... 84 - 100% 66 - 90% 51 - 84% Risk-free interest rate............ 5.48 - 5.85% 4.60 - 6.40% 4.40 - 5.85% Expected life of options........... 3 - 5 years 3 - 5 years 3 - 5 years
The weighted average fair value of options granted during the year ended December 31, 2000, 1999 and 1998 was $38.37, $15.14 and $8.22, respectively. The following table is a summary of Molecular Devices' outstanding and exercisable options at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------- ---------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICE OUTSTANDING LIFE (YR.) PRICE EXERCISABLE PRICE - -------------- ----------- ----------- -------- ----------- -------- $ 0.33 1,125 5.0 $ 0.33 450 $ 0.33 $ 2.00 - 3.00 25,780 4.7 2.65 19,810 2.85 $ 3.33 27,644 6.4 3.33 15,734 3.33 $ 5.25 - 6.67 116,731 4.8 5.28 115,231 5.26 $ 8.00 - 12.00 86,350 8.0 9.40 19,412 9.29 $ 12.92 - 19.17 551,922 7.5 16.64 204,204 16.26 $ 19.50 - 29.19 366,723 8.3 26.27 62,075 25.82 $ 35.25 - 49.38 542,658 9.1 45.78 12,357 44.36 $ 53.33 - 78.75 118,335 9.7 76.26 888 61.83 $ 93.33 10,200 9.2 93.33 -- -- --------- ------- $ 0.33 - 93.33 1,847,468 8.1 29.89 450,161 14.27 ========= =======
There were 450,161, 554,812 and 412,225 options exercisable under the various plans at December 31, 2000, 1999 and 1998, respectively. Deferred Compensation Deferred compensation is recorded when the exercise price of an option is less than the deemed fair value of the underlying stock on the date of grant. For options granted in September 1995, Molecular Devices recognized $578,000 as deferred compensation. The deferred compensation expense was being amortized ratably over the vesting period of the options, generally 3 - 5 years. The amortization of this deferred compensation was completed during 2000. For options granted in 1997, LJL BioSystems recognized $772,000 as deferred compensation. On March 10, 1998, LJL BioSystems granted an option to an employee to purchase shares of common stock at a price 15% below fair market value at the date of the grant. Deferred compensation of $33,600 was recorded based on the estimated fair value of the options granted. Deferred compensation is amortized over the vesting period of the options, generally four to five years. During 1998, Molecular Devices granted 42,500 shares of restricted stock to certain employees. These restricted shares vested in quarterly increments from the date of grant over two years. Molecular Devices recognized $782,000 of deferred compensation for the total value of these shares on their respective dates of grant. The deferred compensation expense was being recognized ratably over the two-year vesting period. The amortization of this deferred compensation was completed during 2000. During 2000, Molecular Devices granted 2,500 shares of restricted stock to an employee. These restricted shares vest in quarterly increments from the date of grant over two years. Molecular Devices recognized $223,000 of deferred compensation for the total value of these shares on the date of grant. The deferred compensation expense is being recognized ratably over the two-year vesting period. 47 48 Stock compensation expense for options granted to consultants has been determined using the Black-Scholes option pricing model to measure the fair value of the option. The fair value of such options is periodically remeasured as the options vest. Employee Stock Purchase Plans Under the Molecular Devices' Employee Stock Purchase Plan (the "Molecular Devices Purchase Plan"), 200,000 shares of common stock have been authorized for issuance. Shares may be purchased under the Molecular Devices Purchase Plan at 85% of the lesser of the fair market value of the common stock on the grant or purchase date. As of December 31, 2000, 82,005 shares remained available for purchase. Under the LJL BioSystems' Employee Stock Purchase Plan ("LJL BioSystems' Purchase Plan"), which was terminated upon closing of the merger on August 30, 2000, 300,000 shares of common stock (90,000 equivalent Molecular Devices shares) were reserved for issuance. Shares could be purchased under LJL BioSystems' Purchase Plan at 85% of the lesser of the fair market value of the common stock on the grant or purchase date. In 2000, through the close of the merger, 69,558 shares of LJL BioSystems' common stock (20,867 equivalent Molecular Devices shares) were purchased by the participants under the terms of this plan. NOTE 8. INCOME TAXES The components of the provisions for income taxes consist of the following:
YEARS ENDED DECEMBER 31, ----------------------------------- 2000 1999 1998 ------- ------- ------- (IN THOUSANDS) Current: Federal .... $ 5,498 $ 4,920 $ 2,671 State ...... 1,012 861 756 Foreign .... 516 394 581 ------- ------- ------- $ 7,026 $ 6,175 $ 4,008 Deferred: Federal .... (488) (3,371) (2,369) State ...... (123) (748) (683) Foreign .... -- -- -- ------- ------- ------- (611) (4,119) (3,052) ------- ------- ------- $ 6,415 $ 2,056 $ 956 ======= ======= =======
The provisions for income taxes differ from the amounts computed by applying the statutory federal income tax rate to income before income taxes. The source and tax effects of the differences are as follows:
YEARS ENDED DECEMBER 31, ----------------------------------- 2000 1999 1998 ------- ------- ------- (IN THOUSANDS) Income before provisions for income taxes ... $ 1,481 $ 5,707 $ 2,789 ======= ======= ======= Income tax at statutory federal rate (35%) .. 519 1,997 976 Non-deductible merger expenses .............. 5,313 -- -- State income tax, net of federal benefit .... 580 73 47 Net operating loss carryforwards ............ -- (90) (62) Foreign sales corporation ................... (248) (243) (173) Research and development credits ............ -- (150) -- Foreign losses not currently benefited ...... 182 469 168 Other ....................................... 69 -- -- ------- ------- ------- $ 6,415 $ 2,056 $ 956 ======= ======= =======
Foreign pretax income was $308,000, $900,000 and $1,500,000 in 2000, 1999 and 1998, respectively. 48 49 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amount used for income tax purposes.
YEARS ENDED DECEMBER 31, ----------------------- 2000 1999 -------- -------- (IN THOUSANDS) Deferred tax assets: Non-deductible reserves ............ $ 1,299 $ 840 Warranty and accrued expenses ...... 563 408 Net operating losses ............... 9,177 7,761 Foreign loss carryforwards ......... 1,298 869 Other .............................. 925 1,196 Valuation allowance ................ (2,446) (869) -------- -------- Total deferred tax assets .. $ 10,816 $ 10,205 ======== ========
The net valuation allowance increased by $1,577,000 and $339,000 during 2000 and 1999 respectively. $1,394,000 of the valuation allowance relates to stock option deductions that will be credited to equity when realized. As of December 31, 2000, Molecular Devices had net operating loss carryforwards for federal income tax purposes of approximately $23,000,000, which expire in the years 2010 through 2020 and federal research and development tax credits of approximately $1,000,000, which expire in the years 2012 through 2020. Utilization of the net operating loss carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss carryforwards before utilization. NOTE 9. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION Molecular Devices operates in a single industry segment: the design, development, manufacture, sale and service of bioanalytical measurement systems for drug discovery and life sciences research applications. Foreign operations of European subsidiaries consist of sales, service, manufacturing and distribution. Intercompany transfers between geographic areas are accounted for at prices that approximate those negotiated in arm's-length transactions. Summarized data for Molecular Devices' domestic and international operations was as follows (in thousands):
ADJUSTMENTS AND UNITED STATES EUROPE ELIMINATIONS TOTAL ------------- ------- ------------ --------- YEAR ENDED DECEMBER 31, 2000 Revenues $ 90,478 $ 17,302 $(11,745) $ 96,035 Income from operations (3,657)(1) 732 (506) (3,431) Identifiable assets 170,468 12,738 (3,173) 180,033 YEAR ENDED DECEMBER 31, 1999 Revenues $ 67,585 $ 14,984 $(10,667) $ 71,902 Income from operations 2,890 (1) 1,209 (313) 3,786 Identifiable assets 85,641 9,117 (7,909) 86,849 YEAR ENDED DECEMBER 31, 1998 Revenues $ 48,000 $ 10,540 $ (6,306) $ 52,234 Income from operations (866)(1) 1,429 48 611 Identifiable assets 71,103 5,567 (4,351) 72,319
- ----------------------- (1) Includes merger and acquisition related expenses 49 50 Molecular Devices divides their business into two product families. The Drug Discovery family includes the FLIPR, CLIPR, Cytosensor, and LJL BioSystems product lines, and the combined entity's consumables business. The Life Sciences Research family includes the Maxline, Threshold and Skatron product lines. Consolidated revenue from Molecular Devices' product families was as follows (in thousands):
Years ended December 31, --------------------------------- 2000 1999 1998 ------- ------- ------- Drug Discovery $49,168 $33,177 $20,934 Life Sciences Research 46,867 38,725 31,300 ------- ------- ------- Total revenues $96,035 $71,902 $52,234 ======= ======= =======
Sources of consolidated revenue from significant geographic regions were as follows (in thousands):
Years ended December 31, --------------------------------- 2000 1999 1998 ------- ------- ------- North America $63,477 $46,976 $33,799 Europe 25,381 19,338 13,821 Rest of World 7,177 5,588 4,614 ------- ------- ------- Total revenues $96,035 $71,902 $52,234 ======= ======= =======
NOTE 10. COMPARATIVE QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data is as follows:
FIRST SECOND THIRD FOURTH ------- -------- -------- ------- (in thousands, except per share amounts) FISCAL 2000 Revenues $ 20,179 $ 24,038 $ 24,341 $ 27,477 Gross margin 12,818 15,053 15,274 17,307 Net income (loss) 1,186 2,037 (12,395)(1) 4,238 Basic net income (loss) per share 0.09 0.14 (0.77) 0.26 Diluted net income (loss) per share 0.08 0.13 (0.77) 0.25 FISCAL 1999 Revenues $ 14,866 $ 16,819 $ 18,401 $ 21,816 Gross margin 8,904 10,654 11,875 14,170 Net income (loss) 572 (413)(2) 1,207 2,285 Basic net income (loss) per share 0.04 (0.03) 0.09 0.17 Diluted net income (loss) per share 0.04 (0.03) 0.08 0.16
- ---------------- (1) Includes a charge of approximately $15.2 million of direct costs related to the LJL BioSystems merger (2) Includes a charge of approximately $2.0 million for the write-off of acquired in-process research and development related to the acquisition of Skatron. 50 51 NOTE 11. SUBSEQUENT EVENTS On January 5, 2001, Molecular Devices acquired all of the capital stock of Nihon Molecular Devices (NMD), its Japanese distributor, in exchange for $3,150,000. NMD was jointly established by JCR Pharmaceuticals Co., Ltd. and Molecular Devices in 1995 to import and sell Molecular Devices' products in Japan. NMD became a wholly owned subsidiary of Molecular Devices. The acquisition was accounted for as a purchase. The excess of the purchase price over the identified net assets of NMD will be allocated to goodwill and amortized over ten years. 51 52 MOLECULAR DEVICES CORPORATION AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT BALANCE AT BEGINNING CHARGED TO END DESCRIPTION OF YEAR COSTS DEDUCTIONS OF YEAR ----------- ---------- ---------- ---------- ---------- Allowance for doubtful accounts receivable for the year ended December 31, 1998: $ 184 $ 195 $ (10) $ 369 Allowance for doubtful accounts receivable for the year ended December 31, 1999: 369 83 -- 452 Allowance for doubtful accounts receivable for the year ended December 31, 2000: $ 452 $ 161 $ (52) $ 561
52 53 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 2.1(1) Form of Agreement and Plan of Merger between the Registrant and Molecular Devices Corporation, a California Corporation 2.2(2) Stock and Asset Purchase Agreement, dated as of May 17, 1999, among Molecular Devices Corporation, a Delaware corporation, Helge Skare, Wiel Skare, Steinar Faanes and Sten Skare, each an individual resident in Norway, Skatron Instruments AS, a Norwegian company, and Skatron Instruments, Inc., a Virginia corporation 2.3(2) Escrow Agreement, dated as of May 17, 1999, among Molecular Devices Corporation, a Delaware corporation, Helge Skare, Wiel Skare and Greater Bay Trust Company, as Escrow Agent 2.4(6) Agreement and Plan of Merger and Reorganization dated as of June 7, 2000 by and among Molecular Devices Corporation, Mercury Acquisition Sub, Inc. and LJL BioSystems, Inc. 3.1(1) Amended and Restated Certificate of Incorporation of Registrant 3.2(1) Bylaws of the Registrant 4.1(1) Specimen Certificate of Common Stock of Registrant 10.1(1)* 1988 Stock Option Plan 10.2(1)* Form of Incentive Stock Option under the 1988 Stock Option Plan 10.3(1)* Form of Supplemental Stock Option under the 1988 Stock Option Plan 10.4(1)* 1995 Employee Stock Purchase Plan 10.6(1)* Form of Nonstatutory Stock Option under the 1995 Non-Employee Directors' Stock Option Plan 10.8(1)* Form of Incentive Stock Option under the 1995 Stock Option Plan 10.9(1)* Form of Nonstatutory Stock Option under the 1995 Stock Option Plan 10.10(1)* Form of Early Exercise Stock Purchase Agreement under the 1995 Stock Option Plan 10.11(1)* Form of Indemnity Agreement between the Registrant and its Directors and Executive Officers 10.12(1)* Consulting Agreement dated July 20, 1988 by and between the Registrant and Harden M. McConnell, Ph.D. 10.19(2)* Key Employee Agreement for Joseph D. Keegan dated March 11, 1998, as amended 10.20(3) Exclusive License and Technical Support Agreement dated August 28, 1998 by and between the Registrant and Affymax 10.21(3)* Employee Offer Letter for Tim Harkness 10.22(3)* Employee Offer Letter for Tony Lima 10.23(3)* Employee Offer Letter for John Senaldi 10.24(5)* 1995 Non-Employee Director's Stock Option Plan, as amended 10.25(5)* 1995 Stock Option Plan, as amended 10.26(7)* Employee Offer Letter for Patricia Sharp 10.27(8)* LJL BioSystems 1994 Equity Incentive Plan and Forms of Agreements 10.28(8)* LJL BioSystems 1997 Stock Plan and Forms of Agreements 10.29(8)* LJL BioSystems 1998 Directors' Stock Option Plan and Forms of Agreements
54
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10.30(8) Equipment Financing Agreement dated February 16, 1998 between LJL BioSystems and Lease Management Services, Inc. 10.31(9) Lease between the Company and Coptech West 10.32 Sublease Agreement dated September 9, 1999 by and between Medtronic, Inc. and the Registrant 10.33 Lease Agreement dated May 26, 2000 by and between Aetna Life Insurance Company and the Registrant 21.1 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of PricewaterhouseCoopers LLP, Independent Auditors
- ---------- (1) Incorporated by reference to the similarly described exhibit in our Registration Statement on Form S-1 (File No. 33-98926), as amended. (2) Incorporated by reference to the similarly described exhibit in our Form 10-Q Quarterly Report dated June 30, 1998, and filed August 13, 1998. (3) Incorporated by reference to the similarly described exhibit in our Form 10-Q Quarterly Report dated September 30, 1998, and filed November 13, 1998. (4) Incorporated by reference to the similarly described exhibit in our Current Report on Form 8-K filed May 26, 1999. (5) Incorporated by reference to the similarly described exhibit in our Form 10-Q Quarterly Report dated June 30, 1999 and filed August 10, 1999. (6) Incorporated by reference to the similarly described exhibit in our Current Report on Form 8-K filed June 12, 2000. (7) Incorporated by reference to the similarly described exhibit in our Form 10-Q Quarterly Report dated September 30, 2000 and filed on November 13, 2000. (8) Incorporated by reference to the similarly described exhibit filed with LJL BioSystems' Registration Statement on Form S-1 (File No. 333-43529) declared effective on March 12, 1998. (9) Incorporated by reference to the similarly described exhibit filed with LJL BioSystems' Form 10-Q for the quarter ended March 31, 1998. * Management contract or compensatory plan or arrangement. EX-10.32 2 f70069ex10-32.txt EXHIBIT 10.32 1 Exhibit 10.32 LEASE AGREEMENT BY AND BETWEEN AETNA LIFE INSURANCE COMPANY, a Connecticut corporation AS LANDLORD and MOLECULAR DEVICES CORPORATION, a California corporation AS TENANT Dated May 26, 2000 2 TABLE OF CONTENTS
Page Basic Lease Information ..................................................... iv 1. Demise .................................................................. 1 2. Premises ................................................................ 1 3. Term .................................................................... 2 4. Rent .................................................................... 2 5. Utility Expenses ........................................................ 6 6. Late Charge ............................................................. 6 7. Security Deposit ........................................................ 7 8. Use of Premises ......................................................... 7 9. Acceptance of Premises .................................................. 9 10. Surrender ............................................................... 9 11. Alterations and Additions ............................................... 10 12. Maintenance and Repairs of Premises ..................................... 12 13. Landlord's Insurance .................................................... 13 14. Tenant's Insurance ...................................................... 14 15. Indemnification ......................................................... 15 16. Subrogation ............................................................. 16 17. Signs ................................................................... 16 18. Free From Liens ......................................................... 16 19. Entry By Landlord ....................................................... 17 20. Destruction and Damage .................................................. 17 21. Condemnation ............................................................ 19 22. Assignment and Subletting ............................................... 20
i 3 23. Tenant's Default ...................................................... 22 24. Landlord's Remedies ................................................... 24 25. Landlord's Right to Perform Tenant's Obligations ...................... 26 26. Attorneys' Fees ....................................................... 27 27. Taxes ................................................................. 27 28. Effect of Conveyance .................................................. 27 29. Tenant's Estoppel Certificate ......................................... 28 30. Subordination ......................................................... 28 31. Environmental Covenants ............................................... 29 32. Notices ............................................................... 32 33. Waiver ................................................................ 32 34. Holding Over .......................................................... 33 35. Successors and Assigns ................................................ 33 36. Time .................................................................. 33 37. Brokers ............................................................... 33 38. Limitation of Liability ............................................... 33 39. Financial Statements .................................................. 34 40. Rules and Regulations ................................................. 34 41. Mortgagee Protection .................................................. 34 42 Entire Agreement ...................................................... 35 43. Interest .............................................................. 35 44. Construction .......................................................... 35 45. Representations and Warranties of Tenant .............................. 35 46. Security .............................................................. 36 47. Jury Trial Waiver ..................................................... 36
ii 4 48. Option to Renew............................................... 36 49. Right of First Offer.......................................... 37 Exhibit A Rules and Regulations B Hazardous Materials Disclosure Certificate C Form of Tenant Estoppel Certificate iii 5 LEASE AGREEMENT BASIC LEASE INFORMATION - -------------------------------------------------------------------------------- Lease Date: May 26, 2000 - -------------------------------------------------------------------------------- Landlord: AETNA LIFE INSURANCE COMPANY, a Connecticut corporation - -------------------------------------------------------------------------------- Landlord's Address: c/o UBS Brinson Realty Investors LLC 455 Market Street, Suite 1540 San Francisco, California 94105 Attention: Asset Manager Moffett Park - -------------------------------------------------------------------------------- All notices sent to Landlord under this Lease shall be sent to the above address, with copies to: Insignia/ESG of California, Inc. 160 West Santa Clara Street, Suite 1350 San Jose, California 95113 Attention: Property Manager Moffett Park - -------------------------------------------------------------------------------- Tenant: Molecular Devices Corporation, a California corporation - -------------------------------------------------------------------------------- Tenant's Contact Person: Tim Harkness - -------------------------------------------------------------------------------- Tenant's Address: 1311 Orleans Drive Sunnyvale, California 94089 - -------------------------------------------------------------------------------- Premises Square Footage: Approximately sixty thousand sixty-one (60,061) rentable square feet - -------------------------------------------------------------------------------- Premises Address: 1311 Orleans Drive Sunnyvale, California - -------------------------------------------------------------------------------- Project: 1311 Orleans Drive, Sunnyvale, California, together with the land on which the Project is situated and all Common Areas - -------------------------------------------------------------------------------- Building (if not the same as the Project): Same as the Project - -------------------------------------------------------------------------------- Length of Term: Seventy-two (72) months - -------------------------------------------------------------------------------- iv 6 Commencement Date: November 1, 2001 - -------------------------------------------------------------------------------- Expiration Date: October 31, 2007 - --------------------------------------------------------------------------------
Monthly Base Rent: Months Monthly Base Rent - ------------------------------------------------------------------------------------- 1 - 12 $240,244.00 - ------------------------------------------------------------------------------------- 13 - 24 $249,853.76 - ------------------------------------------------------------------------------------- 25 - 36 $259,847.91 - ------------------------------------------------------------------------------------- 37 - 48 $270,241.83 - ------------------------------------------------------------------------------------- 49 - 60 $281,051.50 - ------------------------------------------------------------------------------------- 61 - 72 $292,293.56 - ------------------------------------------------------------------------------------- Security Deposit: Two Hundred Ninety-Two Thousand Two Hundred Ninety-Three and 56/100 Dollars ($292,293.56) - ------------------------------------------------------------------------------------- Permitted Use: General office or laboratory research and development facility, including wet chemistry, manufacturing and biology labs, clean rooms and instrument assembly - ------------------------------------------------------------------------------------- Unreserved Parking Spaces: All nonexclusive and undesignated parking spaces located on the Project - ------------------------------------------------------------------------------------- Alterations Allowance: Three Hundred Thousand Three Hundred Five Dollars ($300,305.00) - ------------------------------------------------------------------------------------- Broker(s): Insignia/ESG of California, Inc. and CPS (collectively, Landlord's Broker) Cresa Partners (Tenant's Broker) - -------------------------------------------------------------------------------------
v 7 LEASE AGREEMENT BASIC LEASE INFORMATION Lease Date: May 26, 2000 - -------------------------------------------------------------------------------- Landlord: AETNA LIFE INSURANCE COMPANY, a Connecticut corporation - -------------------------------------------------------------------------------- Landlord's Address: c/o UBS Brinson Realty Investors LLC 455 Market Street, Suite 1540 San Francisco, California 94105 Attention: Asset Manager Moffett Park - -------------------------------------------------------------------------------- All notices sent to Landlord under this Lease shall be sent to the above address, with copies to: Insignia/ESG of California, Inc. 160 West Santa Clara Street, Suite 1350 San Jose, California 95113 Attention: Property Manager Moffett Park - -------------------------------------------------------------------------------- Tenant: Molecular Devices Corporation, a California corporation - -------------------------------------------------------------------------------- Tenant's Contact Person: Tim Harkness - -------------------------------------------------------------------------------- Tenant's Address: 1311 Orleans Drive Sunnyvale, California 94089 - -------------------------------------------------------------------------------- Premises Square Footage: Approximately sixty thousand sixty-one (60,061) rentable square feet - -------------------------------------------------------------------------------- Premises Address: 1311 Orleans Drive Sunnyvale, California - -------------------------------------------------------------------------------- Project: 1311 Orleans Drive, Sunnyvale, California, together with the land on which the Project is situated and all Common Areas - -------------------------------------------------------------------------------- Building (if not the same as the Project): Same as the Project - -------------------------------------------------------------------------------- Length of Term: Seventy-two (72) months - --------------------------------------------------------------------------------
iv 8 Commencement Date: November 1, 2001 - -------------------------------------------------------------------------------- Expiration Date: October 31, 2007 - --------------------------------------------------------------------------------
Monthly Base Rent: Months Monthly Base Rent - -------------------------------------------------------------------------------- 1 - 12 $240,244.00 - -------------------------------------------------------------------------------- 13 - 24 $249,853.76 - -------------------------------------------------------------------------------- 25 - 36 $259,847.91 - -------------------------------------------------------------------------------- 37 - 48 $270,241.83 - -------------------------------------------------------------------------------- 49 - 60 $281,051.50 - -------------------------------------------------------------------------------- 61 - 72 $292,293.56
- -------------------------------------------------------------------------------- Security Deposit: Two Hundred Ninety-Two Thousand Two Hundred Ninety- Three and 56/100 Dollars ($292,293.56) - -------------------------------------------------------------------------------- Permitted Use: General office or laboratory research and development facility, including wet chemistry, manufacturing and biology labs, clean rooms and instrument assembly - -------------------------------------------------------------------------------- Unreserved Parking Spaces: All nonexclusive and undesignated parking spaces located on the Project - -------------------------------------------------------------------------------- Alterations Allowance: Three Hundred Thousand Three Hundred Five Dollars ($300,305.00) - -------------------------------------------------------------------------------- Broker(s): Insignia/ESG of California, Inc. and CPS (collectively, Landlord's Broker) - -------------------------------------------------------------------------------- Cresa Partners (Tenant's Broker) 9 improvements therefrom; (d) use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project or any portion thereof, and (e) do and perform any other acts or make any other changes in, to or with respect to the Common Areas and the Project as Landlord may, in its sole discretion, deem to be appropriate; provided, however, that Landlord shall not unreasonably interfere with Tenant's use and occupancy of the Premises (or reduce the number of parking spaces by more than five percent (5%) of the number provided to Tenant on the date of this Lease) in the exercise of its rights hereunder. 3. TERM The term of this Lease (the "TERM") shall be for the period of months specified in the Basic Lease Information, commencing on November 1, 2001 (the "COMMENCEMENT DATE") and expiring on October 31, 2007 (the "EXPIRATION DATE"). 4. RENT (a) BASE RENT. Tenant shall pay to Landlord, in advance on the first day of each month, without further notice or demand and without offset, rebate, credit or deduction for any reason whatsoever, the monthly installments of rent specified in the Basic Lease Information (the "BASE RENT"). (b) ADDITIONAL RENT. This Lease is intended to be a triple-net Lease with respect to Landlord; and subject to Paragraph 12(b) below, the Base Rent owing hereunder is (i) to be paid by Tenant absolutely net of all costs and expenses relating to Landlord's ownership and operation of the Project and the Building, and (ii) not to be reduced, offset or diminished, directly or indirectly, by any cost, charge or expense payable hereunder by Tenant or by others in connection with the Premises, the Building and/or the Project or any part thereof. The provisions of this Paragraph 4(b) for the payment of Expenses as hereinafter defined) are intended to pass on to Tenant all such costs and expenses. In addition to the Base Rent, Tenant shall pay to Landlord, in accordance with this Paragraph 4, all costs and expenses paid or incurred by Landlord in connection with the ownership, operation, maintenance, management and repair of the Premises, the Building and/or the Project or any part thereof (collectively, the "EXPENSES"), including, without limitation, all the following items (the "ADDITIONAL RENT"): (i) Taxes and Assessments. All real estate taxes and assessment, which shall include any form of tax, assessment, fee, license fee, business license fee, levy, penalty (if a result of Tenant's delinquency), or tax (other than net income, estate, succession, inheritance, transfer or franchise taxes), imposed by any authority having the direct or indirect power to tax, or by any city, county, state or federal government or any improvement or other district or division thereof, whether such tax is: (A) determined by the area of the Premises, the Building and/or the Project or any part thereof, or the Rent and other sums payable hereunder by Tenant or by other tenants, including, but not limited to, any gross income or excise tax levied by any of the foregoing authorities with respect to receipt of Rent and/or other sums due under this Lease; (B) upon any legal or equitable interest of Landlord in the Premises, the Building and/or the Project or any part thereof; (C) upon this transaction or any document to which Tenant is a party creating or transferring any interest in the Premises, the Building and/or the Project; (D) levied or assessed in lieu of, in substitution for, or in addition to, existing or additional taxes against the Premises, 2 10 the Building and/or the Project, whether or not now customary or within the contemplation of the parties; or (E) surcharged against the parking area. Tenant and Landlord acknowledge that Proposition 13 was adopted by the voters of the State of California in the June, 1978 election and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such purposes as fire protection, street, sidewalk, road, utility construction and maintenance, refuse removal and for other governmental services which may formerly have been provided without charge to property owners or occupants. It is the intention of the parties that all new and increased assessments, taxes, fees, levies and charges due to any cause whatsoever are to be included within the definition of real property taxes for purposes of this Lease. "TAXES AND ASSESSMENTS" shall also include legal and consultants' fees, costs and disbursements incurred in connection with proceedings to contest, determine or reduce taxes, Landlord specifically reserving the right, but not the obligation, to contest by appropriate legal proceedings the amount or validity of any taxes. (ii) Insurance. All insurance premiums for the Building and/or the Project or any part thereof, including premiums for "all risk" fire and extended coverage insurance, commercial general liability insurance, rent loss or abatement insurance, earthquake insurance, flood or surface water coverage, and other insurance as Landlord deems necessary in its sole discretion, and any deductibles paid under policies of any such insurance. (iii) Utilities. The cost of all Utilities (as hereinafter defined) serving the Premises, the Building and the Project that are not separately metered to Tenant, any assessments of charges for Utilities or similar purposes included within any tax bill for the Building or the Project, including, without limitation, entitlement fees, allocation unit fees, and/or any similar fees or charges and any penalties (if a result of Tenant's delinquency) related thereto, and any amounts, taxes, charges, surcharges, assessments or impositions levied, assessed or imposed upon the Premises, the Building or the Project or any part thereof, or upon Tenant's use and occupancy thereof, as a result of any rationing of Utility services or restriction on Utility use affecting the Premises, the Building and/or the Project, as contemplated in Paragraph 5 below (collectively, "UTILITY EXPENSES"). (iv) Common Area Expenses. All costs to operate, maintain, repair, replace, supervise, insure and administer the Common Areas, including supplies, materials, labor and equipment used in or related to the operation and maintenance of the Common Areas, including parking areas (including, without limitation, all costs of resurfacing and restriping parking areas), signs and directories on the Building and/or the Project, landscaping (including maintenance contracts and fees payable to landscaping consultants), amenities, sprinkler systems, sidewalks, walkways, driveways, curbs, lighting systems and security services, if any, provided by Landlord for the Common Areas, and any charges, assessments, costs or fees levied by any association or entity of which the Project or any part thereof is a member or to which the Project or any part thereof is subject. (v) Parking Charges. Any parking charges or other costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations, or interpretations thereof, promulgated by any governmental authority or insurer in connection with the use or occupancy of the Building or the Project. 3 11 LEASE AGREEMENT THIS LEASE AGREEMENT is made and entered into by and between Landlord and Tenant on the Lease Date. The defined terms used in this Lease which are defined in the Basic Lease Information attached to this Lease Agreement ("BASIC LEASE INFORMATION") shall have the meaning and definition given them in the Basic Lease Information. The Basic Lease Information, the exhibits, the addendum or addenda described in the Basic Lease Information, and this Lease Agreement are and shall be construed as a single instrument and are referred to herein as the "LEASE". 1. DEMISE In consideration for the rents and all other charges and payments payable by Tenant, and for the agreements, terms and conditions to be performed by Tenant in this Lease, LANDLORD DOES HEREBY LEASE TO TENANT, AND TENANT DOES HEREBY HIRE AND TAKE FROM LANDLORD the Premises described below (the "PREMISES"), upon the agreements, terms and conditions of this Lease for the Term hereinafter stated. 2. PREMISES The Premises demised by this Lease is located in that certain building (the "BUILDING") specified in the Basic Lease Information, which Building is located in that certain real estate development (the "PROJECT") specified in the Basic Lease Information. The Premises has the address and contains the square footage specified in the Basic Lease Information; provided, however, that any statement of square footage set in this Lease, or that may have been used in calculating any of the economic terms hereof, is an approximation which Landlord and Tenant agree is reasonable, and no economic terms based thereon shall be subject to revision whether or not the actual footage is more or less. Tenant shall have the non-exclusive right (in common with the other tenants, Landlord and any other person granted use by Landlord) to use the Common Areas (as hereinafter defined), except that, with respect to parking, Tenant shall have only a license to use the parking spaces in the Project's parking areas (the "PARKING AREAS"); provided, however, that Landlord shall not be required to enforce Tenant's right to use such parking spaces; and provided, further, that the parking spaces allocated to Tenant hereunder shall be reduced in the event any of the parking spaces in the Parking Areas are taken or otherwise eliminated as a result of any Condemnation (as hereinafter defined) or casualty event affecting such Parking Areas. No easement for light or air is incorporated in the Premises. For purposes of this Lease, the term "COMMON AREAS" shall mean all areas and facilities outside the Premises and within the exterior boundary line of the Project that are provided and designated by Landlord for the non-exclusive use of Landlord, Tenant and other tenants of the Project and their respective employees, guests and invitees. Landlord has the right, in its sole discretion, from time to time, to: (a) make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, ingress, egress, direction of driveways, entrances, corridors and walkways; (b) close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) add additional buildings and improvements to the Common Areas or remove existing buildings or 1 12 (vi) Maintenance and Repair Costs. Except for costs which are the responsibility of Landlord pursuant to Paragraph 12(b) below, all costs to maintain, repair, and replace the Premises, the Building and/or the Project or any part thereof, including, without limitation, (A) all costs paid under maintenance, management and service agreements such as contracts for janitorial, security and refuse removal, (B) all costs to maintain, repair, and replace the roof coverings of the Building or the Project or any part thereof, (C) all costs to maintain, repair and replace the heating, ventilating, air conditioning, plumbing, sewer, drainage, electrical, fire protection, life safety and security systems and other mechanical and electrical systems and equipment serving the Premises, the Building and/or the Project or any part thereof (collectively, the "SYSTEMS"), and (D) all costs and expenses incurred in causing the Project to be Year 2000 Compliant (as defined below). "YEAR 2000 COMPLIANT" shall mean that all Systems containing or using computers or other information technology will function without material error or interruption resulting from the date change from year 1999 to year 2000, to the extent that information technology of third parties properly communicates date/time data with the Systems. (vii) Life Safety Costs. All costs to install, maintain, repair and replace all life safety systems, including, without limitation, all fire alarm systems, serving the Premises, the Building and/or the Project or any part thereof (including all maintenance contracts and fees payable to life safety consultants) whether such systems are or shall be required by Landlord's insurance carriers, Laws (as hereinafter defined) or otherwise. (viii) Management and Administration. All costs for management and administration of the Premises, the Building and/or the Project or any part thereof, including, without limitation, a property management fee, accounting, auditing, billing, postage, salaries and benefits for clerical and supervisory employees, whether located on the Project or off-site, payroll taxes and legal and accounting costs and fees for licenses and permits related to the ownership and operation of the Project. Notwithstanding anything in this Paragraph 4(b) to the contrary, with respect to all sums payable by Tenant as Additional Rent under this Paragraph 4(b) for the replacement of any item or the construction of any new item in connection with the physical operation of the Premises, the Building or the Project (i.e., HVAC, roof membrane or coverings and parking area) which is capital item the replacement of which would be capitalized under Landlord's commercial real estate accounting practices, Tenant shall be required to pay only the prorata share of the cost of the item falling due within the Term (including any Renewal Term) based upon the amortization of the same over the useful life of such item, as determined in accordance with generally accepted accounting principles consistently applied ("GAAP"). (c) PAYMENT OF ADDITIONAL RENT. (i) Upon commencement of this Lease, Landlord shall submit to Tenant an estimate of monthly Additional Rent for the period between the Commencement Date and the following December 31 and Tenant shall pay such estimated Additional Rent on a monthly basis, in advance, on the first day of each month. Tenant shall continue to make said monthly payments until notified by Landlord of a change therein. If at any time or times Landlord determines that the amounts payable under Paragraph 4(b) for the current year will vary from Landlord's estimate given to Tenant, Landlord, by notice to Tenant, may revise the estimate for such year, 4 13 and subsequent payments by Tenant for such year shall be based upon such revised estimate. By April 1 of each calendar year, Landlord shall endeavor to provide to Tenant a statement (each, an "EXPENSE STATEMENT") showing the actual Additional Rent due to Landlord for the prior calendar year, to be prorated during the first year from the Commencement Date. If the total of the monthly payments of Additional Rent that Tenant has made for the prior calendar year is less than the actual Additional Rent chargeable to Tenant for such prior calendar year, then Tenant shall pay the difference in a lump sum within ten(10) days after receipt of such Expense Statement from Landlord. Any overpayment by Tenant of Additional Rent for the prior calendar year shall be credited towards the Additional Rent next due. (ii) Landlord's then-current annual operating and capital budgets for the Building and the Project or the pertinent part thereof shall be used for purposes of calculating Tenant's monthly payment of estimated Additional Rent for the current year, subject to adjustment as provided above. Landlord shall make the final determination of Additional Rent for the year in which this Lease terminates as soon as possible after termination of such year. Even though the Term has expired and Tenant has vacated the Premises, Tenant shall remain liable for payment of any amount due to Landlord in excess of the estimated Additional Rent previously paid by Tenant, and, conversely, Landlord shall promptly return to Tenant any overpayment. Failure of Landlord to submit Expense Statements as called for herein shall not be deemed a waiver of Tenant's obligation to pay Additional Rent as herein provided. (d) AUDIT RIGHTS. Provided that Tenant is not in Default under the terms of this Lease (nor is any event then occurring and continuing which with the giving of notice of the passage of time, or both, would constitute a Default hereunder), Tenant shall have the right at its sole cost and expense within thirty (30) days after the delivery of the applicable Expense Statement to review and audit Landlord's books and records regarding such Expense Statement for the sole purpose of determining the accuracy of such Expense Statement. Such review or audit shall be performed by a nationally recognized accounting firm that calculates its fees with respect to hours actually worked and that does not discount its time or rate (as opposed to a calculation based upon percentage of recoveries or other incentive arrangement), shall take place during normal business hours in the office of Landlord or Landlord's property manager and shall be completed within three (3) business days after the commencement thereof. If Tenant does not so review or audit Landlord's books and records, Landlord's Expense Statement shall be final and binding upon Tenant. In the event that Tenant determines on the basis of its review of Landlord's books and records that the amount of Expenses paid by Tenant pursuant to this Paragraph 4(d) for the period covered by such Expense Statement is less than or greater than the actual amount properly payable by Tenant under the terms of this Lease, Tenant shall promptly pay any deficiency to Landlord or, if Landlord concurs with the results of such audit, Landlord shall promptly refund any excess payment to Tenant, as the case may be. (e) GENERAL PAYMENT TERMS. The Base Rent, Additional Rent and all other sums payable by Tenant to Landlord hereunder, including, without limitation, any late charges assessed pursuant to Paragraph 6 below and any interest assessed pursuant to Paragraph 43 below, are referred to as the "RENT". All Rent shall be paid without deduction, offset or abatement in lawful money of the United States of America. Checks are to be made payable to Aetna Life Insurance Company and shall be mailed to: Aetna Life Insurance Company, c/o Moffett Park, Department No.0394, Los Angeles, California 90084-0394, or to such other person or place as Landlord 5 14 may,from time to time, designate to Tenant in writing. The Rent for any fractional part of a calendar month at the commencement or termination of the Lease term shall be a prorated amount of the Rent for a full calendar month based upon a thirty(30)day month. 5. UTILITY EXPENSES (a) Tenant shall pay the cost of all water,sewer use, sewer discharge fees and permit costs and sewer connection fees, gas, heat, electricity, refuse pick-up, janitorial service, telephone and all materials and services or other utilities (collectively, "UTILITIES") billed or metered separately to the Premises and/or Tenant, together with all taxes, assessments, charges and penalties added to or include within such cost. Tenant acknowledges that the Premises, the Building and/or the Project may become subject to the rationing of Utility services of restrictions on Utility use as required by a public utility company, governmental agency or other similar entity having jurisdiction thereof. Tenant acknowledges and agrees that its tenancy and occupancy hereunder shall be subject to such rationing or restrictions as may be imposed upon Landlord,tenant, the Premises, the Building and/or the Project, the Tenant shall in no event be excused or relieved from any covenant or obligation to be kept or performed by tenant by reason of any such rationing or restrictions. Tenant agrees to comply with energy conservation programs implemented by Landlord by reason of rationing, restrictions or Laws. (b) Landlord shall not be liable for any loss, injury or damage to property caused by or resulting from any variation, interruption, failure of Utilities due to any cause whatsoever, or from failure to make any repairs or perform any maintenance. No temporary interruption or failure of such services incident to the making of repairs,alterations, improvements, or due to accident,strike, or conditions or other events shall be deemed an eviction of Tenant or relieve Tenant from any of its obligations hereunder. In no event shall Landlord be liable to Tenant for any damage to the Premises or for any loss, damage or injury to any property therein or thereon occasioned by bursting, rupture, leakage, or overflow of any plumbing or other pipes (including, without limitation, water, steam, and/or refrigerant lines), sprinklers, tanks, drains, drinking fountains or washstands, or other similar cause in, above, upon or about the Premises, the Building, or the Project. 6. LATE CHARGE Notwithstanding any other provision of this Lease, Tenant hereby acknowledges that late payment to Landlord of Rent, or other amounts due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. If any Rent or other sums due from Tenant are not received by Landlord or by Landlord's designated agent within three (3) days after their due date, then Tenant shall pay to the Landlord a late charge equal to ten percent(10%) of such overdue amount, plus any costs and attorneys' fees incurred by Landlord by reason of Tenant's failure to pay Rent and/or other charges when due hereunder. Landlord and Tenant hereby agree that such late charges represent a fair and reasonable estimate of the cost that Landlord will incur by reason of Tenant's late payment and shall not be construed as a penalty. Landlord's acceptance of such late charges 6 15 shall not constitute a waiver of Tenant's default with respect to such overdue amount or estop Landlord from exercising any of the other rights and remedies granted under this Lease. Initials: ----------------- ------------------ Landlord Tenant 7. SECURITY DEPOSIT Prior to the date hereof, Tenant has delivered a Security Deposit to Landlord in the amount of Forty-Five Thousand Forty-Five and 75/100 Dollars ($45,045.75) in accordance with the terms and provisions of the Prior Lease (as hereinafter defined). Concurrently with Tenant's execution of the Lease, Tenant shall deposit with Landlord additional funds such that the total Security Deposit held by Landlord equals the amount specified in the Basic Lease Information as security for the full and faithful performance of each and every term, covenant and condition of this Lease. Landlord may use, apply or retain the whole or any part of the Security Deposit as may be reasonably necessary (a) to remedy Tenant's default in the payment of any Rent, (b) to repair damage to the Premises caused by Tenant, (c) to clean the Premises upon termination of this Lease, (d) to reimburse Landlord for the payment of any amount which Landlord may reasonably spend or be required to spend by reason of Tenant's default, or (e) to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. Should Tenant faithfully and fully comply with all of the terms, covenants and conditions of this Lease, within thirty (30) days following the expiration of the Term, the Security Deposit or any balance thereof shall be returned to Tenant or, at the option of Landlord, to the last assignee of Tenant's interest in this Lease. Landlord shall not be required to keep the Security Deposit separate from its general funds and Tenant shall not be entitled to any interest on such deposit. If Landlord so uses or applies all or any portion of said deposit, within five (5) days after written demand therefor Tenant shall deposit cash with Landlord in an amount sufficient to restore the Security Deposit to the full extent of the above amount, and Tenant's failure to do so shall be a default under this Lease. In the event Landlord transfers its interest in this Lease, Landlord shall transfer the then remaining amount of the Security Deposit to Landlord's successor in interest, and thereafter Landlord shall have no further liability to Tenant with respect to such Security Deposit. 8. USE OF PREMISES (a) PERMITTED USE. The use of the Premises by Tenant and Tenant's agents, advisors, employees, partners, shareholders, directors, invitees and independent contractors (collectively, "TENANT'S AGENTS") shall be solely for the Permitted Use specified in the Basic Lease Information and for no other use. Tenant shall not permit any objectionable or unpleasant odor, smoke, dust, gas, noise or vibration to emanate from or near the Premises. The Premises shall not be used to create any nuisance or trespass, for any illegal purpose, for any purpose not permitted by Laws, for any purpose that would invalidate the insurance or increase the premiums for insurance on the Premises, the Building or the Project or for any purpose or in any manner that would interfere with other tenants' use or occupancy of the Project. Tenant agrees to pay Landlord, as Additional Rent, any increases in premiums on policies resulting from Tenant's Permitted Use or any other use or action by Tenant or Tenant's Agents which increases Landlord's premiums or requires additional coverage by Landlord to insure the Premises. Tenant agrees not to overload the floor(s) of the Building. 7 16 (b) COMPLIANCE WITH GOVERNMENTAL REGULATIONS AND PRIVATE RESTRICTIONS. Tenant and Tenant's Agents shall, at Tenant's expense, faithfully observe and comply with (i) all municipal, state and federal laws, statutes, codes, rules, regulations, ordinances, requirements, and orders (collectively, "LAWS"), now in force or which may hereafter be in force pertaining to the Premises or Tenant's use of the Premises, the Building or the Project, including, without limitation, any Laws requiring installation of fire sprinkler systems, seismic reinforcement and related alterations, and removal of asbestos, whether substantial in cost or otherwise; provided, however, that except provided in Paragraph 8(c) below, Tenant shall not be required to make or, except as provided in Paragraph 4 above, pay for, structural changes to the Premises or the Building not related to Tenant's specific use of the Premises unless the requirement for such changes is imposed as a result of any improvements or additions made or proposed to be made at Tenant's request; and provided, further, that Tenant shall not be required to remove any asbestos from the Premises, unless such asbestos was placed on the Premises by Tenant or Tenant's Agents; (ii) all recorded covenants, conditions and restrictions affecting the Project ("PRIVATE RESTRICTIONS") now in force or which may hereafter be in force; and (iii) any and all rules and regulations set forth in EXHIBIT A and any other rules and regulations now or hereafter promulgated by Landlord related to parking or the operation of the Premises, the Building and/or the Project (collectively, the "RULES AND REGULATIONS"). The judgment of any court of competent jurisdiction, or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such Laws or Private Restrictions, shall be conclusive of that fact as between Landlord and Tenant. (c) COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT. Landlord and Tenant hereby agree and acknowledge that the Premises, the Building and/or the Project may be subject to, among other Laws, the requirements of the Americans with Disabilities Act, a federal law codified at 42 U.S.C. Section 12101 et seq., including, but not limited to, Title III thereof, and all regulations and guidelines related thereto, together with any and all laws, rules, regulations, ordinances, codes and statutes now or hereafter enacted by local or state agencies having jurisdiction thereof, including all requirements of Title 24 of the State of California, as the same may be in effect on the date of this Lease and may be hereafter modified, amended or supplemented (collectively, the "ADA"). Any Alterations to be constructed hereunder shall be in compliance with the requirements of the ADA, and all costs incurred for purposes of compliance therewith shall be a part of and included in the costs of the Alterations. Tenant shall be solely responsible for conducting its own independent investigation of this matter and for ensuring that the design of all Alterations strictly complies with all requirements of the ADA. Subject to reimbursement pursuant to Paragraph 4 above, if any barrier removal work or other work is required to the Building, the Common Areas or the Project under the ADA, then such work shall be responsibility of Landlord; provided, however, that if such work is required under the ADA as a result of Tenant's use of the Premises or any work or Alteration (as hereinafter defined) made to the Premises by or on behalf of Tenant, then such work shall be performed by Landlord at the sole cost and expense of Tenant. Except as otherwise expressly provided in this provision, Tenant shall be responsible at its sole cost and expense for fully and faithfully complying with all applicable requirements of the ADA, including, without limitation, not discriminating against any disabled persons in the operation of Tenant's business in or about the Premises, and offering or otherwise providing auxiliary aids and services as, and when, required by the ADA. Within ten (10) days after receipt, Tenant shall advise Landlord in writing, and provide Landlord with copies of (as applicable), any notices alleging violation of the ADA relating to any portion of the 8 17 Premises, the Building or the Project; any claims made or threatened orally or in writing regarding noncompliance with the ADA and relating to any portion of the Premises, the Building, or the Project; or any governmental or regulatory actions or investigations instituted or threatened regarding noncompliance with the ADA and relating to any portion of the Premises, the Building or the Project. Tenant shall and hereby agrees to protect, defend (with counsel acceptable to Landlord) and hold Landlord and Landlord's agents, advisors, employees, partners, shareholders, directors, invitees and independent contractors (collectively, "LANDLORD'S AGENTS") harmless and indemnify Landlord and Landlord's Agents from and against all liabilities, damages, claims, losses, penalties, judgments, charges and expenses (including attorneys' fees, costs of court and expenses necessary in the prosecution or defense of any litigation including the enforcement of this provision) arising from or in any way related to, directly or indirectly, Tenant's or Tenant's Agents' violation or alleged violation of the ADA. Tenant agrees that the obligations of Tenant herein shall survive the expiration or earlier termination of this Lease. 9. ACCEPTANCE OF PREMISES Tenant has been in possession of the Premises prior to the Commencement Date under that certain Lease Agreement dated January 17, 1994 (the "PRIOR LEASE"). Tenant shall continue to occupy the Premises in its "AS IS" condition from and after the Commencement Date under the terms of this Lease, and Landlord shall have no obligation to improve, remodel or otherwise alter the Premises at any time during the Term. By its execution hereof, Tenant accepts the Premises as suitable for Tenant's intended use and as being in good and sanitary operating order, condition and repair, AS IS, and without representation or warranty by Landlord as to the condition, use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. 10. SURRENDER Tenant agrees that on the last day of the Term, or on the sooner termination of this Lease, Tenant shall surrender the Premises to Landlord (a) in good condition and repair (damages by acts of God, fire, and normal wear and tear excepted), but with all carpets cleaned and all floors in "broom clean" condition, and (b) otherwise in accordance with Paragraph 31(h). Normal wear and tear shall not include any damage or deterioration to the floors of the Premises arising from the use of forklifts in, on or about the Premises (including, without limitation, any marks or stains on any portion of the floors), and any damage or deterioration that would have been prevented by proper maintenance by Tenant, or Tenant otherwise performing all of its obligations under this Lease. On or before the expiration or sooner termination of this Lease, (i) Tenant shall remove all of Tenant's Property (as hereinafter defined) and Tenant's signage from the Premises, the Building and the Project and repair any damage caused by such removal, and (ii) except as provided in the last sentence of this Paragraph 10, Landlord may, by notice to Tenant given not later than ninety (90) days prior to the Expiration Date (except in the event of a termination of this Lease prior to the scheduled Expiration Date, in which event no advance notice shall be required), require Tenant at Tenant's expense to remove any or all Alterations and to repair any damage caused by such removal. Any of Tenant's Property not so removed by Tenant as required herein shall be deemed abandoned and may be stored, removed, and disposed of by Landlord at Tenant's expense, and Tenant waives all claims against Landlord for any damages resulting from Landlord's retention and disposition of such property; provided 9 18 however, that Tenant shall remain liable to Landlord for all costs incurred in storing and disposing of such abandoned property of Tenant. All Alterations except those which Landlord requires Tenant to remove shall remain in the Premises as the property of Landlord. If the Premises are not surrendered at the end of the Term or sooner termination of this Lease, and in accordance with the provisions of this Paragraph 10 and Paragraph 31(h) below, Tenant shall continue to be responsible for the payment of Rent (as the same may be increased pursuant to Paragraph 34 below) until the Premises are so surrendered in accordance with said Paragraphs, and Tenant shall indemnify, defend and hold Landlord harmless from and against any and all loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any loss or liability resulting from any claim against Landlord made by any succeeding tenant or prospective tenant founded on or resulting from such delay and losses to Landlord due to lost opportunities to lease any portion of the Premises to any such succeeding tenant or prospective tenant, together with, in each case, actual attorneys' fees and costs. Notwithstanding the terms of this Paragraph 10, if Tenant made Alterations to the Premises during the term of the Prior Lease, and if at the time such Alterations were made, Landlord did not inform Tenant that such Alterations would be required to be removed at the expiration of the Term, then Tenant shall be entitled to leave such Alterations in the Premises upon the expiration or sooner termination of this Lease and Landlord shall not have the right to require removal in accordance with clause (ii) above of this Paragraph 10. 11. ALTERATIONS AND ADDITIONS (a) Tenant shall not make, or permit to be made, any alteration, addition or improvement (hereinafter referred to individually as an "ALTERATION" and collectively as the "ALTERATIONS") to the Premises or any part thereof without the prior written consent of Landlord, which consent shall not be unreasonably withheld; provided, however, that Landlord shall have the right in it sole and absolute discretion to consent or to withhold its consent to any Alteration which affects the structural portions of the Premises, the Building or the Project or the Systems serving the Premises, the Building and/or the Project or any portion thereof (collectively, "STRUCTURAL ALTERATIONS"). Notwithstanding the foregoing, Tenant shall have the right to make Alterations (specifically excluding, however, Structural Alterations) to the Premises with prior notice to but without the consent of Landlord, provided that such Alterations are constructed and performed in full compliance with the terms of Paragraphs 11(b) through (g) and do not exceed five thousand dollars ($5,000.00) in cost on an individual basis or fifteen thousand dollars ($15,000.00) in the aggregate over the Term of this Lease. (b) Any Alteration to the Premises shall be at Tenant's sole cost and expense, in compliance with all applicable Laws and all requirements requested by Landlord, including, without limitation, the requirements of any insurer providing coverage for the Premises or the Project or any part thereof, and in accordance with plans and specifications approved in writing by Landlord, and shall be constructed and installed by a contractor approved in writing by Landlord. As a further condition to giving consent, Landlord may require Tenant to provide Landlord, at Tenant's sole cost and expense, a payment and performance bond in form acceptable to Landlord, in a principal amount not less than one and one-half times the estimated costs of such Alterations, to ensure Landlord against any liability for mechanic's and materialmen's liens and to ensure completion of work. Before Alterations may begin, valid building permits or other permits or licenses required must be furnished to Landlord, and, once 10 19 the Alterations begin, Tenant will diligently and continuously pursue their completion. Landlord may monitor construction of the Alterations and Tenant shall reimburse Landlord for its costs (including, without limitation, the costs of any construction manager retained by Landlord) in reviewing plans and documents and in monitoring construction; provided, however, that such costs shall not exceed five percent (5%) of the total cost ("hard" and "soft" costs) of the applicable Alterations. Tenant shall maintain during the course of construction, at its sole cost and expense, builders' risk insurance for the amount of the completed value of the Alterations on an all-risk non-reporting form covering all improvements under construction, including building materials, and other insurance in amounts and against such risks as Landlord shall reasonably require in connection with the Alterations. In addition to and without limitation on the generality of the foregoing, Tenant shall ensure that its contractor(s) procure and maintain in full force and effect during the course of construction a "broad form" commercial general liability and property damage policy of insurance naming Landlord, Landlord's investment advisor and agent, UBS Brinson Realty Investors LLC, Tenant and Landlord's lenders as additional insureds. The minimum limit of coverage of the aforesaid policy shall be in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of one person in any one accident or occurrence and in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of more than one person in any one accident or occurrence, and shall contain a severability of interest clause or a cross liability endorsement. Such insurance shall further insure Landlord and Tenant against liability for property damage of at least One Million Dollars ($1,000,000.00). (c) Excluding any Specialized Laboratory Equipment (as hereinafter defined), all Alterations, including, but not limited to, heating, lighting, electrical, air conditioning, fixed partitioning, drapery, wall covering and paneling, built-in cabinet work and carpeting installations made by Tenant, together with all property that has become an integral part of the Premises or the Building, shall at once be and become the property of Landlord, and shall not be deemed trade fixtures or Tenant's Property. If requested by Landlord, Tenant will pay, prior to the commencement of construction, an amount determined by Landlord necessary to cover the costs of demolishing such Alterations and/or the cost of returning the Premises and the Building to its condition prior to such Alterations. (d) No private telephone systems and/or other related computer or telecommunications equipment or lines may be installed without Landlord's prior written consent, which consent shall not be unreasonably withheld; provided, however, that Landlord shall have the right in its sole and absolute discretion to consent or to withhold its consent to the installation of any such systems, equipment or lines which affect the structural portions of the Premises, the Building or the Project or the Systems serving the Premises, the Building and/or the Project or any portion thereof. If Landlord gives such consent, all equipment must be installed within the Premises and, at the request of Landlord made at any time prior to the expiration of the Term, removed upon the expiration or sooner termination of this Lease and the Premises restored to the same condition as before such installation. (e) Notwithstanding anything herein to the contrary, before installing any equipment or lights which generate an undue amount of heat in the Premises, or if Tenant plans to use any high-power usage equipment in the Premises, Tenant shall obtain the written permission of Landlord, which permission shall not be unreasonably withheld; provided, however, that Landlord may refuse to grant such permission unless Tenant agrees to pay the costs to Landlord 11 20 for installation of supplementary air conditioning capacity or electrical systems necessitated by such equipment. (f) Tenant agrees not to proceed to make any Alterations, notwithstanding consent from Landlord to do so, until Tenant notifies Landlord in writing of the date Tenant desires to commence construction or installation of such Alterations and Landlord has approved such date in writing, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. (g) Promptly following the Commencement Date, Landlord shall provide an allowance (the "ALTERATIONS ALLOWANCE") to Tenant in the amount specified in the Basic Lease Information to reimburse Tenant for costs actually incurred for the planning and construction of Alterations made by Tenant to the Premises between the date of this Lease and the Commencement Date (the "PRE-COMMENCEMENT ALTERATIONS"). The Alterations Allowance shall be the maximum contribution by Landlord toward the cost of the Pre-Commencement Alterations. Landlord shall disburse the Alterations Allowance to Tenant following the completion of the Pre-Commencement Alterations, the inspection of the same by Landlord and the review and approval by Landlord of invoices, lien waivers, certificates of occupancy and other documentation required by Landlord to substantiate the cost of the Pre-Commencement Alterations and the completion thereof in a lien-free manner and in accordance with all Laws, the requirements of Paragraph 11 of the Prior Lease and any additional requirements set forth in this Paragraph 11. Notwithstanding the foregoing, Landlord's obligation to provide the Alterations Allowance to Tenant shall terminate on the thirtieth (30th) day after the Commencement Date and any portion of the Alterations Allowance which remains undisbursed to Tenant as of such date shall no longer be available for disbursement to Tenant. 12. MAINTENANCE AND REPAIRS OF PREMISES (a) MAINTENANCE BY TENANT. Throughout the Term, Tenant shall, at its sole expense, (i) keep and maintain in good order and condition the Premises, and repair and replace every part thereof, including glass, windows, window frames, window casements, skylights, interior and exterior doors, door frames and door closers; interior lighting (including, without limitation, light bulb and ballasts), the plumbing and electrical systems exclusively serving the Premises, all communications systems serving the Premises, Tenant's signage, interior demising walls and partitions, equipment, interior painting and interior walls and floors, and the roll-up doors, ramps and dock equipment, including, without limitation, dock bumpers, dock plates, dock seals, dock levelers and dock lights located in or on the Premises (excepting only those portions of the Building or the Project to be maintained by Landlord, as provided in Paragraph 12(b) below), (ii) furnish all expendables, including light bulbs, paper goods and soaps, used in the Premises, and (iii) keep and maintain in good order and condition, repair and replace all of Tenant's security systems in or about or serving the Premises and, except to the extent that Landlord notifies Tenant in writing of its intention to arrange for such monitoring, cause the fire alarm systems serving the Premises to be monitored by a monitoring or protective services firm approved by Landlord in writing. Tenant shall not do nor shall Tenant allow Tenant's Agents to do anything to cause any damage, deterioration or unsightliness to the Premises, the Building or the Project. 12 21 (b) MAINTENANCE BY LANDLORD. Subject to the provisions of Paragraphs 12(a), 20 and 21, and further subject to Tenant's obligation under Paragraph 4 to reimburse Landlord, in the form of Additional Rent, for the cost and expense of the following items, Landlord agrees to repair and maintain the following items: the roof coverings (provided that Tenant installs no additional air conditioning or other equipment on the roof that damages the roof coverings, in which event Tenant shall pay all costs resulting from the presence of such additional equipment); the Systems serving the Premises and the Building, excluding the plumbing and electrical systems exclusively serving the Premises; and the Parking Areas, pavement, landscaping, sprinkler systems, sidewalks, driveways, curbs, and lighting systems in the Common Areas. Subject to the provisions of Paragraphs 12(a), 20 and 21, Landlord, at its own cost and expense, agrees to repair and maintain the following items: the structural portions of the roof (specifically excluding the roof coverings), the foundation, the footings, the floor slab, and the load bearing walls and exterior walls of the Building (excluding any glass and any routine maintenance, including, without limitation, any painting, sealing, patching and waterproofing of such walls). Notwithstanding anything in this Paragraph 12 to the contrary, Landlord shall have the right to either repair or to require Tenant to repair any damage to any portion of the Premises, the Building and/or the Project caused by or created due to any act, omission, negligence or willful misconduct of Tenant or Tenant's Agents and to restore the Premises, the Building and/or the Project, as applicable, to the condition existing prior to the occurrence of such damage; provided, however, that in the event Landlord elects to perform such repair and restoration work, Tenant shall reimburse Landlord upon demand for all costs and expenses incurred by Landlord in connection therewith. Landlord's obligation hereunder to repair and maintain is subject to the condition precedent that Landlord shall have received written notice of the need for such repairs and maintenance and a reasonable time to perform such repair and maintenance. Tenant shall promptly report in writing to Landlord any defective condition known to it which Landlord is required to repair, and failure to so report such defects shall make Tenant responsible to Landlord for any liability incurred by Landlord by reason of such condition. (c) TENANT'S WAIVER OF RIGHTS. Tenant hereby expressly waives all rights to make repairs at the expense of Landlord or to terminate this Lease, as provided for in California Civil Code Sections 1941 and 1942, and 1932(1), respectively, and any similar or successor statute or law in effect or any amendment thereof during the Term. 13. LANDLORD'S INSURANCE Landlord shall purchase and keep in force fire, extended coverage and "all risk" insurance covering the Building and the Project. Tenant shall, at its sole cost and expense, comply with any and all reasonable requirements pertaining to the Premises, the Building and the Project of any insurer necessary for the maintenance of reasonable fire and commercial general liability insurance, covering the Building and the Project. Landlord, at Tenant's cost, may maintain "Loss of Rents" insurance, insuring that the Rent will be paid in a timely manner to Landlord for a period of at least twelve (12) months if the Premises, the Building or the Project or any portion thereof are destroyed or rendered unusable or inaccessible by any cause insured against under this Lease. 13 22 14. TENANT'S INSURANCE (a) COMMERCIAL GENERAL LIABILITY INSURANCE. Tenant shall, at Tenant's expense, secure and keep in force a "broad form" commercial general liability insurance and property damage policy covering the Premises, insuring Tenant, and naming Landlord, Landlord's investment advisors and agents from time to time, including, without limitation, UBS Brinson Realty Investors LLC, and Landlord's lenders as additional insureds, against any liability arising out of the ownership, use, occupancy or maintenance of the Premises. The minimum limit of coverage of such policy shall be in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of one person in any one accident or occurrence and in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of more than one person in any one accident or occurrence, shall include an extended liability endorsement providing contractual liability coverage (which shall include coverage for Tenant's indemnification obligations in this Lease), and shall contain a severability of interest clause or a cross liability endorsement. Such insurance shall further insure Landlord and Tenant against liability for property damage of at least Three Million Dollars ($3,000,000.00). Landlord may from time to time require reasonable increases in any such limits if Landlord believes that additional coverage is necessary or desirable. The limit of any insurance shall not limit the liability of Tenant hereunder. No policy maintained by Tenant under this Paragraph 14(a) shall contain a deductible greater than Two Thousand Five Hundred Dollars ($2,500.00). No policy shall be cancelable or subject to reduction of coverage without thirty (30) days' prior written notice to Landlord, and loss payable clauses shall be subject to Landlord's approval. Such policies of insurance shall be issued as primary policies and not contributing with or in excess or coverage that Landlord may carry, by an insurance company authorized to do business in the State of California for the issuance of such type of insurance coverage and rated A:XIII or better in Best's Key Rating Guide. (b) PERSONAL PROPERTY INSURANCE. Tenant shall maintain in full force and effect on all of its personal property, furniture, furnishings, trade or business fixtures and equipment, including, without limitation, all specialized laboratory equipment (collectively, "SPECIALIZED LABORATORY EQUIPMENT") such as lab benches, fume hoods, cold rooms and specialized processing equipment (collectively, "TENANT'S PROPERTY") in the Premises, a policy or policies of fire and extended coverage insurance with standard coverage endorsement to the extent of the full replacement cost thereof. No such policy shall contain a deductible greater than Two Thousand Five Hundred Dollars ($2,500.00). During the term of this Lease the proceeds from any such policy or policies of insurance shall be used for the repair or replacement of the fixtures and equipment so insured. Landlord shall have no interest in the insurance upon Tenant's equipment and fixtures and will sign all documents reasonably necessary in connection with the settlement of any claim or loss by Tenant. Landlord will not carry insurance on Tenant's possessions. (c) WORKER'S COMPENSATION INSURANCE; EMPLOYER'S LIABILITY INSURANCE. Tenant shall, at Tenant's expense, maintain in full force and effect worker's compensation insurance with not less than the minimum limits required by law, and employer's liability insurance with a minimum limit of coverage of One Million Dollars ($1,000,000.00). (d) EVIDENCE OF COVERAGE. Tenant shall deliver to Landlord certificates of insurance and true and complete copies of any and all endorsements required herein for all insurance required to be maintained by Tenant hereunder at the time of execution of this Lease by Tenant. Tenant 14 23 shall, at least thirty (30) days prior to expiration of each policy, furnish Landlord with certificates of renewal or "binders" thereof. Each certificate shall expressly provide that such policies shall not be cancellable or otherwise subject to modification except after thirty (30) days' prior written notice to Landlord and the other parties named as additional insureds as required in this Lease (except for cancellation for nonpayment of premium, in which event cancellation shall not take effect until at least ten (10) days' notice has been given to Landlord). 15. INDEMNIFICATION (a) OF LANDLORD. Tenant shall indemnify and hold harmless Landlord and Landlord's Agents against and from any and all claims, liabilities, judgments, costs, demands, causes of action and expenses (including, without limitation, reasonable attorneys' fees) arising from (i) the use of the Premises, the Building or the Project by Tenant or Tenant's Agents, or from any activity done, permitted or suffered by Tenant or Tenant's Agents in or about the Premises, the Building or the Project, and (ii) any act, neglect, fault, willful misconduct or omission of Tenant or Tenant's Agents, or from any breach or default in the terms of this Lease by Tenant or Tenant's Agents, and (iii) any action or proceeding brought on account of any matter in items (i) or (ii). If any action or proceeding is brought against Landlord by reason of any such claim, upon notice from Landlord, Tenant shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. As a material part of the consideration to Landlord, Tenant hereby releases Landlord and Landlord's Agents from responsibility for, waives its entire claim of recovery for and assumes all risk of (A) damage to property or injury to persons in or about the Premises, the Building or the Project from any cause whatsoever (except that which is caused by the gross negligence or willful misconduct of Landlord or Landlord's Agents or by the failure of Landlord to observe any of the terms and conditions of this Lease, if such failure has persisted for an unreasonable period of time after written notice of such failure), or (B) loss resulting from business interruption or loss of income at the Premises. The obligations of Tenant under this Paragraph 15(a) shall survive any termination of this Lease. (b) OF TENANT. Landlord shall indemnify and hold harmless Tenant against and from any and all claims, liabilities, judgments, costs, demands, causes of action and expenses (including, without limitation, reasonable attorneys' fees) arising from (i) the gross negligence of Landlord or from any breach or default in the terms of this Lease by Landlord (if such breach or default has persisted for an unreasonable period of time after written notice of such failure), and (ii) any action or proceeding brought on account of any matter in item (i). If any action or proceeding is brought against Tenant by reason of any such claim, upon notice from Tenant, Landlord shall defend the same at Landlord's expense by counsel reasonably satisfactory to Tenant. The obligations of Landlord under this Paragraph 15(b) shall survive any termination of this Lease. (c) NO IMPAIRMENT OF INSURANCE. The foregoing indemnities shall not relieve any insurance carrier of its obligations under any policies required to be carried by either party pursuant to this Lease, to the extent that such policies cover the peril or occurrence that results in the claim that is subject to the foregoing indemnity. 15 24 16. SUBROGATION Landlord and Tenant hereby mutually waive any claim against the other and its Agents for any loss or damage to any of their property located on or about the Premises, the Building or the Project that is caused by or results from perils covered by property insurance carried by the respective parties, to the extent of the proceeds of such insurance actually received with respect to such loss or damage, whether or not due to the negligence of the other party or its Agents. Because the foregoing waivers will preclude the assignment of any claim by way of subrogation to an insurance company or any other person, each party now agrees to immediately give to its insurer written notice of the terms of these mutual waivers and shall have their insurance policies endorsed to prevent the invalidation of the insurance coverage because of these waivers. Nothing in this Paragraph 16 shall relieve a party of liability to the other for failure to carry insurance required by this Lease. 17. SIGNS Tenant shall not place or permit to be placed in, upon, or about the Premises, the Building or the Project any exterior lights, decorations, balloons, flags, pennants, banners, advertisements or notices, or erect or install any signs, windows or door lettering, placards, decorations, or advertising media of any type which can be viewed from the exterior the Premises without obtaining Landlord's prior written consent or without complying with Landlord's signage criteria, as the same may be modified by Landlord from time to time, and with all applicable Laws, and will not conduct, or permit to be conducted, any sale by auction on the Premises or otherwise on the Project. Notwithstanding the foregoing, Tenant shall not be required to remove any signs placed on the Premises in accordance with the terms of the Prior Lease. Tenant shall remove any sign, advertisement or notice placed on the Premises, the Building or the Project by Tenant upon the expiration of the Term or sooner termination of this Lease, and Tenant shall repair any damage or injury to the Premises, the Building or the Project caused thereby, all at Tenant's expense. If any signs are not removed, or necessary repairs not made, Landlord shall have the right to remove the signs and repair any damage or injury to the Premises, the Building or the Project at Tenant's sole cost and expense. 18. FREE FROM LIENS Tenant shall keep the Premises, the Building and the Project free from any liens arising out of any work performed, material furnished or obligations incurred by or for Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of any such lien, cause the lien to be released of record by payment or posting of a proper bond, Landlord shall have in addition to all other remedies provided herein and by law the right but not the obligation to cause same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection therewith (including, without limitation, attorneys' fees) shall be payable to Landlord by Tenant upon demand. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law or that Landlord shall deem proper for the protection of Landlord, the Premises, the Building and the Project, from mechanics' and materialmen's liens. Tenant shall give to Landlord at least five (5) business days' prior written notice of commencement of any repair or construction on the Premises. 16 25 19. ENTRY BY LANDLORD Tenant shall permit Landlord and Landlord's Agents to enter into and upon the Premises at all reasonable times, upon reasonable notice (except in the case of an emergency, for which no notice shall be required), and subject to Tenant's reasonable security arrangements, for the purpose of inspecting the same or showing the Premises to prospective purchasers, lenders or tenants or to alter, improve, maintain and repair the Premises or the Building as required or permitted of Landlord under the terms hereof, or for any other business purpose, without any rebate of Rent and without any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned (except for actual damages resulting from the sole active gross negligence or willful misconduct of Landlord); and Tenant shall permit Landlord to post notices of non-responsibility and ordinary "for sale" or, during the last six (6) months of the Term, "for lease," signs. No such entry shall be construed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises. Landlord may temporarily close entrances, doors, corridors, elevators or other facilities without liability to Tenant by reason of such closure in the case of an emergency and when Landlord otherwise deems such closure necessary; provided, however, that except in the case of an emergency, Landlord shall use reasonable efforts to avoid materially interfering with Tenant's use and occupancy of the Premises in the exercise of Landlord's rights under this sentence. 20. DESTRUCTION AND DAMAGE (a) If the Premises are damaged by fire or other perils covered by extended coverage insurance, Landlord shall, at Landlord's option: (i) In the event of total destruction (which shall mean destruction or damage in excess of twenty-five percent (25%) of the full insurable value thereof) of the Premises, elect either to commence promptly to repair and restore the Premises and prosecute the same diligently to completion, in which event this Lease shall remain in full force and effect; or not to repair or restore the Premises, in which event this Lease shall terminate. Landlord shall give Tenant written notice of its intention within sixty (60) days after the date (the "CASUALTY DISCOVERY DATE") Landlord obtains actual knowledge of such destruction. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date of such total destruction. (ii) In the event of a partial destruction (which shall mean destruction or damage to an extent not exceeding twenty-five percent (25%) of the full insurable value thereof) of the Premises for which Landlord will receive insurance proceeds sufficient to cover the cost to repair and restore such partial destruction and, if the damage thereto is such that the Premises may be substantially repaired or restored to its condition existing immediately prior to such damage or destruction within one hundred eighty (180) days from the Casualty Discovery Date, Landlord shall commence and proceed diligently with the work of repair and restoration, in which event the Lease shall continue in full force and effect. If such repair and restoration requires longer than one hundred eighty (180) days or if the insurance proceeds therefor (plus any amounts Tenant may elect or is obligated to contribute) are not sufficient to cover the cost of such repair and restoration, Landlord may elect either to so repair and restore, in which event the Lease shall continue in full force and effect, or not to repair or restore, in which event the Lease shall 26 terminate. In either case, Landlord shall give written notice to Tenant of its intention within sixty (60) days after the Casualty Discovery Date. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date of such partial destruction. (iii) Notwithstanding anything to the contrary contained in this Paragraph, in the event of damage to the Premises occurring during the last twelve (12) months of the Term, Landlord may elect to terminate this Lease by written notice of such election given to Tenant within thirty (30) days after the Casualty Discovery Date. (b) If the Premises are damaged by any peril not covered by extended coverage insurance, and the cost to repair such damage exceeds any amount Tenant may agree to contribute, Landlord may elect either to commence promptly to repair and restore the Premises and prosecute the same diligently to completion, in which event this Lease shall remain in full force and effect; or not to repair or restore the Premises, in which event this Lease shall terminate. Landlord shall give Tenant written notice of its intention within sixty (60) days after the Casualty Discovery Date. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date on which Tenant surrenders possession of the Premises to Landlord, except that if the damage to the Premises materially impairs Tenant's ability to continue its business operations in the Premises, then this Lease shall be deemed to have terminated as of the date such damage occurred. (c) Notwithstanding anything to the contrary in this Paragraph 20, Landlord shall have the option to terminate this Lease, exercisable by notice to Tenant within sixty (60) days after the Casualty Discovery Date, in each of the following instances: (i) If more than twenty-five percent (25%) of the full insurable value of the Building or the Project is damaged or destroyed, regardless of whether or not the Premises are destroyed. (ii) If the Building or the Project or any portion thereof is damaged or destroyed and the repair and restoration of such damage requires longer than one hundred eighty (180) days from the Casualty Discovery Date. (iii) If the Building or the Project or any portion thereof is damaged or destroyed and the insurance proceeds therefor are not sufficient to cover the costs of repair and restoration. (iv) If the Building or the Project or any portion thereof is damaged or destroyed during the last twelve (12) months of the Term. (d) In the event of repair and restoration as herein provided, the monthly installments of Base Rent shall be abated proportionately in the ratio which Tenant's use of the Premises is impaired during the period of such repair or restoration, but only to the extent of rental abatement insurance proceeds received by Landlord; provided, however, that Tenant shall not be entitled to such abatement to the extent that such damage or destruction resulted from the acts or inaction of Tenant or Tenant's Agents. Except as expressly provided in the immediately preceding sentence with respect to abatement of Base Rent, Tenant shall have no claim against Landlord for, and hereby releases Landlord and Landlord's Agents from responsibility for and waives its entire claim of recovery for any cost, loss or expense suffered or incurred by Tenant as a result of any damage to or destruction of the Premises, the Building or the Project or the repair 18 27 or restoration thereof, including, without limitation, any cost, loss or expense resulting from any loss of use of the whole or any part of the Premises, the Building or the Project and/or any inconvenience or annoyance occasioned by such damage, repair or restoration. (e) If Landlord is obligated to or elects to repair or restore as herein provided, Landlord shall repair or restore only the initial Building shell and tenant improvements, if any, constructed by Landlord in the Premises pursuant to the terms of this Lease, substantially to their condition existing immediately prior to the occurrence of the damage or destruction; and Tenant shall promptly repair and restore, at Tenant's expense, all interior improvements. (f) Tenant hereby waives the provisions of California Civil Code Section 1932(2) and Section 1933(4) which permit termination of a lease upon destruction of the leased premises, and the provisions of any similar law now or hereinafter in effect, and the provisions of this Paragraph 20 shall govern exclusively in case of such destruction. 21. CONDEMNATION (a) If twenty-five percent (25%) or more of either the Premises, the Building or the Project or the parking areas for the Building or the Project is taken for any public or quasi-public purpose by any lawful governmental power or authority, by exercise of the right of appropriation, inverse condemnation, condemnation or eminent domain, or sold to prevent such taking (each such event being referred to as a "CONDEMNATION"), Landlord may, at its option, terminate this Lease as of the date title vests in the condemning party. If twenty-five percent (25%) or more of the Premises is taken and if the Premises remaining after such Condemnation and any repairs by Landlord would be untenantable for the conduct of Tenant's business operations, Tenant shall have the right to terminate this Lease as of the date title vests in the condemning party. If either party elects to terminate this Lease as provided herein, such election shall be made by written notice to the other party given within thirty (30) days after the nature and extent of such Condemnation have been finally determined. If neither Landlord nor Tenant elects to terminate this Lease to the extent permitted above, Landlord shall promptly proceed to restore the Premises, to the extent of any Condemnation award received by Landlord, to substantially the same condition as existed prior to such Condemnation, allowing for the reasonable effects of such Condemnation, and a proportionate abatement shall be made to the Base Rent corresponding to the time during which, and to the portion of the floor area of the Premises (adjusted for any increase thereto resulting from any reconstruction) of which, Tenant is deprived on account of such Condemnation and restoration, as reasonably determined by Landlord. Except as expressly provided in the immediately preceding sentence with respect to abatement of Base Rent, Tenant shall have no claim against Landlord for, and hereby releases Landlord and Landlord's Agents from responsibility for and waives its entire claim of recovery for any cost, loss or expense suffered or incurred by Tenant as a result of any Condemnation or the repair or restoration of the Premises, the Building or the Project or the parking areas for the Building or the Project following such Condemnation, including, without limitation, any cost, loss or expense resulting from any loss of use of the whole or an part of the Premises, the Building, the Project or the parking areas and/or any inconvenience or annoyance occasioned by such Condemnation, repair or restoration. The provisions of California Code of Civil Procedure Section 1265.130, which allows either party to petition the Superior Court to terminate the Lease in the event of a partial taking of the Premises, the Building or the Project or the parking areas 19 28 for the Building or the Project, and any other applicable law now or hereafter enacted, are hereby waived by Tenant. (b) Landlord shall be entitled to any and all compensation, damages, income, rent, awards, or any interest therein whatsoever which may be paid or made in connection with any Condemnation, and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease or otherwise; provided, however, that Tenant shall be entitled to receive any award separately allocated by the condemning authority to Tenant for Tenant's relocation expenses or the value of Tenant's Property (specifically excluding fixtures, Alterations and other components of the Premises which under this Lease or by law are or at the expiration of the Term will become the property of Landlord), provided that such award does not reduce any award otherwise allocable or payable to Landlord. 22. ASSIGNMENT AND SUBLETTING (a) Tenant shall not voluntarily or by operation of law, (i) mortgage, pledge, hypothecate or encumber this Lease or any interest herein, (ii) assign or transfer this Lease or any interest herein, sublease the Premises or any part thereof, or any right or privilege appurtenant thereto, or allow any other person (the employees and invitees of Tenant excepted) to occupy or use the Premises, or any portion thereof, without first obtaining the written consent of Landlord, which consent shall not be unreasonably withheld; provided, however, that (A) Tenant is not then in Default under this Lease nor is any event then occurring which with the giving of notice or the passage of time, or both, would constitute a Default hereunder, and (B) the proposed transfer is not an assignment or a sublease under a previous assignment or an existing sublease. When Tenant requests Landlord's consent to such assignment or subletting, it shall notify Landlord in writing of the name and address of the proposed assignee or subtenant and the nature and character of the business of the proposed assignee or subtenant and shall provide (1) a fully completed Hazardous Materials Disclosure Certificate for such assignee or subtenant in the form of EXHIBIT B hereto, and (2) current and prior financial statements for the proposed assignee or subtenant, which financial statements shall be audited to the extent available and shall in any event be prepared in accordance with GAAP. Tenant shall also provide Landlord with a copy of the proposed sublease or assignment agreement, including all material terms and conditions thereof. Landlord shall have the option, to be exercised within thirty (30) days of receipt of the foregoing, to (1) terminate this Lease as of the commencement date stated in the proposed sublease or assignment, (2) sublease or take an assignment, as the case may be, from Tenant of the interest, or any portion thereof, in this Lease and/or the Premises that Tenant proposes to assign or sublease, on the same terms and conditions as stated in the proposed sublet or assignment agreement, (3) consent to the proposed assignment or sublease, or (4) refuse its consent to the proposed assignment or sublease, provided that such consent shall not be unreasonably withheld so long as Tenant is not then in Default under this Lease nor is any event then occurring which with the giving of notice or the passage of time, or both, would constitute a Default hereunder. In the event Landlord elects to terminate this Lease or sublease or take an assignment from Tenant of the interest, or portion thereof, in the Lease and/or the Premises that Tenant proposes to assign or sublease as provided in the foregoing clauses (1) and (2), respectively, then Landlord shall have the additional right to negotiate directly with Tenant's proposed assignee or subtenant and to enter into a direct lease or occupancy agreement with such party on such terms a shall be acceptable to Landlord in its sole and absolute discretion, and 20 29 Tenant hereby waives any claims against Landlord related thereto, including, without limitation, any claims for any compensation or profit related to such lease or occupancy agreement. (b) Without otherwise limiting the criteria upon which Landlord may withhold its consent, Landlord shall be entitled to consider all reasonable criteria including, but not limited to, the following: (i) whether or not the proposed subtenant or assignee is engaged in a business which, and the use of the Premises will be in an manner which, is in keeping with the then character and nature of all other tenancies in the Project; (ii) whether the use to be made of the Premises by the proposed subtenant or assignee will conflict with any so-called "exclusive" use then in favor of any other tenant of the Building or the Project, and whether such use would be prohibited by any other portion of this Lease, including, but not limited to, any rules and regulations then in effect, or under applicable Laws, and whether such use imposes a greater load upon the Premises and the Building and Project services then imposed by Tenant; (iii) the business reputation of the proposed individuals who will be managing and operating the business operations of the assignee or subtenant, and the long-term financial and competitive business prospects of the proposed assignee or subtenant; and (iv) the creditworthiness and financial stability of the proposed assignee or subtenant in light of the responsibilities involved. In any event, Landlord may withhold its consent to any assignment or sublease, if (A) the actual use proposed to be conducted in the Premises or portion thereof conflicts with the provisions of Paragraph 8(a) or (b) above or with any other lease which restricts the use to which any space in the Building or the Project may be put, or (B) the proposed assignment or sublease requires alterations, improvements or additions to the Premises or portions thereof. (c) If Landlord approves an assignment or subletting as herein provided, Tenant shall pay to Landlord, as Additional Rent, the difference, if any, between (i) the Base Rent plus Additional Rent allocable to that part of the Premises affected by such assignment or sublease pursuant to the provisions of this Lease, and (ii) the rent and any additional rent payable by the assignee or sublessee to Tenant, less reasonable and customary market-based leasing commissions and reasonable legal fees, if any, incurred by Tenant in connection with such assignment or sublease, which commissions and fees shall, for purposes of the aforesaid calculation, be amortized on a straight-line basis over the term of such assignment or sublease. In any subletting undertaken by Tenant, Tenant shall list or offer the sublease premises at a rental rate not less than Landlord's then current asking-rate for similarly situated space in the Project (the "ASKING RATE") and shall diligently seek to obtain not less than the Asking Rate for the space so sublet. In any assignment of this Lease in whole or in part, Tenant shall list or offer the premises subject to such assignment at a rate not less than the Asking Rate and shall diligently seek to obtain from the assignee consideration reflecting a value of not less than Asking Rate for the space subject to such assignment. The assignment or sublease agreement, as the case may be, after approval by Landlord, shall not be amended without Landlord's prior written consent, and shall contain a provision directing the assignee or subtenant to pay the rent and other sums due thereunder directly to Landlord upon receiving written notice from Landlord that Tenant is in default under this Lease with respect to the payment of Rent. In the event that, notwithstanding the giving of such notice, Tenant collects any rent or other sums from the assignee or subtenant, then Tenant shall hold such sums in trust for the benefit of Landlord and shall immediately forward the same to Landlord. Landlord's collection of such rent and other sums shall not constitute an acceptance by Landlord of attornment by such assignee or subtenant. A consent to one assignment, subletting, occupation or use shall not be deemed to be a consent to any other or subsequent 21 30 assignment, subletting, occupation or use, and consent to any assignment or subletting shall in no way relieve Tenant of any liability under this Lease. Any assignment or subletting without Landlord's consent shall be void, and shall, at the option of Landlord, constitute a Default under this Lease. (d) Notwithstanding any assignment or subletting, Tenant and any guarantor or surety of Tenant's obligations under this Lease shall at all times remain fully responsible and liable for the payment of the Rent and for compliance with all of Tenant's other obligations under this Lease (regardless of whether Landlord's approval has been obtained for any such assignment or subletting). (e) Tenant shall pay Landlord's reasonable fees (including, without limitation, the fees of Landlord's counsel, not to exceed $1,000.00), incurred in connection with Landlord's review and processing of documents regarding any proposed assignment or sublease. (f) Notwithstanding anything in this Lease to the contrary, in the event Landlord consents to an assignment or subletting by Tenant in accordance with the terms of this Paragraph 22, Tenant's assignee or subtenant shall have no right to further assign this Lease or any interest therein or thereunder or to further sublease all or any portion of the Premises. In furtherance of the foregoing, Tenant acknowledges and agrees on behalf of itself and any assignee or subtenant claiming under it (and any such assignee or subtenant by accepting such assignment or sublease shall be deemed to acknowledge and agree) that no sub-subleases or further assignments of this Lease shall be permitted at any time. (g) Tenant acknowledges and agrees that the restrictions, conditions and limitations imposed by this Paragraph 22 on Tenant's ability to assign or transfer this Lease or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right or privilege appurtenant to the Premises, or to allow any other person to occupy or use the Premises or any portion thereof, are, for the purposes of California Civil Code Section 1951.4, as amended from time to time, and for all other purposes, reasonable at the time that the Lease was entered into, and shall be deemed to be reasonable at the time that Tenant seeks to assign or transfer this Lease or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right or privilege appurtenant to the Premises, or to allow any other person to occupy or use the Premises or any portion thereof. 23. TENANT'S DEFAULT The occurrence of any one of the following events shall constitute an event of default on the part of Tenant ("DEFAULT"): (a) The vacation or abandonment of the Premises by Tenant for a period often (10) consecutive days or any vacation or abandonment of the Premises by Tenant which would cause any insurance policy to be invalidated or otherwise lapse, or the failure of Tenant to continuously operate Tenant's business in the Premises, in each of the foregoing cases irrespective of whether or not Tenant is then in monetary default under this Lease. Tenant agrees to notice and service of notice as provided for in this Lease and waives any right to any other or further notice or service of notice which Tenant may have under any statute or law now or hereafter in effect; 22 31 (b) Failure to pay any installment of Rent or any other monies due and payable hereunder, said failure continuing for a period of three (3) days after the same is due; (c) A general assignment by Tenant or any guarantor or surety of Tenant's obligations hereunder (collectively, "GUARANTOR") for the benefit of creditors; (d) The filing of a voluntary petition in bankruptcy by Tenant or any Guarantor, the filing by Tenant or any Guarantor of a voluntary petition for an arrangement, the filing by or against Tenant or any Guarantor of a petition, voluntary or involuntary, for reorganization, or the filing of an involuntary petition by the creditors of Tenant or any Guarantor, said involuntary petition remaining undischarged for a period of sixty (60) days; (e) Receivership, attachment, or other judicial seizure of substantially all of Tenant's assets on the Premises, such attachment or other seizure remaining undismissed or undischarged for a period of sixty (60) days after the levy thereof; (f) Death or disability of Tenant or any Guarantor, if Tenant or such Guarantor is a natural person, or the failure by Tenant or any Guarantor to maintain its legal existence, if Tenant or such Guarantor is a corporation, partnership, limited liability company, trust or other legal entity; (g) Failure of Tenant to execute and deliver to Landlord any estoppel certificate, subordination agreement, or lease amendment within the time periods and in the manner required by Paragraphs 29 or 30 or 41, and/or failure by Tenant to deliver to Landlord any financial statement within the time period and in the manner required by Paragraph 39; (h) An assignment or sublease, or attempted assignment or sublease, of this Lease or the Premises by Tenant contrary to the provision of Paragraph 22, unless such assignment or sublease is expressly conditioned upon Tenant having received Landlord's consent thereto; (i) Failure of Tenant to restore the Security Deposit to the amount and within the time period provided in Paragraph 7 above; (j) Failure in the performance of any of Tenant's covenants, agreements or obligations hereunder (except those failures specified as events of Default in any other subparagraphs of this Paragraph 23, which shall be governed by such other Paragraphs), which failure continues for ten (10) days after written notice thereof from Landlord to Tenant, provided that, if Tenant has exercised reasonable diligence to cure such failure and such failure cannot be cured within such ten (10) day period despite reasonable diligence, Tenant shall not be in default under this subparagraph so long as Tenant thereafter diligently and continuously prosecutes the cure to completion and actually completes such cure within thirty (30) days after the giving of the aforesaid written notice; (k) Chronic delinquency by Tenant in the payment of Rent, or any other periodic payments required to be paid by Tenant under this Lease. "CHRONIC DELINQUENCY" shall mean failure by Tenant to pay Rent, or any other payments required to be paid by Tenant under this Lease within three (3) days after written notice thereof for any three (3) months (consecutive or nonconsecutive) during any period of twelve (12) months. In the event of a Chronic delinquency, in addition to Landlord's other remedies for Default provided in this Lease, at 23 32 Landlord's option, Landlord shall have the right to require that Rent be paid by Tenant quarterly, in advance; (l) Any insurance required to be maintained by Tenant pursuant to this Lease shall be canceled or terminated or shall expire or be reduced or materially changed, except as permitted in this Lease; and (m) Any failure by Tenant to discharge any lien or encumbrance placed on the Project or any part thereof in violation of this Lease within ten (10) days after the date such lien or encumbrance is filed or recorded against the Project or any part thereof. Tenant agrees that any notice given by Landlord pursuant to Paragraph 23(j) or (k) above shall satisfy the requirements for notice under California Code of Civil Procedure Section 1161, and Landlord shall not be required to give any additional notice in order to be entitled to commence an unlawful detainer proceeding. 24. LANDLORD'S REMEDIES (a) TERMINATION. In the event of any Default by Tenant, then in addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect to so terminate this Lease then Landlord may recover from Tenant: (i) the worth at the time of award of any unpaid Rent and any other sums due and payable which have been earned at the time of such termination; plus (ii) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable which would have been earned after termination until the time of award exceeds the amount of such rental loss Tenant proves could have been reasonably avoided; plus (iii) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable for the balance of the term of this Lease after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course would be likely to result therefrom, including, without limitation: (A) any costs or expenses incurred by Landlord: (1) in retaking possession of the Premises; (2) in maintaining, repairing, preserving, restoring, replacing, cleaning, altering, remodeling or rehabilitating the Premises or any affected portions of the Building or the Project, including such actions undertaken in connection with the reletting or attempted reletting of the Premises to a new tenant or tenants; (3) for leasing commissions, advertising costs and other expenses of reletting the Premises; or (4) in carrying the Premises, including taxes, insurance premiums, utilities and security precautions; (B) any unearned brokerage commissions paid in connection with this Lease; (C) reimbursement of any previously waived or abated Base Rent or Additional Rent or any free rent or reduced rental rate granted hereunder; and (D) any concession made or 24 33 paid by Landlord to the benefit of Tenant in consideration of this Lease including, but not limited to, any moving allowances, contributions, or assumptions by Landlord of any of Tenant's previous lease obligations; plus (v) such reasonable attorneys' fees incurred by Landlord as a result of a Default, and costs in the event suit is filed by Landlord to enforce such remedy; and plus (vi) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. As used in subparagraphs (i) and (ii) above, the "WORTH AT THE TIME OF AWARD" is computed by allowing interest at an annual rate equal to twelve percent (12%) per annum or the maximum rate permitted by law, whichever is less. As used in subparagraph (iii) above, the "WORTH AT THE TIME OF AWARD" is 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%). Tenant waives redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or under any other pertinent present or future Law, in the event Tenant is evicted or Landlord takes possession of the Premises by reason of any Default of Tenant hereunder. (b) CONTINUATION OF LEASE. In the event of any Default by Tenant, then in addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the remedy described in California Civil Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's Default and abandonment and recover Rent as it becomes due, provided that Tenant has the right to sublet or assign, subject only to reasonable limitations). In addition, Landlord shall not be liable in any way whatsoever for its failure or refusal to relet the Premises. For purposes of this Paragraph 24(b), the following acts by Landlord will not constitute the termination of Tenant's right to possession of the Premises: (i) Acts of maintenance or preservation or efforts to relet the Premises, including, but not limited to, alterations, remodeling, redecorating, repairs, replacements and/or painting as Landlord shall consider advisable for the purpose of reletting the Premises or any part thereof; or (ii) The appointment of a receiver upon the initiative of Landlord to protect Landlord's interest under this Lease or in the Premises. (c) RE-ENTRY. In the event of any Default by Tenant, Landlord shall also have the right, with or without terminating this Lease, in compliance with applicable law, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. (d) RELETTING. In the event of the abandonment of the Premises by Tenant or in the event that Landlord shall elect to re-enter as provided in Paragraph 24(c) or shall take possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease as provided in Paragraph 24(a), Landlord may from time to time, without terminating this Lease, relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable with the right to make alterations and repairs to the Premises in Landlord's sole discretion. In the event that Landlord shall elect to so relet, then 25 34 rentals received by Landlord from such reletting shall be applied in the following order: (i) to reasonable attorneys' fees incurred by Landlord as a result of a Default and costs in the event suit is filed by Landlord to enforce such remedies; (ii) to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; (iii) to the payment of any costs of such reletting; (iv) to the payment of the costs of any alterations and repairs to the Premises; (v) to the payment of Rent due and unpaid hereunder; and (vi) the residue, if any, shall be held by Landlord and applied in payment of future Rent and other sums payable by Tenant hereunder as the same may become due and payable hereunder. Should that portion of such rentals received from such reletting during any month, which is applied to the payment of Rent hereunder, be less than the Rent payable during the month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. (e) TERMINATION. No re-entry or taking of possession of the Premises by Landlord pursuant to this Paragraph 24 shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any Default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such Default. (F) CUMULATIVE REMEDIES. The remedies herein provided are not exclusive and Landlord shall have any and all other remedies provided herein or bylaw or in equity. (G) NO SURRENDER. No act or conduct of Landlord, whether consisting of the acceptance of the keys to the Premises, or otherwise, shall be deemed to be or constitute an acceptance of the surrender of the Premises by Tenant prior to the expiration of the Term, and such acceptance by Landlord of surrender by Tenant shall only flow from and must be evidenced by a written acknowledgment of acceptance of surrender signed by Landlord. The surrender of this Lease by Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects in writing that such merger take place, but shall operate as an assignment to Landlord of any and all existing subleases, or Landlord may, at its option, elect in writing to treat such surrender as a merger terminating Tenant's estate under this Lease, and thereupon Landlord may terminate any or all such subleases by notifying the sublessee of its election so to do within five (5) days after such surrender. 25. LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS (a) Without limiting the rights and remedies of Landlord contained in Paragraph 24 above, if Tenant shall be in Default in the performance of any of the terms, provisions, covenants or conditions to be performed or complied with by Tenant pursuant to this Lease, then Landlord may at Landlord's option, without any obligation to do so, and without notice to Tenant perform any such term, provision, covenant, or condition, or make any such payment and Landlord by reason of so doing shall not be liable or responsible for any loss or damage thereby sustained by Tenant or anyone holding under or through Tenant or any of Tenant's Agents. 26 35 (b) Without limiting the rights of Landlord under Paragraph 25(a) above, Landlord shall have the right at Landlord's option, without any obligation to do so, to perform any of Tenant's covenants or obligations under this Lease without notice to Tenant in the case of an emergency, as determined by Landlord in its sole and absolute judgment, or if Landlord otherwise determines in its sole discretion that such performance is necessary or desirable for the proper management and operation of the Building or the Project or for the preservation of the rights and interests or safety of other tenants of the Building or the Project. (c) If Landlord performs any of Tenant's obligations hereunder in accordance with this Paragraph 25, the full amount of the cost and expense incurred or the payment so made or the amount of the loss so sustained shall immediately be owing by Tenant to Landlord, and Tenant shall promptly pay to Landlord upon demand, as Additional Rent, the full amount thereof with interest thereon from the date of payment by Landlord at the lower of (i) ten percent (10%) per annum, or (ii) the highest rate permitted by applicable law. 26. ATTORNEYS' FEES (a) If either party hereto fails to perform any of its obligations under this Lease or if any dispute arises between the parties hereto concerning the meaning or interpretation of any provision of this Lease, then the defaulting party or the party not prevailing in such dispute, as the case may be, shall pay any and all costs and expenses incurred by the other party on account of such default and/or in enforcing or establishing its rights hereunder, including, without limitation, court costs and reasonable attorneys' fees and disbursements. Any such attorneys' fees and other expenses incurred by either party in enforcing a judgment in its favor under this Lease shall be recoverable separately from and in addition to any other amount included in such judgment, and such attorneys' fees obligation is intended to be severable from the other provisions of this Lease and to survive and not be merged into any such judgment. (b) Without limiting the generality of Paragraph 26(a) above, if Landlord utilizes the services of an attorney for the purpose of collecting any Rent due and unpaid by Tenant or in connection with any other breach of this Lease by Tenant, Tenant agrees to pay Landlord actual attorneys' fees as determined by Landlord for such services, regardless of the fact that no legal action may be commenced or filed by Landlord. 27. TAXES Tenant shall be liable for and shall pay, prior to delinquency, all taxes levied against Tenant's Property. If any Alteration installed by Tenant or any of Tenant's Property is assessed and taxed with the Project or Building, Tenant shall pay such taxes to Landlord within fifteen (15) days after delivery to Tenant of a statement therefor. 28. EFFECT OF CONVEYANCE The term "LANDLORD" as used in this Lease means, from time to time, the then current owner of the Building or the Project containing the Premises, so that, in the event of any sale of the Building or the Project, Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale, that the purchaser of 27 36 the Building or the Project has assumed and agreed to carry out any and obligations of Landlord hereunder. 29. TENANT'S ESTOPPEL CERTIFICATE From time to time, upon written request of Landlord, Tenant shall execute, acknowledge and deliver to Landlord or its designee, an Estoppel Certificate in substantially the form attached hereto as EXHIBIT C and with any other statements reasonably requested by Landlord or its designee. Any such Estoppel Certificate delivered pursuant to this Paragraph 29 may be relied upon by a prospective purchaser of Landlord's interest or a mortgagee of Landlord's interest or assignee of any mortgage upon Landlord's interest in the Premises. If Tenant shall fail to provide such certificate within ten (10) days of receipt by Tenant of a written request by Landlord as herein provided, such failure shall, at Landlord's election, constitute a Default under this Lease, and Tenant shall be deemed to have given such certificate as above provided without modification and shall be deemed to have admitted the accuracy of any information supplied by Landlord to a prospective purchaser or mortgagee. 30. SUBORDINATION This Lease, and all rights of Tenant hereunder, are and shall be subject and subordinate to all ground leases, overriding leases and underlying leases affecting the Building or the Project now or hereafter existing and each of the terms, covenants and conditions thereto (the "SUPERIOR LEASE(S)"), and to all mortgages which may now or hereafter affect the Building, the Project or any of such leases and each of the terms, covenants and conditions thereto (the "SUPERIOR MORTGAGE(S)"), whether or not such mortgages shall also cover other lands, buildings or leases, to each and every advance made or hereafter to be made under such mortgages, and to all renewals, modifications, replacements and extensions of such leases and such mortgages and spreaders and consolidations of such mortgages. This Paragraph shall be self-operative and no further instrument of subordination shall be required. Tenant shall promptly execute, acknowledge and deliver any reasonable instrument that Landlord, the lessor under any such lease or the holder of any such mortgage or any of their respective successors in interest may reasonably request to evidence such subordination; if Tenant fails to execute, acknowledge and deliver any such instrument within ten (10) business days after request therefor, Tenant hereby irrevocably constitutes and appoints Landlord as Tenant's attorney-in-fact, coupled with an interest, to execute and deliver any such instrument for and on behalf of Tenant. Without limiting the foregoing, Tenant's failure to execute, acknowledge and deliver such instrument within the aforesaid time period shall constitute a Default hereunder. As used herein the lessor of a Superior Lease or its successor in interest is herein called "SUPERIOR LESSOR"; and the holder of a Superior Mortgage is herein called "SUPERIOR MORTGAGEE". Notwithstanding the foregoing terms of this Paragraph 30 if a Superior Lease or Superior Mortgage is hereafter placed against or affecting any or all of the Building or the Premises, Landlord shall use reasonable efforts to obtain an agreement from the holder thereof in form and substance acceptable to such holder, whereby such holder agrees that Tenant, upon paying the Base Rent and all of the Additional Rent and other charges herein provided for, and observing and complying with the covenants, agreements and conditions of this Lease on its part to be observed and complied with, shall lawfully and quietly hold, occupy and enjoy the Premises 28 37 during the Term of this Lease (including any exercised renewal term), without hindrance or interference from anyone claiming by or through said Superior Mortgagee or Superior Lessor and that said Superior Mortgagee or Superior Lessor shall respect Tenant's rights under the Lease and, upon succeeding to Landlord's interest in the Building and Lease, shall observe and comply with all of Landlord's duties under the Lease. If any Superior Lessor or Superior Mortgagee shall succeed to the rights of Landlord under this Lease, whether through possession or foreclosure action or delivery of a new lease or deed (such party so succeeding to Landlord's rights herein called "SUCCESSOR LANDLORD"), then Tenant shall attorn to and recognize such Successor Landlord as Tenant's landlord under this Lease (without the need for further agreement) and shall promptly execute and deliver any reasonable instrument that such Successor Landlord may reasonably request to evidence such attornment. This Lease shall continue in full force and effect as a direct lease between the Successor Landlord and Tenant upon all of the terms, conditions and covenants as are set forth in this Lease, except that the Successor Landlord shall not (a) be liable for any previous act or omission of Landlord under this Lease, except to the extent such act or omission shall constitute a continuing Landlord default hereunder; (b) be subject to any offset, not expressly provided for in this Lease; or (c) be bound by any previous modification of this Lease or by any previous prepayment of more than one month's Base Rent, unless such modification or prepayment shall have been expressly approved in writing by the Successor Landlord (or its predecessor in interest). 31. ENVIRONMENTAL COVENANTS (a) Prior to executing this Lease, Tenant has completed, executed and delivered to Landlord a Hazardous Materials Disclosure Certificate ("INITIAL DISCLOSURE CERTIFICATE"), a fully completed copy of which is attached hereto as EXHIBIT B and incorporated herein by this reference. Tenant covenants, represents and warrants to Landlord that the information on the Initial Disclosure Certificate is true and correct and accurately describes the Hazardous Materials which will be manufactured, treated, used or stored on or about the Premises by Tenant or Tenant's Agents. Tenant shall, on each anniversary of the Commencement Date and at such other times as Tenant desires to manufacture, treat, use or store on or about the Premises new or additional Hazardous Materials which were not listed on the Initial Disclosure Certificate, complete, execute and deliver to Landlord an updated Disclosure Certificate (each, an "UPDATED DISCLOSURE CERTIFICATE") describing Tenant's then current and proposed future uses of Hazardous Materials on or about the Premises, which Updated Disclosure Certificates shall be in the same format as that which is set forth in EXHIBIT B or in such updated format as Landlord may require from time to time. Tenant shall deliver an Updated Disclosure Certificate to Landlord not less than thirty (30) days prior to the date Tenant intends to commence the manufacture, treatment, use or storage of new or additional Hazardous Materials on or about the Premises, and Landlord shall have the right to approve or disapprove such new or additional Hazardous Materials in its sole and absolute discretion. Tenant shall make no use of Hazardous Materials on or about the Premises except as described in the Initial Disclosure Certificate or as otherwise approved by Landlord in writing in accordance with this Paragraph 31(a). (b) As used in this Lease, the term "HAZARDOUS MATERIALS" shall mean and include any substance that is or contains: (i) any "hazardous substance" as now or hereafter defined in 29 38 Section 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA") (42 U.S.C. Section 9601 et seq.) or any regulations promulgated under CERCLA; (ii) any "hazardous waste" as now or hereafter defined in the Resource Conservation and Recovery Act, as amended ("RCRA") (42 U.S.C. Section 6901 et seq.) or any regulations promulgated under ("RCRA"); (iii) any substance now or hereafter regulated by the Toxic Substances Control Act, as amended ("TSCA") (15 U.S.C. Section 2601 et seq.) or any regulations promulgated under TSCA; (iv) petroleum, petroleum by-products, gasoline, diesel fuel, or other petroleum hydrocarbons; (v) asbestos and asbestos-containing material, in any form, whether friable or non-friable; (vi) polychlorinated biphenyls; (vii) lead and lead-containing materials; or (viii) any additional substance, material or waste (A) the presence of which on or about the Premises (1) requires reporting, investigation or remediation under any Environmental Laws (as hereinafter defined), (2) causes or threatens to cause a nuisance on the Premises or any adjacent area or property or poses or threatens to pose a hazard to the health or safety of persons on the Premises or any adjacent area or property, or (3) which, if it emanated or migrated from the Premises, could constitute a trespass, or (B) which is now or is hereafter classified or considered to be hazardous or toxic under any Environmental Laws. (c) As used in this Lease, the term "ENVIRONMENTAL LAWS" shall mean and include: (i) CERCLA, "RCRA" and TSCA; and (ii) any other federal, state or local laws, ordinances, statutes, codes, rules, regulations, orders or decrees now or hereinafter in effect relating to (A) pollution, (B) the protection or regulation of human health, natural resources or the environment, (C) the treatment, storage or disposal of Hazardous Materials, or (D) the emission, discharge, release or threatened release of Hazardous Materials into the environment. (d) Tenant agrees that during its use and occupancy of the Premises it will: (i) not (A) permit Hazardous Materials to be present on or about the Premises except in a manner and quantity necessary for the ordinary performance of Tenant's business or (B) release, discharge or dispose of any Hazardous Materials on, in, at, under, or emanating from, the Premises, the Building or the Project; (ii) comply with all Environmental Laws relating to the Premises and the use of Hazardous Materials on or about the Premises and not engage in or permit others to engage in any activity at the Premises in violation of any Environmental Laws; and (iii) immediately notify Landlord of (A) any inquiry, test, investigation or enforcement proceeding by any governmental agency or authority against Tenant, Landlord or the Premises, Building or Project relating to any Hazardous Materials or under any Environmental Laws or (B) the occurrence of any event or existence of any condition that would cause a breach of any of the covenants set forth in this Paragraph 31. (e) If Tenant's use of Hazardous Materials on or about the Premises results in a release, discharge or disposal of Hazardous Materials on, in, at, under, or emanating from, the Premises, the Building or the Project, Tenant agrees to investigate, clean up, remove or remediate such Hazardous Materials in full compliance with: (i) the requirements of (A) all Environmental Laws and (B) any governmental agency or authority responsible for the enforcement of any Environmental Laws; and (ii) any additional requirements of Landlord that are reasonably necessary to protect the value of the Premises, the Building or the Project. (f) Upon reasonable notice to Tenant, Landlord may inspect the Premises and surrounding areas for the purpose of determining whether there exists on or about the Premises any 30 39 Hazardous Material or other condition or activity that is in violation of the requirements of this Lease or of any Environmental Laws. Such inspections may include, but are not limited to, entering the Premises or adjacent property with drill rigs or other machinery for the purpose of obtaining laboratory samples. Landlord shall not be limited in the number of such inspections during the Term of this Lease. In the event (i) such inspections reveal the presence of any such Hazardous Material or other condition or activity in violation of the requirements of this Lease or of any Environmental Laws, or (ii) Tenant or its Agents contribute or knowingly consent to the presence of any Hazardous Materials in, on, under, through or about the Premises, the Building or the Project or exacerbate the condition of or the conditions caused by any Hazardous Materials in, on, under, through or about the Premises, the Building or the Project, Tenant shall reimburse Landlord for the cost of such inspections within ten (10) days of receipt of a written statement therefor. Tenant will supply to Landlord such historical and operational information regarding the Premises and surrounding areas as may be reasonably requested to facilitate any such inspection and will make available for meetings appropriate personnel having knowledge of such matters. Tenant agrees to give Landlord at least sixty (60) days' prior notice of its intention to vacate the Premises so that Landlord will have an opportunity to perform such an inspection prior to such vacation. The right granted to Landlord herein to perform inspections shall not create a duty on Landlord's part to inspect the Premises, or liability on the part of Landlord for Tenant's use, storage, treatment or disposal of Hazardous Materials, it being understood that Tenant shall be solely responsible for all liability in connection therewith. (g) Landlord shall have the right, but not the obligation, prior or subsequent to a Default, without in any way limiting Landlord's other rights and remedies under this Lease, to enter upon the Premises, or to take such other actions as it deems necessary or advisable, to investigate, clean up, remove or remediate any Hazardous Materials or contamination by Hazardous Materials present on, in, at, under, or emanating from, the Premises, the Building or the Project in violation of Tenant's obligations under this Lease or under any Environmental Laws. Notwithstanding any other provision of this Lease, Landlord shall also have the right, at its election, in its own name or as Tenant's agent, to negotiate, defend, approve and appeal, at Tenant's expense, any action taken or order issued by any governmental agency or authority with regard to any such Hazardous Materials or contamination by Hazardous Materials. All costs and expenses paid or incurred by Landlord in the exercise of the rights set forth in this Paragraph 31 shall be payable by Tenant upon demand. (h) Tenant shall surrender the Premises to Landlord upon the expiration or earlier termination of this Lease free of debris, waste or Hazardous Materials placed on, about or near the Premises by Tenant or Tenant's Agents, and in a condition which complies with all Environmental Laws and any additional requirements of Landlord that are reasonably necessary to protect the value of the Premises, the Building or the Project, including, without limitation, the obtaining of any closure permits or other governmental permits or approvals related to Tenant's use of Hazardous Materials in or about the Premises. Tenant's obligations and liabilities pursuant to the provisions of this Paragraph 31 shall survive the expiration or earlier termination of this Lease. If it is determined by Landlord that the condition of all or any portion of the Premises, the Building, and/or the Project is not in compliance with the provisions of this Lease with respect to Hazardous Materials, including, without limitation, all Environmental Laws, at the expiration or earlier termination of this Lease, then at Landlord's sole option, Landlord may require Tenant to hold over possession of the Premises until Tenant can surrender the Premises 31 40 to Landlord in the condition in which the Premises existed as of the Commencement Date and prior to the appearance of such Hazardous Materials except for normal wear and tear, including, without limitation, the conduct or performance of any closures as required by any Environmental Laws. The burden of proof hereunder shall be upon Tenant. For purposes hereof, the term "NORMAL WEAR AND TEAR" shall not include any deterioration in the condition or diminution of the value of any portion of the Premises, the Building, and/or the Project in any manner whatsoever related to directly, or indirectly, Hazardous Materials. Any such holdover by Tenant will be with Landlord's consent, will not be terminable by Tenant in any event or circumstance and will otherwise be subject to the provisions of Paragraph 34 of this Lease. (i) Tenant agrees to indemnify and hold harmless Landlord from and against any and all claims, losses (including, without limitation, loss in value of the Premises, the Building or the Project, liabilities and expenses (including attorneys' fees)) sustained by Landlord attributable to (i) any Hazardous Materials placed on or about the Premises, the Building or the Project by Tenant or Tenant's Agents, or (ii) Tenant's breach of any provision of this Paragraph 31. (j) The provisions of this Paragraph 31 shall survive the expiration or earlier termination of this Lease. 32. NOTICES All notices and demands which are required or may be permitted to be given to either party by the other hereunder shall be in writing and shall be sent by United States mail, postage prepaid, certified, or by personal delivery or overnight courier, addressed to the addressee at Tenant's Address or Landlord's Address as specified in the Basic Lease Information, or to such other place as either party may from time to time designate in a notice to the other party given as provided herein. Copies of all notices and demands given to Landlord shall additionally be sent to Landlord's property manager at the address specified in the Basic Lease Information or at such other address as Landlord may specify in writing from time to time. Notice shall be deemed given upon actual receipt (or attempted delivery if delivery is refused), if personally delivered, or one (1) business day following deposit with a reputable overnight courier that provides a receipt, or on the third (3rd) day following deposit in the United States mail in the manner described above. 33. WAIVER The waiver of any breach of any term, covenant or condition of this Lease shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. No delay or omission in the exercise of any right or remedy of Landlord in regard to any Default by Tenant shall impair such a right or remedy or be construed as a waiver. Any waiver by Landlord of any Default must be in writing and shall not be a waiver of any other Default concerning the same or any other provisions of this Lease. 32 41 34. HOLDING OVER Any holding over after the expiration of the Term, without the express written consent of Landlord, shall constitute a Default and, without limiting Landlord's remedies provided in this Lease, such holding over shall be construed to be a tenancy at sufferance, at a rental rate equal to the greater of one hundred fifty percent (150%) of the fair market rental value for the Premises as determined by Landlord or two hundred percent (200%) of the Base Rent last due in this Lease, plus Additional Rent, and shall otherwise be on the terms and conditions herein specified, so far as applicable; provided, however, that in no event shall any renewal or expansion option or other similar right or option contained in this Lease be deemed applicable to any such tenancy at sufferance. If the Premises are not surrendered at the end of the Term or sooner termination of this Lease, and in accordance with the provisions of Paragraphs 10 and 31(h), Tenant shall indemnify, defend and hold Landlord harmless from and against any and all loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any loss or liability resulting from any claim against Landlord made by any succeeding tenant or prospective tenant founded on or resulting from such delay and losses to Landlord due to lost opportunities to lease any portion of the Premises to any such succeeding tenant or prospective tenant, together with, in each case, actual attorneys' fees and costs. 35. SUCCESSORS AND ASSIGNS The terms, covenants and conditions of this Lease shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all of the parties hereto. If Tenant shall consist of more than one entity or person, the obligations of Tenant under this Lease shall be joint and several. 36. TIME Time is of the essence of this Lease and each and every term, condition and provision herein. 37. BROKERS Landlord and Tenant each represents and warrants to the other that neither it nor its officers or agents nor anyone acting on its behalf has dealt with any real estate broker except the Broker(s) specified in the Basic Lease Information in the negotiating or making of this Lease, and each party agrees to indemnify and hold harmless the other from any claim or claims, and costs and expenses, including attorneys' fees, incurred by the indemnified party in conjunction with any such claim or claims of any other broker or brokers to a commission in connection with this Lease as a result of the actions of the indemnifying party. 38. LIMITATION OF LIABILITY Tenant agrees that, in the event of any default or breach by Landlord with respect to any of the terms of the Lease to be observed and performed by Landlord: (a) Tenant shall look solely to the then-current Landlord's interest in the Building for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord; (b) no other property or assets of Landlord, its partners, shareholders, officers, 33 42 directors, employees, investment advisors, or any successor in interest of any of them (collectively, the "LANDLORD PARTIES") shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies; (c) no personal liability shall at any time be asserted or enforceable against the Landlord Parties; and (d) no judgment will be taken against the Landlord Parties. The provisions of this section shall apply only to the Landlord and the parties herein described, and shall not be for the benefit of any insurer nor any other third party. 39. FINANCIAL STATEMENTS Within ten (10) days after Landlord's request, Tenant shall deliver to Landlord the then current financial statements of Tenant (including interim periods following the end of the last fiscal year for which annual statements are available), prepared or compiled by a certified public accountant, including a balance sheet and profit and loss statement for the most recent prior year, all prepared in accordance with GAAP. 40. RULES AND REGULATIONS Tenant agrees to comply with such reasonable rules and regulations as Landlord may adopt from time to time for the orderly and proper operation of the Building and the Project. Such rules may include but shall not be limited to the following: (a) restriction of employee parking to a limited, designated area or areas; and (b) regulation of the removal, storage and disposal of Tenant's refuse and other rubbish at the sole cost and expense of Tenant. The then current rules and regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant. Landlord shall not be responsible to Tenant for the failure of any other person to observe and abide by any of said rules and regulations. Landlord's current rules and regulations are attached to this Lease as Exhibit A. 41. MORTGAGEE PROTECTION (a) MODIFICATIONS FOR LENDER. If, in connection with obtaining financing for the Project or any portion thereof, Landlord's lender shall request reasonable modifications to this Lease as a condition to such financing, Tenant shall not unreasonably withhold, delay or defer its consent to such modifications, provided that such modifications do not materially adversely affect Tenant's rights or increase Tenant's obligations under this Lease. (b) RIGHTS TO CURE. Tenant agrees to give to any trust deed or mortgage holder ("HOLDER"), by registered mail, at the same time as it is given to Landlord, a copy of any notice of default given to Landlord, provided that, prior to such notice, Tenant has been notified, in writing (by way of notice of assignment of rents and leases, or otherwise) of the address of such Holder. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then the Holder shall have an additional twenty (20) days after expiration of such period, or after receipt of such notice from Tenant (if such notice to the Holder is required by this Paragraph 41(b)), whichever shall last occur within which to cure such default or if such default cannot be cured within that time, then such additional time as may be necessary if within such twenty (20) days; any Holder has commenced and is diligently pursuing the remedies necessary to cure such default (including, but not limited to, commencement of 34 43 foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated. 42. ENTIRE AGREEMENT This Lease, including the Exhibits and any Addenda attached hereto, which are hereby incorporated herein by this reference, contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties, not embodied herein or therein, shall be of any force and effect. 43. INTEREST Any installment of Rent and any other sum due from Tenant under this Lease which is not received by Landlord within ten (10) days from when the same is due shall bear interest from the date such payment was originally due under this Lease until paid at an annual rate equal to the maximum rate of interest permitted by law. Payment of such interest shall not excuse or cure any Default by Tenant. In addition, Tenant shall pay all costs and attorneys' fees incurred by Landlord in collection of such amounts. 44. CONSTRUCTION This Lease shall be construed and interpreted in accordance with the laws of the State of California. The parties acknowledge and agree that no rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall be employed in the interpretation of this Lease, including the Exhibits and any Addenda attached hereto. All captions in this Lease are for reference only and shall not be used in the interpretation of this Lease. Whenever required by the context of this Lease, the singular shall include the plural, the masculine shall include the feminine, and vice versa. If any provision of this Lease shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Lease and all such other provisions shall remain in full force and effect. 45. REPRESENTATIONS AND WARRANTIES OF TENANT Tenant hereby makes the following representations and warranties, each of which is material and being relied upon by Landlord, is true in all respects as of the date of this Lease, and shall survive the expiration or termination of the Lease. (a) If Tenant is an entity, Tenant is duly organized, validly existing and in good standing under the laws of the state of its organization and the persons executing this Lease on behalf of Tenant have the full right and authority to execute this Lease on behalf of Tenant and to bind Tenant without the consent or approval of any other person or entity. Tenant has full power, capacity, authority and legal right to execute and deliver this Lease and to perform all of its obligations hereunder. This Lease is a legal, valid and binding obligation of Tenant, enforceable in accordance with its terms. (b) Tenant has not (i) made a general assignment for the benefit of creditors, (ii) filed any voluntary petition in bankruptcy or suffered the filing of an involuntary petition by any creditors, (iii) suffered the appointment of a receiver to take possession of all or substantially all of its 35 44 assets, (iv) suffered the attachment or other judicial seizure of all or substantially all of its assets, (v) admitted in writing its inability to pay its debts as they come due, or (vi) made an offer of settlement, extension or composition to its creditors generally. 46. SECURITY (a) Tenant acknowledges and agrees that, while Landlord may engage security personnel to patrol the Building or the Project, Landlord is not providing any security services with respect to the Premises, the Building or the Project and that Landlord shall not be liable to Tenant for, and Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage suffered or incurred by Tenant in connection with any unauthorized entry into the Premises or any other breach of security with respect to the Premises, the Building or the Project. (b) Tenant hereby agrees to the exercise by Landlord and Landlord's Agents, within their sole discretion, of such security measures as, but not limited to, the evacuation of the Premises, the Building or the Project for cause, suspected cause or for drill purposes, the denial of any access to the Premises, the Building or the Project and other similarly related actions that it deems necessary to prevent any threat of property damage or bodily injury. The exercise of such security measures by Landlord and Landlord's Agents, and the resulting interruption of service and cessation of Tenant's business, if any, shall not be deemed an eviction or disturbance of Tenant's use and possession of the Premises, or any part thereof, or render Landlord or Landlord's Agents liable to Tenant for any resulting damages or relieve Tenant from Tenant's obligations under this Lease. 47. JURY TRIAL WAIVER Tenant hereby waives any right to trial by jury with respect to any action or proceeding (a) brought by Landlord, Tenant or any other party, relating to (i) this Lease and/or any understandings or prior dealings between the parties hereto, or (ii) the Premises, the Building or the Project or any part thereof, or (b) to which Landlord is a party. Tenant hereby agrees that this Lease constitutes a written consent to waiver of trial by jury pursuant to the provisions of California Code of Civil Procedure Section 631, and Tenant does hereby constitute and appoint Landlord its true and lawful attorney-in-fact, which appointment is coupled with an interest, and Tenant does hereby authorize and empower Landlord, in the name, place and stead of Tenant, to file this Lease with the clerk or judge of any court of competent jurisdiction as a statutory written consent to waiver of trial by jury. 48. OPTION TO RENEW Tenant shall have one (1) option (the "RENEWAL OPTION") to extend the Term for a period of five (5) years beyond the Expiration Date (the "RENEWAL TERM"). The Renewal Option is personal to Tenant and may not be exercised by any sublessee or assignee, or by any other successor or assign of Tenant. The Renewal Option shall be effective only if Tenant is not in Default under this Lease, nor has any event occurred which with the giving of notice or the passage of time, or both, would constitute a Default hereunder, either at the time of exercise of the Renewal Option or the time of commencement of the Renewal Term. The Renewal Option must be exercised, if at all, by written notice (the "ELECTION NOTICE") from Tenant to Landlord 36 45 given not more than twelve (12) months nor less than nine (9) months prior to the expiration of the initial Term. Except as hereinafter provided in this Paragraph 48, any such notice given by Tenant to Landlord shall be irrevocable. If Tenant fails to exercise the Renewal Option in a timely manner as provided for above, the Renewal Option shall be void. The Renewal Term shall be upon the same terms and conditions as the initial Term, except that the annual Base Rent during the Renewal Term (the "RENEWAL RATE") shall be equal to a rate specified by Landlord in writing and furnished to Tenant. Landlord shall endeavor to notify Tenant in writing (such notice being hereinafter referred to as the "RENEWAL RATE NOTICE") of the Renewal Rate for the Renewal Term within thirty (30) days after Landlord's receipt of the Election Notice. Tenant shall have ten (10) days after receipt of the Renewal Rate Notice (the "RESPONSE PERIOD") to advise Landlord whether or not Tenant accepts the Renewal Rate. If Tenant agrees to pay the Renewal Rate, then Landlord and Tenant shall promptly enter into an amendment to this Lease providing for the lease of the Premises by Tenant during the Renewal Term upon the terms stated in the Renewal Rate Notice. If Tenant does not agree to pay the Renewal Rate, Tenant shall have the right to rescind its Election Notice in writing within the Response Period and neither party shall have any further rights or obligations under this Paragraph 48. If Tenant fails to provide Landlord with written notice of rescission prior to the expiration of the Response Period, then Tenant shall be deemed to have agreed to pay the Renewal Rate. No further renewal option shall be available to Tenant at the end of the Renewal Term. 49. RIGHT OF FIRST OFFER (a) Subject to the terms of this Paragraph 49, Tenant shall have a recurring right of first offer (the "RIGHT OF FIRST OFFER") during the Term to lease space that becomes available during such period in the building commonly known as 1320 Orleans Drive, Sunnyvale, California (the "1320 BUILDING"). The Right of First Offer is personal to Tenant and may not be exercised by any sublessee or assignee, or by any other successor or assign of Tenant. The Right of First Offer shall be effective only if Tenant is not in Default under this Lease, nor has any event occurred which with the giving of notice or the passage of time, or both, would constitute a Default hereunder, either at the time of exercise of the Right of First Offer or on the applicable Expansion Commencement Date (as hereinafter defined). (b) In the event that, during the Term, Landlord elects to market or offer to the public for lease any space in the 1320 Building (each such space being herein referred to as an "EXPANSION SPACE"), or Landlord receives a proposal to lease any Expansion Space which Landlord desires to accept (a "PROPOSAL"), Landlord shall notify Tenant in writing of the terms and conditions upon which Landlord would be willing to lease such Expansion Space to Tenant (each such written notice being herein referred to as an "EXPANSION SPACE AVAILABILITY NOTICE". Tenant shall thereafter have the right to lease such Expansion Space on the terms and conditions specified in the Expansion Space Availability Notice by written notice (an "EXPANSION NOTICE") to Landlord given not later than five (5) business days after Tenant's receipt of the Expansion Space Availability Notice. Notwithstanding anything herein to the contrary, Tenant's Right of First Offer shall not apply to, and Tenant shall have no right to Lease pursuant to this Paragraph 49, any space that Landlord elects to lease to a then-current tenant of the 1320 Building. (c) In the event Tenant fails to exercise its Right of First Offer with respect to any Expansion Space in a timely manner as provided herein, such Right of First Offer shall lapse and 37 46 Landlord shall thereafter have the right to lease such Expansion Space to any party or parties on terms deemed acceptable to Landlord in its sole and absolute discretion. If Tenant validly exercises such Right of First Offer, then (i) Tenant's lease of the applicable Expansion Space shall commence on a date (an "EXPANSION COMMENCEMENT DATE") specified in the Expansion Space Availability Notice, (ii) the Expansion Space shall be leased to Tenant upon the terms and conditions set forth in the applicable Expansion Space Availability Notice, and (iii) except to the extent that the applicable Expansion Space Availability Notice provides a tenant improvement allowance or a tenant improvement loan to Tenant, the Expansion Space shall be delivered to Tenant in its "AS IS" condition on the Expansion Commencement Date, Tenant acknowledging and agreeing that Landlord shall have no obligation to improve, remodel or otherwise alter such Expansion Space prior to or after the Expansion Commencement Date, except to the extent expressly provided in the Expansion Space Availability Notice. (d) In the event Tenant exercises its Right of First Offer with respect to any Expansion Space, then from and after the applicable Expansion Commencement Date, the term "Premises," whenever used in this Lease, shall mean the original Premises demised under this Lease, any Expansion Space previously leased by Tenant and the Expansion Space then being leased. Landlord and Tenant have executed and delivered this Lease as of the Lease Date specified in the Basic Lease Information. LANDLORD: AETNA LIFE INSURANCE COMPANY, a Connecticut corporation By: UBS Brinson Realty Investors LLC Its Investment Advisor and Agent By: --------------------------------- Cynthia Stevenin Vice President TENANT: MOLECULAR DEVICES CORPORATION, a California corporation By: ------------------------------------ Name: ----------------------------------- Title: ---------------------------------- 38 47 EXHIBIT A RULES AND REGULATIONS This exhibit, entitled "Rules and Regulations," is and shall constitute Exhibit A to the Lease Agreement, dated as of the Lease Date, by and between landlord and Tenant for the Premises. The terms and conditions of this Exhibit A are hereby incorporated into and are made a part of the Lease. Capitalized terms used, but not otherwise defined, in this Exhibit A have the meanings ascribed to such terms in the Lease. 1. Tenant shall not use any method of heating or air conditioning other than that supplied by Landlord or the utility company providing service to the Building without the consent of Landlord. 2. All window coverings installed by Tenant and visible from the outside of the building require the prior written approval of Landlord. 3. Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance or any flammable or combustible materials on or around the Premises, except to the extent that Tenant is permitted to use the same under the terms of Paragraph 31 of the Lease. 4. Tenant shall not alter any lock or install any new locks or bolts on any door at the Premises without the prior consent of Landlord. 5. Tenant shall not make any duplicate keys without the prior consent of Landlord. 6. Tenant shall not park motor vehicles in designated parking areas after the conclusion of Tenant's normal daily business activity. 7. No person shall go on the roof without Landlord's permission. 8. Business machines and mechanical equipment belonging to Tenant which cause noise or vibration that may be transmitted to the structure of the Building, to such a degree as to be objectionable to Landlord, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or in noise-dampening housing or other devices sufficient to eliminate noise or vibration. 9. All goods, including material used to store goods, delivered to the Premises of Tenant A shall be immediately moved into the Premises and shall not be left in parking or receiving areas overnight. 10. Tractor trailers which must be unhooked or parked with dolly wheels beyond the concrete loading areas must use steel plates or wood blocks under the dolly wheels to prevent damage to the asphalt paving surfaces. No parking or storing of such trailers will be permitted in the auto parking areas of the Project or on streets adjacent thereto. 11. Forklifts which operate on asphalt paving areas shall not have solid rubber tires and shall only use tires that do not damage the asphalt. A-1 48 12. Tenant is responsible for the storage and removal of all trash and refuse. All such trash and refuse shall be contained in suitable receptacles stored behind screened enclosures at locations approved by Landlord. 13. Tenant shall not store or permit the storage or placement of goods or merchandise in or around the common areas surrounding the Premises. No displays or sales of merchandise shall be allowed in the parking lots or other common areas. 14. Tenant shall not permit any animals, including, but not limited to, any household pets, to be brought or kept in or about the Premises, the Building, the Project or any of the common areas. A-2 49 EXHIBIT B HAZARDOUS MATERIALS DISCLOSURE CERTIFICATE Your cooperation in this matter is appreciated. Initially, the information provided by you in this Hazardous Materials Disclosure Certificate is necessary for the Landlord to evaluate your proposed uses of the premises (the "PREMISES") and to determine whether to enter into a lease agreement with you as tenant. If a lease agreement is signed by you and the Landlord (the "LEASE AGREEMENT"), on an annual basis in accordance with the provisions of Paragraph 31 of the Lease Agreement, you are to provide an update to the information initially provided by you in this certificate. Any questions regarding this certificate should be directed to, and when completed, the certificate should be delivered to: Landlord: Aetna Life Insurance Company c/o UBS Brinson Realty Investors LLC 455 Market Street, Suite 1540 San Francisco, California 94105 Attention: Cynthia Stevenin Phone: (415) 538-4800 Name of (Prospective) Tenant: Molecular Devices Corporation Mailing Address: ------------------------------------------------------------------------ Contact Person, Title and Telephone Number(s): ------------------------------------------------------------------------ Contact Person for Hazardous Waste Materials Management and Manifests and Telephone Number(s): ------------------------------------------------------------------------ Address of (Prospective) Premises: ------------------------------------------------------------------------ Length of (Prospective) Initial Term: ------------------------------------------------------------------------ 1. GENERAL INFORMATION: Describe the proposed operations to take place in, on, or about the Premises, including, without limitation, principal products processed, manufactured or assembled, and services and activities to be provided or otherwise conducted. Existing tenants should describe any proposed changes to on-going operations. ------------------------------------------------------------------------ ------------------------------------------------------------------------ B-1 50 2. USE, STORAGE AND DISPOSAL OF HAZARDOUS MATERIALS 2.1 Will any Hazardous Materials (as hereinafter defined) be used, generated, treated, stored or disposed of in, on or about the Premises? Existing tenants should describe any Hazardous Materials which continue to be used, generated, treated, stored or disposed of in, on or about the Premises. Wastes Yes [ ] No [ ] Chemical Products Yes [ ] No [ ] Other Yes [ ] No [ ] If Yes is marked, please explain: 2.2 If Yes is marked in Section 2.1, attach a list of any Hazardous Materials to be used, generated, treated, stored or disposed of in, on or about the Premises, including the applicable hazard class and an estimate of the quantities of such Hazardous Materials to be present on or about the Premises at any given time; estimated annual throughput; the proposed location(s) and method of storage (excluding nominal amounts of ordinary household cleaners and janitorial supplies which are not regulated by any Environmental Laws, as hereinafter defined); and the proposed location(s) and method(s) of treatment or disposal for each Hazardous Material, including the estimated frequency, and the proposed contractors or subcontractors. Existing tenants should attach a list setting forth the information requested above and such list should include actual data from on-going operations and the identification of any variations in such information from the prior year's certificate. 3. STORAGE TANKS AND SUMPS 3.1 Is any above or below ground storage or treatment of gasoline, diesel, petroleum, or other Hazardous Materials in tanks or sumps proposed in, on or about the Premises? Existing tenants should describe any such actual or proposed activities. Yes [ ] No [ ] If yes, please explain: ---------------------------------------------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- B-2 51 4. WASTE MANAGEMENT 4.1 Has your company been issued an EPA Hazardous Waste Generator I.D. Number? Existing tenants should describe any additional identification numbers issued since the previous certificate. Yes [ ] No [ ] 4.2 Has your company filed a biennial or quarterly reports as a hazardous waste generator? Existing tenants should describe any new reports filed. Yes [ ] No [ ] If yes, attach a copy of the most recent report filed. 5. WASTEWATER TREATMENT AND DISCHARGE 5.1 Will your company discharge wastewater or other wastes to: ___ storm drain? ___ sewer? ___ surface water? ___ no wastewater or other wastes discharged. Existing tenants should indicate any actual discharges. If so, describe the nature of any proposed or actual discharge(s). ---------------------------------------------------------------- ---------------------------------------------------------------- 5.2 Will any such wastewater or waste be treated before discharge? Yes [ ] No [ ] If yes, describe the type of treatment proposed to be conducted. Existing tenants should describe the actual treatment conducted. ---------------------------------------------------------------- ---------------------------------------------------------------- B-3 52 6. AIR DISCHARGES 6.1 Do you plan for any air filtration systems or stacks to be used in your company's operations in, on or about the Premises that will discharge into the air; and will such air emissions be monitored? Existing tenants should indicate whether or not there are any such air filtration systems or stacks in use in, on or about the Premises which discharge into the air and whether such air emissions are being monitored. Yes [ ] No [ ] If yes, please describe: ---------------------------------------------------------------- ---------------------------------------------------------------- 6.2 Do you propose to operate any of the following types of equipment, or any other equipment requiring an air emissions permit? Existing tenants should specify any such equipment being operated in, on or about the Premises. ___ Spray booth(s) ___ Incinerator(s) ___ Dip tank(s) ___ Other (Please describe) ___ Drying oven(s) ___ No Equipment Requiring Air Permits If yes, please describe: ---------------------------------------------------------------- ---------------------------------------------------------------- 6.3 Please describe (and submit copies of with this Hazardous Materials Disclosure Certificate) any reports you have filed in the past [thirty-six] months with any governmental or quasi-governmental agencies or authorities related to air discharges or clean air requirements and any such reports which have been issued during such period by any such agencies or authorities with respect to you or your business operations. B-4 53 7. HAZARDOUS MATERIALS DISCLOSURES 7.1 Has your company prepared or will it be required to prepare a Hazardous Materials management plan ("MANAGEMENT PLAN") or Hazardous Materials Business Plan and Inventory ("BUSINESS PLAN") pursuant to Fire Department or other governmental or regulatory agencies' requirements? Existing tenants should indicate whether or not a Management Plan is required and has been prepared. Yes [ ] No [ ] If yes, attach a copy of the Management Plan or Business Plan. Existing tenants should attach a copy of any required updates to the Management Plan or Business Plan. 7.2 Are any of the Hazardous Materials, and in particular chemicals, proposed to be used in your operations in, on or about the Premises listed or regulated under Proposition 65? Existing tenants should indicate whether or not there are any new Hazardous Materials being so used which are listed or regulated under Proposition 65. Yes [ ] No [ ] If yes, please explain: ---------------------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- 8. ENFORCEMENT ACTIONS AND COMPLAINTS 8.1 With respect to Hazardous Materials or Environmental Laws, has your company ever been subject to any agency enforcement actions, administrative orders, or consent decrees or has your company received requests for information, notice or demand letters, or any other inquiries regarding its operations? Existing tenants should indicate whether or not any such actions, orders or decrees have been, or are in the process of being, undertaken or if any such requests have been received. Yes [ ] No [ ] If yes, describe the actions, orders or decrees and any continuing compliance obligations imposed as a result of these actions, orders or decrees and also describe any requests, notices or demands, and attach a copy of all such documents. Existing tenants should describe and attach a copy of any new actions, orders, decrees, requests, notices or demands not already delivered to Landlord pursuant to the provisions of Paragraph 31 of the Lease Agreement. ---------------------------------------------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- B-5 54 8.2 Have there ever been, or are there now pending, any lawsuits against your company regarding any environmental or health and safety concerns? Yes [ ] No [ ] If yes, describe any such lawsuits and attach copies of the complaint(s), cross complaint(s), pleadings and other documents related thereto as requested by Landlord. Existing tenants should describe and attach a copy of any new complaint(s), cross-complaint(s), pleadings and other related documents not already delivered to Landlord pursuant to the provisions of Paragraph 31 of the Lease Agreement. ---------------------------------------------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- 8.3 Have there been any problems or complaints from adjacent tenants, owners or other neighbors at your company's current facility with regard to environmental or health and safety concerns? Existing tenants should indicate whether or not there have been any such problems or complaints from adjacent tenants, owners or other neighbors at, about or near the Premises and the current status of any such problems or complaints. Yes [ ] No [ ] If yes, please describe. Existing tenants should describe any such problems or complaints not already disclosed to Landlord under the provisions of the signed Lease Agreement and the current status of any such problems or complaints. ---------------------------------------------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- 9. PERMITS AND LICENSES 9.1 Attach copies of all permits and licenses issued to your company with respect to its proposed operations in, on or about the Premises, including, without limitation, any Hazardous Materials permits, wastewater discharge permits, air emissions permits, and use permits or approvals. Existing tenants should attach copies of any new permits and licenses as well as any renewals of permits or licenses previously issued. As used herein, "HAZARDOUS MATERIALS" shall mean and include any substance that is or contains (a) any "hazardous substance" as now or hereafter defined in Section 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA") (42 U.S.C. Section 9601 et seq.) or any regulations promulgated under CERCLA; (b) any "hazardous waste" as now or hereafter defined in the Resource Conservation and Recovery Act, as amended ("RCRA") (42 U.S.C. Section 6901 et seq.) or any regulations promulgated under RCRA; B-6 55 (c) any substance now or hereafter regulated by the Toxic Substances Control Act, as amended ("TSCA") (15 U.S.C. Section 2601 et seq.) or any regulations promulgated under TSCA; (d) petroleum, petroleum by-products, gasoline, diesel fuel, or other petroleum hydrocarbons; (e) asbestos and asbestos-containing material, in any form, whether friable or non-friable; (f) polychlorinated biphenyls; (g) lead and lead-containing materials; or (h) any additional substance, material or waste (i) the presence of which on or about the Premises (A) requires reporting, investigation or remediation under any Environmental Laws (as hereinafter defined), (B) causes or threatens to cause a nuisance on the Premises or any adjacent property or poses or threatens to pose a hazard to the health or safety of persons on the Premises or any adjacent property, or (C) which, if it emanated or migrated from the Premises, could constitute a trespass, or (ii) which is now or is hereafter classified or considered to be hazardous or toxic under any Environmental Laws; and "ENVIRONMENTAL LAWS" shall mean and include (a) CERCLA, RCRA and TSCA; and (b) any other federal, state or local laws, ordinances, statutes, codes, rules, regulations, orders or decrees now or hereinafter in effect relating to (i) pollution, (ii) the protection or regulation of human health, natural resources or the environment, (iii) the treatment, storage or disposal of Hazardous Materials, or (iv) the emission, discharge, release or threatened release of Hazardous Materials into the environment. The undersigned hereby acknowledges and agrees that this Hazardous Materials Disclosure Certificate is being delivered to Landlord in connection with the evaluation of a Lease Agreement and, if such Lease Agreement is executed, will be attached thereto as an exhibit. The undersigned further acknowledges and agrees that if such Lease Agreement is executed, this Hazardous Materials Disclosure Certificate will be updated from time to time in accordance with Paragraph 31 of the Lease Agreement. The undersigned further acknowledges and agrees that the Landlord and its partners, lenders and representatives may, and will, rely upon the statements, representations, warranties, and certifications made herein and the truthfulness thereof in entering into the Lease Agreement and the continuance thereof throughout the term, and any renewals thereof, of the Lease Agreement. I [print name] __________________, acting with full authority to bind the (proposed) Tenant and on behalf of the (proposed) Tenant, certify, represent and warrant that the information contained in this certificate is true and correct. (PROSPECTIVE) TENANT: MOLECULAR DEVICES CORPORATION, a California corporation By: ------------------------------------- Title: ---------------------------------- Date: ----------------------------------- B-7 56 EXHIBIT C FORM OF TENANT ESTOPPEL CERTIFICATE ________________________ (herein "TENANT") hereby certifies to ________________________ and its successors and assigns that Tenant leases from _______________________ ("LANDLORD") approximately _____ square feet of space (the "PREMISES") in _____________ pursuant to that certain Lease Agreement dated ___________, _____ by and between Landlord and Tenant, as amended by __________________________ (collectively, the "LEASE"), a true and correct copy of which is attached hereto as Exhibit A. Tenant hereby certifies to ___________________, that as of the date hereof: 1. The Lease is in full force and effect and has not been modified, supplemented or amended, except as set forth in the introductory paragraph hereof. 2. Tenant is in actual occupancy of the Premises under the Lease and Tenant has accepted the same. Landlord has performed all obligations under the Lease to be performed by Landlord, including, without limitation, completion of all tenant work required under the Lease and the making of any required payments or contributions therefor. Tenant is not entitled to any further payment or credit for tenant work. 3. The initial term of the lease commenced ____________, _____ and shall expire ___________, ____. Tenant has the following rights to renew or extend the term of the Lease or to expand the Premises: ________________________. 4. Tenant has not paid any rentals or other payments more than one (1) month in advance except as follows: _______________________. 5. Base Rent payable under the Lease is ___________________________ Dollars ($________________). Base Rent and additional Rent have been paid through ________________, _____. There currently exists no claims, defenses, rights of set-off or abatement to or against the obligations of Tenant to pay Base Rent or Additional Rent or relating to any other term, covenant or condition under the Lease. 6. There are no concessions, bonuses, free months' rent, rebates or other matters affecting the rentals except as follows: ___________________________. 7. No security or other deposit has been paid with respect to the Lease except as follows: ___________________________________. 8. Landlord is not currently in default under the Lease and there are no events or conditions existing which, with or without notice or the lapse of time, or both, could constitute a default of the Landlord under the Lease or entitle Tenant to offsets or defenses against the prompt payment of rent except as follows: ________________________________________. Tenant is not in default under any of the terms and conditions of the lease nor is there now any fact or condition which, with notice or lapse of time or both, will become such a default. C-1 57 9. Tenant has not assigned, transferred, mortgaged or otherwise encumbered its interest under the lease, nor subleased any of the Premises nor permitted any person or entity to use the Premises except as follows: ______________________________________. 10. Tenant has no rights of first refusal or options to purchase the property of which the Premises is a part. 11. The Lease represents the entire agreement between the parties with respect to Tenant's right to use and occupy the Premises. Tenant acknowledges that the parties to whom this certificate is addressed will be relying upon the accuracy of this certificate in connection with their acquisition and/or financing of the Premises. IN WITNESS WHEREOF, Tenant has caused this certificate to be executed this ____ day of _________, ____. TENANT: ___________________________________________, a __________________________________________ By: ________________________________________ Name: ______________________________________ Title: _____________________________________ C-2 EX-10.33 3 f70069ex10-33.txt EXHIBIT 10.33 1 EXHIBIT 10.33 SUBLEASE AGREEMENT This Sublease is made as of September 9, 1999, by and between Molecular Devices, a California Corporation ("Sublessee") and Medtronic, Inc., a Minnesota Corporation ("Sublessor"). Whereas, Sublessor entered into a Lease ("Master Lease") dated February 1, 1996, between Principal Mutual Life Insurance Company, an Iowa Corporation, or subsequent assigns as Lessor ("Lessor"), and whereby Lessor is leasing to Sublessor, as Lessee, certain Premises located at 1312 Crossman Avenue, Sunnyvale, California. A copy of the Master Lease is attached hereto as Exhibit "A" and made a part of this Sublease. Capitalized terms not otherwise defined herein shall have the same meanings assigned to them in the Master Lease. 1. PREMISES Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from Sublessor, for the term and upon the conditions hereinafter provided, the Premises as described in the Master Lease. The Premises address is known as 1312 Crossman Avenue, Sunnyvale California (Tax Parcel #110-36-002-00), and shall consist of 54,430 square feet for purposes of this Sublease. 2. TERM The term of this Sublease shall commence upon the "Commencement Date", which shall be January 1, 2000 and the Termination Date shall be April 30, 2003. 3. EARLY POSSESSION Sublessor will allow Sublessee early possession of the Premises on October 15, 1999 ("Possession Date"), to construct Sublessee's improvements, and Sublessee, as a condition to early possession, will be required to provide a certificate of liability and builders risk insurance, and effective on the Possession Date pursuant to Section 9 and 12 of this Sublease, pay all utility costs and repairs and maintenance of all building electrical and mechanical systems serving the Premises. Sublessor will continue to pay the Operating Expense and Tax Expense until the Commencement Date of this Sublease, at which time the Operating Expense and Tax Expense will be paid by Sublessee to Sublessor pursuant to Section 8 of this Sublease. 4. ACCEPTANCE OF PREMISES Sublessee acknowledges that the Premises contains certain existing improvements with which the Sublessee is familiar, and Sublessee agrees that by its act of taking possession of the Premises on the Possession Date will constitute Sublessee's acceptance of the Premises in good condition, and except as provided for herein, that Sublessor makes no representation or warranty of any kind whatsoever as to the condition or repair of the Premises, except as otherwise provided herein. Sublessee acknowledges that Sublessee is subleasing the Premises strictly on an "as is" basis. Sublessor makes no representation or warranty relating to the suitability of the Premises for Sublessee's intended use, or whether the Premises are in compliance with all applicable building codes, governmental laws, statutes, ordinances and regulations (e.g., ADA and Title 24 statutes and laws). 2 5. BASE RENT Sublessee shall pay directly to Sublessor on a monthly basis "Base Rent" as calculated using a triple net (NNN) rental rate, as follows:
RENTAL PERIOD MONTHLY BASE RENT NNN RENTAL RATE - --------------------- -------------------- --------------------- 1/01/2000 - 4/30/2001 $51,708.50 per month $0.95 NNN per s.f./mo. 5/01/2001 - 4/30/2003 $52,797.10 per month $0.97 NNN per s.f./mo.
The Base Rent shall be paid in monthly installments, in advance, on or before the first day of each and every calendar month during the Term to Sublessor at the Sublessor's address set forth in Section 33 or to such other party or to such other address as Sublessor may designate from time to time by written notice to Sublessee, without demand and without deduction or set-off upon execution of the Sublease, Sublessee shall deposit with Sublessor the sum of $51,708.50 which shall apply to the "Base Rent" for the first months rent, namely, January 1, 2000 through January 31, 2000. Notwithstanding the foregoing, the Rent shall abate hereunder to the extent Rent is abated under the Master Lease. 6. REIMBURSED IMPROVEMENTS In addition to the Base Rent, the Sublessee will pay to Sublessor on a monthly basis "Reimbursed Improvements" of $32,658.00 per month as a reimbursement for the improvements Sublessor has already made in the facility. The Reimbursed Improvements shall be paid in monthly installments of $32,658.00, in advance, on or before the first day of each and every calendar month during the Term to Sublessor at the Sublessor's address set forth in Section 30 or to such other party or to such other address as Sublessor may designate from time to time by written notice to Sublessee, without demand and without deduction or set-off. Upon execution of the Sublease, Sublessee shall deposit with Sublessor in addition to the Base Rent, the sum of $32,658.00 which shall apply to the Reimbursed Improvements for the first month, namely January 1, 2000 through January 31, 2000. Sublessor represents and warrants that there are no alterations or improvements made by Sublessor to the Premises that are or will be required to be removed or restored to the Premises upon termination of the Master Lease. In the event that Lessor shall require the removal of any signs, fixtures, furniture or furnishings or any improvements made by Sublessor prior to the commencement of this Sublease, or any repair of any damage caused by the installation or removal of such items, in accordance with the provisions of Section 10 of the Master Lease, Sublessor shall be and remain responsible for such removal and/or repair. 7. SECURITY DEPOSIT Sublessee shall deposit with Sublessor upon execution hereof One hundred thousand dollars and no/cents ($100,000.00) as security for Sublessee's faithful performance of Sublessee's obligations hereunder. If Sublessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Sublessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default of the payment of any other sum to which Sublessor may become obligated by reason of Sublessee's default, or to compensate Sublessor for any loss or damage which Sublessor may suffer thereby. If Sublessor so uses or applies all or any portion of said deposit, Sublessee shall within ten (10) days after written demand therefor deposit cash with Sublessor in an amount sufficient to restore said deposit to the full amount. Sublessor shall not be required to keep said security deposit separate from its general accounts. Said deposit, or so much thereof as has not theretofore been applied by Sublessor, shall 3 be returned, without payment of interest, to Sublessee (or, at Sublessor's option, to the last assignee, if any, of Sublessee's interest hereunder) at the expiration or early termination of the term hereof, and after Sublessee has vacated the Premises. No trust relationship is created herein between Sublessor and Sublessee with respect to said Security Deposit. 8. OPERATING EXPENSES TAX EXPENSE In addition to Base Rent and Reimbursed Improvements set forth above, starting with the Commencement Date the Sublessee shall pay directly to Sublessor as additional rent all the Operating Expense and Tax Expense as defined in and in accordance with Lessee's obligations under paragraph 6 of the Master Lease. 9. UTILITIES Starting with early possession of the Premises on October 15, 1999 pursuant to Section 3 of this Sublease, Sublessee at Sublessee's sole cost and expense, shall be obligated for Lessee's obligations for all utility costs and expenses defined in and in accordance with paragraph 7 of the Master Lease. 10. USE Sublessee will not use the Premises differently than what Lessee is permitted under the Master Lease in accordance with paragraph 9 of the Master Lease. 11. ALTERATIONS Sublessee shall have the same rights and obligations regarding the installation of any signs, fixtures or improvements to the Premises as the Lessee under the Master Lease, and shall comply with the obligations of Lessee under paragraph 10 of the Master Lease with respect to signs, fixtures or improvements to the Premises by Sublessee. 12. REPAIRS AND MAINTENANCE As of October 15, 1999, the Sublessor will have all building systems in good working order and condition. Starting on October 15, 1999, Sublessee at Sublessee's sole cost and expense, shall be obligated for Lessee's obligations for maintaining and repairing the Premises and adjacent areas in accordance with paragraph 11 of the Master Lease. 13. INSURANCE Sublessee, at Sublessee's sole cost and expense, shall accept the obligations of the Lessee to maintain insurance in accordance with paragraph 12 of the Master Lease. Sublessee shall maintain insurance coverage limits for bodily injury of not less than $1,000,000 per occurrence and property damage of not less than $2,000,000 per occurrence. 14. LIMITATION OF LIABILITY AND INDEMNITY 14.1 Sublessor shall hold harmless, indemnify and defend Sublessee and it's employees, agents, servants, customers, vendors, Sublessees or invitees against all claims, demands and action or loss, liability, damage, cost and expense resulting from injury or death to any person and damage to property caused by the negligent act or omission of Sublessor and it's employees, agents, servants, vendors. Sublessees or invitees while in, upon or connected in any way with the subleased premises or the common areas during the term of this sublease. 4 14.2 Sublessee shall hold harmless, indemnify and defend Sublessor and its employees, agents, servants, customers, vendors, Sublessees or invitees against all claims, demands and action or loss, liability, damage, cost and expense resulting from injury or death to any person and damage to property caused by the negligent act or omission of Sublessee and its employees, agents, servants, vendors, Sublessees or invitees while in, upon or connected in any way with the subleased premises during the term of this sublease. 15. ASSIGNMENT AND SUBLETTING Sublessee shall have the right to sublease all or any portion of the leased premises during the term of this Sublease with the prior written approval of Sublessor and Lessor in accordance with paragraph 14 of the Master Lease. In any and all events, Sublessee agrees that it shall remain primarily liable and obligated to perform all its obligations under the Sublease and Master Lease. Notwithstanding the foregoing, Sublessor's consent shall not be required for any assignment or sublease to an affiliate of Sublessee; or to any party merging with or acquiring Sublessee, or to any party acquiring all or substantially all of the assets of Sublessee. 16. WAIVER OF SUBROGATION Sublessor hereby releases Sublessee and Sublessee releases Sublessor and their respective officers, agents, employees and servants from any and all claims or demands for damages, loss, expense or injury to the Premises, or to the furnishings, fixtures and equipment, inventory or other property of, or loss of income or possible income to, or for any additional expenses incurred by either Sublessee or Sublessor in, about, upon or in connection with the Premises, as the case may be, which are caused or result from perils, events or happenings which are the subject of insurance carried by the respective parties, in force at the time of any such loss. 17. AD VALOREM TAXES Sublessee shall pay before delinquent all taxes assessed against the personal property of the Sublessee and all taxes attributable to any leasehold improvements made by Sublessee. 18. SUBORDINATION Sublessee shall comply with the obligations of the Lessee in accordance with paragraph 17 of the Master Lease. 19. RIGHT OF ENTRY Sublessee shall comply with the obligations of Lessee under paragraph 18 of the Master Lease. 5 20. ESTOPPEL CERTIFICATES Sublessee agrees at any time and from time to time, upon not less than ten (10) days prior written notice by Sublessor, to execute, acknowledge and deliver to Sublessor or a party designated by Sublessor a statement in writing (i) certifying that this Sublease is unmodified and in full force and effect, or if there have been modifications, that the Sublease is in full force and effect as modified and stating the modifications, (ii) stating whether or not Sublessor is in default in the performance of any covenant, agreement or condition contained in this Sublease, and, if so, specifying each such default, and (iv) agreeing that, except for any security deposit required herein or stated otherwise herein, Sublessee shall not prepay any rent more than 30 days in advance. Any such statement delivered pursuant hereto may be relied upon by any owner of the Building, any prospective purchaser of the Building, any mortgagee or prospective mortgagee of the Building or of Sublessor's interest, or any prospective assignee of any such mortgagee. 21. SUBLESSEE'S DEFAULT Any one of the following events shall constitute an Event of Default by Sublessee: (i) The vacation or abandonment of the Premises by the Sublessee, and failing to pay rent, (ii) The failure of Sublessee to make payment of Base Rent, Reimbursed Improvements, Operating Expense, Tax Expenses or other rent or expense as herein provided when said payment is due, (iii) The failure of Sublessee to observe, perform or comply with any of the conditions or provisions of the Sublease for a period, unless otherwise noted herein, of five (5) days after written notice, or such reasonable time as is reasonably necessary, with Sublessor's prior approval. (iv) The Sublessee becoming the subject of any bankruptcy (including reorganization or arrangement proceedings pursuant to any bankruptcy act) or insolvency proceeding whether voluntary or involuntary. (v) The Sublessee using or storing Hazardous Materials as defined in the Master Lease on the Premises other than as permitted by the provisions of paragraph 29 of the Master Lease. 22. REMEDIES FOR SUBLESSEE'S DEFAULTS 22.1 If an Event of Default shall have occurred and be continuing, Sublessor may at its sole option by written notice of Sublessee terminate this Sublease. Neither the passage of time after the occurrence of the Event of Default nor exercise by Sublessor of any other remedy with regard to such Event of Default shall limit Sublessor's rights under this Section 22. 22.2 If an Event of Default shall have occurred and be continuing, whether or not Sublessor elects to terminate this Sublease, Sublessor may enter upon and repossess the Premises (said repossession being hereinafter referred to as "Repossession") by legal means, and may remove Sublessee and all other persons and property therefrom. 6 22.3 From time to time after Repossession of the Premises, whether or not this Sublease has been terminated, Sublessor may attempt to relet the Premises for the account of Sublessee in the name of Sublessor or otherwise, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) and for such terms (which may include concessions or free rent) and for such uses as Sublessor, may determine, and may collect and receive the rent therefor. Any rent received shall be applied against Sublessee's obligations hereunder. If Sublessor elects to relet the premises for the account of Sublessee, Sublessor agrees to exert a good faith effort to relet the premises at the then fair market rate and on terms similar to those in effect at the time Sublessee's possession terminated. 22.4 No termination of this Sublease pursuant to Section 22.1 and no Repossession of the Premises pursuant to Section 22.2 or otherwise shall relieve Sublessee of its liabilities and obligations under this Sublease, all of which shall survive any such termination or Repossession. In the event of any such termination or Repossession, whether or not the Premises shall have been relet, Sublessee shall pay to Sublessor the Base Rent and other sums and charges to be paid by Sublessee up to the time of such termination or Repossession, and thereafter Sublessee, until the end of what would have been the Term in the absence of such termination or Repossession, shall pay to Sublessor, as and for liquidated and agreed current damages for Sublessee's default, the equivalent of the amount of the Base Rent and such other sums and charges which would be payable under this Sublease by Sublessee if this Sublease were still in effect, less the net proceeds, if any, of any reletting effected pursuant to the provisions of Section 22.3 after deducting all of Sublessor's expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage and management commissions, operating expenses, and reasonable attorneys' fees. Sublessee shall pay such current damages to Sublessor monthly on the days on which the Base Rent would have been payable under this Sublease if this Sublease were still in effect, and Sublessor shall be entitled to recover the same from Sublessee on each such day. At any time after such termination or Repossession, whether or not Sublessor shall have collected any current damages as aforesaid, Sublessor shall be entitled to recover from Sublessee, and Sublessee shall pay to Sublessor on demand, as and for liquidated and agreed final damages for Sublessee's default, an amount equal to the then present value of the excess of the Base Rent and other sums or charges reserved under this Sublease from the day of such termination or Repossession for what would be the then unexpired term if the same had remained in effect, over the amount of rent Sublessee demonstrates that Sublessor could in all likelihood actually collect for the Premises for the same period, said present value to be arrived at on the basis of a discount of four percent (4%) per annum. Sublessor agrees that remedies set forth in this Section 22.4 shall not be exercised in a manner as to result in double recovery of damages incurred. 22.5 Sublessor shall be in default in the event Sublessor fails to perform any of Sublessor's obligations herein. Sublessor shall have 30 days to cure each default, or such additional time as is reasonably required to correct any such default, after notice by Sublessee to Sublessor properly specifying wherein Sublessor has failed to perform any such obligation. 7 23. HOLDING OVER Upon the expiration of this Sublease or the earlier termination of Sublessee's right to possession, Sublessee shall immediately vacate the Premises, remove all of its property therefrom, and leave the Premises in the condition required by this Sublease. Should the Sublessee continue to occupy the Premises, or any part thereof, after the expiration or termination of the Term, whether with or without the consent of the Sublessor, such tenancy shall be from month to month and the monthly Base Rent and Reimbursed Improvements shall be 125% of the last month of the term thereafter. 24. PARKING Sublessee shall have the use of all parking spaces available within the existing parking lot and legal Parcel in accordance with paragraph 24 of the Master Lease. 25. CASUALTY DAMAGE If the Premises or any part thereof shall be damaged by fire or other casualty, Sublessee shall have the same rights and obligations of the Lessee as stated in paragraph 27 of the Master Lease. 26. CONDEMNATION If any portion of the Premises, the absence of which would be detrimental to Sublessee's business, is taken for any public or quasi-public purpose of any lawful government power or authority or sold to a governmental entity to prevent such taking, Sublessee shall have the same rights and obligations as stated in the Master Lease. 27. HAZARDOUS MATERIALS Sublessor hereby agrees to defend, indemnify and hold harmless Sublessee from and against any loss, claim, liability or damage arising as the result of any past or present existence, use, handling, storage, transportation, manufacture, release or disposal of any Hazardous Materials in, on or under the Property, including costs of experts and attorneys fees and costs directly or indirectly incurred (hereinafter collectively referred to as "Loss") caused by Sublessor's actions during the term of the Master Lease. Sublessee agrees to defend, indemnify and hold harmless Sublessor from and against any Loss caused by Sublessee's actions during the term of this Sublease. The foregoing indemnification's against Loss include indemnification against all costs of removal, response, and disposal of such Hazardous Substances and shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 28. FINANCIAL STATEMENTS Within ten (10) business days of Sublessor's request Sublessee shall deliver to Sublessor the then current Annual Report and 10K Report of Sublessee (including publicly available financials for interim periods following the end of the last fiscal year for which such annual statements are available. 29. QUIET ENJOYMENT The Sublessor agrees that Sublessee, upon paying the rentals and other payments herein required from Sublessee, and upon Sublessee's performance of all of the provisions, covenants and conditions of this Sublease and the Master Lease on its part to be kept and performed, may quietly have, hold and enjoy the Premises during the term of this Sublease. 8 30. AMERICANS WITH DISABILITIES ACT Sublessor makes no warranties that the building is in compliance with the Americans with Disabilities Act (ADA). 31. ATTORNEYS FEES In the event of any action or proceeding brought by either party against the other under this sublease, the prevailing party shall be entitled to recover for the fees of its attorneys in such action or proceeding, including costs of appeal, if any, in such amount as the court may adjudge reasonable as attorney's fees. 32. NOTICES All notices or other communications hereunder shall be in writing and shall be hand delivered or sent by registered or certified first-class mail, postage prepaid, or by overnight air express service to the following addresses: (i) Sublessor: Attention: Real Estate Department Medtronic Inc. 3850 Victoria Street North Shoreview, MN 55126-2978 (ii) Sublessee: Attention: Mr. Timothy Harkness ---------------------------------- 1311 Orleans Drive ---------------------------------- Sunnyvale, CA 94089 ---------------------------------- 33. BROKERS Sublessor and Sublessee acknowledge that the real estate representatives are CRESA Partners San Jose ("Broker"), acting solely as agent for Sublessee, and CRESA Partners Minneapolis/St. Paul, acting solely as agent for Sublessor. Sublessee shall pay the real estate commission to Broker for this transaction according to a separate agreement between Sublessor and CRESA Partners Minneapolis/St. Paul and shall indemnify and hold Sublessee harmless from any and all claims for brokers' fees or commissions from Broker or CRESA Partners Minneapolis/St. Paul and from any party claiming to be an entitled to brokers' fees or commissions through the actions of Sublessor. 34. MISCELLANEOUS (a) This is a California contract and shall be construed according to the laws of California. (b) The captions in this Sublease are for convenience only and are not a part of this Sublease. (c) If more than one person or entity shall sign this Sublease as Sublessee, the obligations set forth herein shall be deeded joint and several obligations of each such party. (d) Time is of the essence. 9 (f) This Sublease shall be binding upon and inure to the benefit of the parties hereto and, subject to the restrictions and limitations herein contained, their respective heirs, successors and assigns. 35. TERMS OF MASTER LEASE Sublessee agrees to abide by the terms of the Master Lease and to agree to perform all obligations of Sublessor, as set forth herein. Sublessee and Sublessor covenant and agree that they will not do anything or permit anything to be done which would give rise to a breach of the Master Lease. Except as inconsistent with the provisions of this Sublease, the following terms, provisions, covenants, and conditions of the Master Lease are incorporated herein by reference in like manner as through the same were specifically set forth herein: 8. Late Charges, 25. Sale of the Premises, 36. MASTER LEASE Sublessor agrees to maintain the Master Lease in full force and effect, without default, for the entire term of this Sublease, and specifically agrees to pay all Rent due under the Master Lease to the extent that failure to pay the same would adversely affect Sublessee's use or occupancy of the Premises. Sublessor agrees that Sublessee shall be entitled to receive all services and repairs to the Premises to be provided by Lessor to Sublessor as tenant under the Master Lease. To the extent reasonably possible and appropriate, Sublessor agrees to act as a conduit to transmit any instructions or requests by Sublessee to Lessor. 37. LESSOR'S CONSENT The effectiveness of this Sublease is conditioned upon receipt of Lessor's consent to this Sublease pursuant to paragraph 14 of the Master Lease on before September __, 1999. IN WITNESS WHEREOF, this Sublease is executed on the date and year first written above. SUBLESSOR: SUBLESSEE: MEDTRONIC, INC. MOLECULAR DEVICES By: /s/ Donald Hagman By: /s/ Tim Harkness ------------------------------- ------------------------------- Donald Hagman Tim Harkness Its: Director - Real Estate Its: VP Finance & CFO -------------------------- -------------------------- LANDLORD: PRINCIPAL MUTUAL INSURANCE COMPANY By: -------------------------------- Its: --------------------- 10 [FLOOR PLAN] MEDTRONIC ANEURX 1312 CROSSMAN AVE SUNNYVALE, CA 94089 11 LEASE AGREEMENT BASIC LEASE INFORMATION LEASE DATE: February 1, 1996 LESSOR: Principal Mutual Life Insurance Company, an Iowa corporation LESSOR'S ADDRESS: 711 High Street c/o Tarlton Properties Des Moines, IA 50309 300 Second Street #109 Los Altos, CA 94022 LESSEE: Medtronic, Inc., a Minnesota corporation LESSEE'S ADDRESS: 7000 Central Ave. N.E. Minneapolis, MN 55432 LOT: The tax parcel on which the Building is located. PREMISES: Approximately 54,430 square feet as shown on Exhibit A. PREMISES ADDRESS: BUILDING: 1312 Crossman Ave., Sunnyvale, CA TAX PARCEL # 110-36-002-00 TERM: May 1, 1996 ("Commencement Date"), through April 30, 2003 Seven (7) years BASE RENT: Month Rent ----- ---- 01-18 $0.59 NNN per s.f./mo 19-36 $0.80 NNN per s.f./mo 37-60 $0.95 NNN per s.f./mo 61-84 $0.97 NNN per s.f./mo SECURITY DEPOSIT $32,133.00 LESSEE'S SHARE OF OPERATING EXPENSE: 100% percent LESSEE'S SHARE OF TAX EXPENSE: 100% percent LESSEE'S SHARE OF UTILITY EXPENSES: 100% percent PERMITTED USES: Light manufacturing, storage and distribution, offices, marketing of medical devices and other related legal uses. INSURANCE AMOUNT: Bodily injury limit of not less than $1,000,000 per occurrence. Property damage limit of not less than $2,000,000 per occurrence. PARKING SPACES: All spaces available within existing parking lot and legal Parcel EXHIBITS: Exhibit A - Premises Exhibit B - Work Letter Agreement Exhibit B-1 - Work Letter Addendum Exhibit C - Rules and Regulations Exhibit D - Commencement Date Memorandum Exhibit E - Sample From Tenant Estoppel Certificate ADDENDA: Addendum I: Adjustments to Rent 1 12 LEASE AGREEMENT DATE: THIS LEASE IS MADE AND ENTERED INTO AS OF THE LEASE DATE DEFINED ON PAGE 1. THE BASIC LEASE INFORMATION SET FORTH ON PAGE 1 AND THIS LEASE ARE AND SHALL BE CONSTRUED AS A SINGLE INSTRUMENT. 1. PREMISES: Lessor hereby leases to Lessee upon the terms and conditions contained herein the Premises. 2. TERM AND ADJUSTMENT OF COMMENCEMENT DATE: Term of Lease to be seven (7) years from May 1, 1996 through April 30, 2003. If Lessor cannot deliver possession of the Premises on the Commencement Date, Lessor shall not be subject to any liability nor shall the validity of the Lease be affected; provided the Lease term and the obligation to pay Rent shall commence on the date possession is tendered and the termination date shall be extended by a period of time equal to the period computed from the Commencement Date to the date possession is tendered. In the event that Lessor permits Lessee to occupy the Premises prior to the Commencement Date for the purposes of constructing Tenant Improvements, such occupancy shall be subject to all the provisions of this Lease, except rent and non-utility expenses. 3. RENT: Lessee agrees to pay Lessor, without prior notice or demand, the Base Rent described on Page 1, payable in advance at Lessor's address shown on Page 1 on the first day of each month throughout the term of the Lease. In addition to the Rent set forth on Page 1, Rent also includes Lessee's share of Operating Expenses and Tax Expenses and Utilities as specified in Paragraph 6.A., 6.B., and 7. of this Lease, and the term "Rent" whenever used herein refers to all these amounts. 4. SECURITY DEPOSIT: Upon Lessee's execution of this Lease, Lessee shall deposit with Lessor as a Security Deposit for the performance by Lessee of its obligations under this Lease the amount described on Page 1. If Lessee is in default, Lessor may use the Security Deposit, or any portion thereof, to cure the default or to compensate Lessor for all damage sustained by Lessor resulting from Lessee's default. Lessee shall immediately on demand pay to Lessor a sum equal to the portion of the Security Deposit so applied so as to maintain the Security Deposit in the sum initially deposited with Lessor. If after the twelfth (12th) month of the Lease Term, Lessee is not currently in default and Lessee has not been in a monetary default throughout the first 12 months of the lease term, Lessor shall return the Security Deposit to Lessee, less such amounts as are reasonably necessary to remedy Lessee's defaults. Lessor shall not be required to keep the Security Deposit separate from other funds, and, unless otherwise required by law, Lessee shall not be entitled to interest on the Security Deposit. 5. TENANT IMPROVEMENTS: Lessee shall install The Improvements ("Tenant Improvements") on the Premises as described and in accordance with the criteria set forth in Exhibit B, attached and incorporated herein by this reference. 6. EXPENSES: A. OPERATING EXPENSES: In addition to the Rent set forth in Paragraph 3, Lessee shall pay its share, which is defined on Page 1, of all operating expenses. "Operating Expenses" are defined as the total amounts paid or payable by the Lessor in connection with the ownership, maintenance, repair and operation of the Premises, the Building and the Lot, or where applicable, of the Park referred to on Page 1. These Operating Expenses may include, but are not limited to: (a) Lessor's cost of non-structural repairs to and maintenance of the roof and exterior walls of the Building; (b) Lessor's cost of maintaining the outside paved area, landscaping and other common areas for the Park; (c) Lessor's annual cost of all risk and other insurance including earthquake endorsements for the Building and the Lot and rental loss insurance; 2 13 (d) Lessor's cost of modifications to the Building occasioned by any rules, laws or regulations effective subsequent to the commencement of the Lease; (e) Lessor's cost of modifications to the Building occasioned by any rules, laws or regulations arising from Lessee's use of the Premises regardless of when such rules, laws or regulations became effective; (f) Lessor's cost of preventative maintenance contracts including, but not limited to, contracts for elevator systems and heating, ventilation and air conditioning systems, with bi-monthly service; (g) Lessor's cost of security and fire protection services for the Project, if in Lessor's sole discretion such services are provided; and (h) As compensation to Lessor for accounting and management services rendered, an additional amount equal to ten percent (10%) of the sum of (i) the total cost and expenses described in Paragraphs 6.A. above and 6.B. below, and (ii) all common area utility costs for the Project. (i) "Operating Expenses" shall not include: (1) Costs of electrical, heating, cooling and combined utility services to the extent that such services are separately metered to individual tenants and paid by them. (2) Costs of obtaining and enforcing Leases. (3) Costs incurred in connection with the original construction of the Building or in connection with any major change to the Building, such as adding or deleting floors. (4) Costs arising from latent defects in the Base Building, or shell, or core of the Building or improvements installed by Landlord or repair thereof. (5) Expenses directly resulting from the gross negligence of Landlord, its agents, servants or employees or another tenant. B. TAX EXPENSES: In addition to the Rent set forth in Paragraph 3, Lessee shall pay its share, which is defined on Page 1, of all real property taxes applicable to the land and improvements included within the Lot. The term "Tax Expense" includes any form of tax and assessment (general, special, ordinary or extraordinary), commercial rental tax, payments under any improvement bond or bonds, license, rental tax, transaction tax, levy, or penalty imposed by authority having the direct or indirect power of tax (including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement district thereof) as against any legal or equitable interest of Lessor in the Premises, Lot or Park, as against Lessor's right to rent or other income therefrom, or as against Lessor's business of leasing the Premises or the occupancy of Lessee or any other tax, fee, or excise, however described, other than inheritance or estate taxes, including any value added tax, or any tax imposed in substitution, partially or totally, of any tax previously included within the definition of real property taxes, or any additional tax the nature of which was previously included within the definition of real property taxes, or any additional tax the nature of which was previously included within the definition of real property tax. Real Estate Taxes shall not include: (a) Income Taxes; (b) Transfer and franchise taxes; (c) "Other Taxes" imposed directly by Landlord, unless common to NET leases in local market. C. PAYMENT OF EXPENSES: Lessor shall estimate the Operating Expense and Tax Expense for the calendar year in which the Lease commences. Commencing on the Commencement Date, one-twelfth (1/12th) of this estimate shall be paid by Lessee to Lessor on the first day of each month of the remaining months of the calendar year. Thereafter, Lessor may estimate such expenses as of the beginning of each calendar year and require Lessee to pay one-twelfth (1/12th) of such estimated amount as additional Rent hereunder on the first day of each month. Not later than March 31 of the following calendar year, or as soon thereafter as reasonably possible, including the year following the year in which this Lease terminates, Lessor shall endeavor to furnish Lessee with a true and correct accounting of actual Operating Expenses and Tax Expenses, and within thirty (30) days of Lessor's delivery of such accounting, Lessee shall pay to Lessor, the amount of any underpayment. Notwithstanding the foregoing, failure by Lessor to give such accounting by such date shall not constitute a waiver of 3 14 Lessor of its right to collect Lessee's share of any underpayment. Lessor shall credit the amount of any overpayment by Lessee toward the next estimated monthly installment(s) falling due, or where the term of the Lease has expired, refund the amount of overpayment to Lessee. 7. UTILITIES: Lessee shall pay the cost of all water, sewer use and connection fees, gas, heat, electricity, telephone and other utilities billed or metered separately to Lessee. For utility fees or use charges that are not billed separately to Lessee, Lessee shall pay the amount which is attributable to Lessee's use of the Premises. In addition, Lessee shall within fifteen (15) days after receiving a bill from Lessor pay Lessor its share, which is described on Page 1, of any common area utility costs. 8. LATE CHARGES: Lessee acknowledges that late payment by Lessee to Lessor of Rent, Lessee's share of Operating Expenses, Tax Expenses, utility costs or other sums due hereunder, will cause Lessor to incur costs not contemplated by this Lease and the exact amount of such costs are extremely difficult and impracticable to fix. Such costs, include without limitation, processing and accounting charges, and late charges that may be imposed on Lessor by the terms of any note secured by any encumbrance against the Premises. Therefore, if any installment of Rent or other sums due from Lessee is not received by Lessor shall pay to Lessor a sum equal to ten percent (10%) of such overdue amount as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Lessor will incur by reason of late payment by Lessee. Acceptance of any late charge shall not constitute a waiver of Lessee's default with respect to the overdue amount, nor prevent Lessor from exercising any of the other rights and remedies available to Lessor. 9. USE OF PREMISES: The Premises are to be used for the uses stated on Page 1 and for no other purposes without Lessor's prior written consent. Lessee shall not do or permit anything to be done in or about the Premises nor keep or bring anything therein which will in any way increase the existing rate of or affect any policy of fire or other insurance upon the Building or any of its contents,or cause a cancellation of any insurance policy. Lessee shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or other buildings in the Project or injure or annoy other tenants or sue or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Lessee cause, maintain or permit any nuisance in, on or about the Premises. Lessee shall not damage or deface or otherwise commit or suffer to be committed any waste in or upon the Premises. Lessee shall honor the terms of all recorded covenants, conditions and restrictions relating to the property on which the Premises are located. Lessee shall honor the rules and regulations attached to and made a part of this Lease and any other reasonable regulations of the Lessor related to parking and the operation of the Building. 10. ALTERATIONS AND ADDITIONS: Lessee shall not install any signs, fixtures or improvements to the Premises without the prior written consent of Lessor. Lessee shall keep the Premises and the property on which the Premises are situated free from any liens arising out of any work performed, materials furnished or obligations incurred by or on behalf of Lessee. As a condition to Lessor's consent to the installation of any fixtures or improvements, Lessor may require Lessee to post a completion bond for up to 150% of the cost of the work. Upon termination of this Lease, Lessee shall remove any improvements made by Lessee, and repair any damage caused by the installation or removal of such signs, fixtures, furniture, furnishings and improvements and leave Premises in as good condition as they were in at the time of the commencement of this Lease, excepting for reasonable wear and tear. Notwithstanding the provisions of Section 10, Tenant shall not be required to cause any lien or encumbrance to be removed and satisfied provided Tenant shall bond against the same within fifteen (15) days after receipt of written request by Landlord. 11. REPAIRS AND MAINTENANCE: Lessee shall, at Lessee's sole cost and expense, maintain the Premises and adjacent areas in good, clean and safe condition and repair 4 15 to the satisfaction of the Lessor any damage caused by Lessee or its employees, agents, invitees, licensees or contractors. Without limiting the generality of the foregoing, and within the interior of space, Lessee shall be solely responsible for maintaining and repairing all plumbing, electrical wiring and equipment, lighting, and interior walls. Lessor may repair the heating, ventilation and air conditioning systems as deemed necessary by Lessor and Lessee shall pay the cost of such repairs. Except for repairs rendered necessary by the negligence of Lessee, its agents, customers, employees and invitees, Lessor agrees, at Lessor's sole cost and expense, to keep in good repair the structural portions of the roof, foundations and exterior walls of the Premises (exclusive of glass and exterior doors), and underground utility and sewer pipes outside the exterior walls of the Building. Except for normal maintenance and repair of the items outlined above, Lessee shall have no right of access to or install any device on the roof of the Building nor make any penetrations of the roof of the Building without the express prior written consent of Lessor. 12. INSURANCE. Lessee shall at all times during the term of this Lease, and at its sole cost and expense, maintain workers compensation insurance and comprehensive general liability insurance against liability for bodily injury and property damage with liability limits as set forth on Page 1 with such insurance naming Lessor and Owner as an additional insured and including such endorsements as may be required by Lessor. In no event shall the limits of said policy or policies be considered as limiting the liability of Lessee under this Lease. Landlord shall carry insurance against the loss by fire and the hazards covered by All-Risk insurance coverage to 90% of the replacement costs of the building, leasehold improvements, Landlord's personal property and any land improvements. All insurance shall be with companies licensed to do business with the Insurance Commissioner of the State of California. Upon written request, Tenant shall provide to Landlord a statement of insurance. Tenant shall have the right to self-insure (with Landlord's written approval not to be unreasonably withheld) against any and all perils and/or liabilities against which it would otherwise be required to insure. 13. LIMITATION OF LIABILITY AND INDEMNITY: Except for damage resulting from the active negligence or willful misconduct of Lessor or its authorized representatives, Lessor agrees to save and hold harmless and indemnify Lessor from and against all liabilities, charges and expenses (including reasonable attorneys' fees, costs of court and expenses necessary in the prosecution or defense of any litigation) by reason of injury to person or property, from whatever cause, while in or on the Premises, or in any way connected with the Premises or with the improvements or personal property therein, including any liability for injury to person or property of Lessee, its agents or employees or third party persons. Except for damage resulting from the active negligence of Lessor or its authorized representatives, Lessor shall not be liable to Lessee for any damage to Lessee or Lessee's property, for any injury to or less of Lessee's business or for any damage or injury to any person from any cause. 14. ASSIGNMENT AND SUBLEASING: Lessee shall not assign or transfer this Lease nor sublet all or any portion of the Premises without the written consent of Lessor, which shall not be unreasonably withheld. If Lessee seeks to sublet or assign all or any portion of the Premises, a copy of the proposed sublease or assignment agreement and all agreements collateral thereto, shall be delivered to Lessor at least thirty (30) days prior to the commencement of the sublease or assignment (the "Proposed Effective Date"). Each permitted assignee or sublessee shall assume and be deemed to assume this Lease and shall be and remain liable jointly and severally with Lessee for payment of Rent and for the due performance of, and compliance with all the terms, covenants, conditions and agreements herein contained on Lessee's part to be performed or complied with, for the term of this Lease. In the event of any sublease or assignment of all or any portion of the Premises where the Rent reserved in the sublease or 5 16 assignment exceeds the Rent or pro rata portion of the Rent (including all costs associated with such sublease or assignment), as the case may be, for such space reserved in the Lease, Lessee shall pay the Lessor monthly, as additional Rent, at the same time as the monthly installments of Rent hereunder, one-half (1/2) of the excess of the Rent reserved in the sublease over the Rent reserved in this Lease applicable to the sublease space. Notwithstanding the provisions of Section 14, nothing contained herein shall limit Tenant's rights to assign or sublet the Premises to any subsidiary of Tenant's or any subsidiary of such subsidiary without Landlord's consent. 15. Subrogation: Subject to the approval of their respective insurers, Lessor and Lessee hereby mutually waive their respective rights of recovery against each other from any insured loss. Each party shall obtain any special endorsements, if required by their insurer, to evidence compliance with the aforementioned waiver. 16. Ad Valorem Taxes: Lessee shall pay before delinquent all taxes assessed against the personal property of the Lessee and all taxes attributable to any leasehold improvements made by Lessee. 17. Subordination: Lessee shall, upon written request of the Lessor, execute any is instrument necessary or desirable to subordinate this Lease and all of its rights contained hereunder to any and all encumbrances now or hereafter in force against the Lot and the Building. In the event any proceedings are brought for foreclosure or in the event of the exercise of the power of sale under any deed of trust made by Lessor covering the Premises or a deed in lieu of foreclosure thereunder, Lessee shall attorn to the purchaser upon any such foreclosure or sale and recognize as the Lessor under this Lease any such purchaser or such transferee who acquires the Premises by deed in lieu of foreclosure. Landlord shall cause any Mortgagee to agree in writing that so long as Tenant is not then in default under the terms of this Lease, in the event of a foreclosure under any mortgage or deed of trust affecting the Premises, or conveyance by assignment in lieu of foreclosure or by deed in lieu of foreclosure, will not disturb the rights of Tenant under the terms of this Lease. In which event, the Lease shall continue in full force and effect and Tenant shall attorn to the new Landlord hereunder upon the same terms and conditions contained herein. 18. Right of Entry: Lessee grants Lessor or its agents the right to enter the Premises at all reasonable times for purposes of inspection, exhibition, repair and alteration. Lessor shall at all times have and retain a key with which to unlock all the doors in, upon and about the Premises, excluding Lessee's vaults and safes, and Lessor shall have the right to use any and all means Lessor deems necessary to enter the Premises in an emergency. Lessor shall also have the right to place "for rent" and/or "for sale" signs on the outside of the Premises. Lessee hereby waives any claim from damages or for any injury or inconvenience to or interference with Lessee's business, or any other loss occasioned thereby except for any claim for any of the foregoing arising out of the negligent acts or omissions of Lessor or its authorized representatives. 19. Estoppel Certificate: Lessee shall execute and deliver to Lessor, upon not less than fifteen (15) business days prior written notice, a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification) and the date to which the Rent and other charges are paid in advance, if any, and acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder or specifying such defaults as are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Lessee's failure to deliver such statement within such time shall be conclusive upon the Lessee that (1) this Lease is in full force and effect, without modification except as may be represented by Lessor; (2) there are no uncured defaults in the Lessor's performance; and (3) not more than one month's rent has been paid in advance. 20. Lessee's Default: The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Lessee: 6 17 (a) The vacation or abandonment of the Premises by the Lessee, and failing to pay rent. (b) The failure by Lessee to make any payment of Rent or any other payment required hereunder the date said payment is due. (c) The failure of Lessee to observe, perform or comply with any of the conditions or provisions of this Lease for a period, unless otherwise noted herein, of ten (10) days after written notice, or such reasonable time as is reasonably necessary, with Landlord's prior written approval. (d) The Lessee becoming the subject of any bankruptcy (including reorganization or arrangement proceedings pursuant to any bankruptcy act) or insolvency proceeding whether voluntary or involuntary. (e) The Lessee using or storing Hazardous Materials on the Premises other than as permitted by the provisions of Paragraph 29 below. 21. Remedies for Lessee's Default: In the event of Lessee's default or breach of the Lease, Lessor may terminate Lessee's right to possession of the Premises by any lawful means in which case this Lease shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In addition, the Lessor shall have the immediate right of re-entry, and if this right of re-entry is exercised following abandonment of the Premises by Lessee, Lessor may consider any personal property belonging to Lessee and left on the Premises to also have been abandoned, except Medtronic products. If Lessee breaches this Lease and abandons the property before the end of the term, or if Lessee's right to possession is terminated by Lessor because of a breach of the Lease, then in either such case, Lessor may recover from Lessee all damages suffered by Lessor as a result of Lessee's failure to perform its obligations hereunder, including, but not restricted to, the worth at the time of the award (computed in accordance with Paragraph (3) of Subdivision (a) of Section 1951.2 of the California Civil Code) of the amount by which the Rent then unpaid hereunder for the balance of the Lease term exceeds the amount of such loss of Rent for the same period which the Lessee proves could be reasonably avoided by Lessor and in such case, Lessor prior to the award, may relet the Premises for the purpose of mitigating damages suffered by Lessor because of Lessee's failure to perform its obligations hereunder; provided, however, that even though Lessee has abandoned the Premises following such breach, this Lease shall nevertheless continue in full force and effect for as long as the Lessor does not terminate Lessee's right of possession, and until such termination, Lessor may enforce all its rights and remedies under this Lease, including the right to recover the Rent from Lessee as it becomes due hereunder. The "worth at the time of the award" within the meaning of Subparagraphs (a)(1) and (a)(2) of Section 1951.2 of the California Civil Code shall be computed by allowing interest at the rate of ten percent (10%) per annum. Landlord agrees that remedies set forth in Section 21 shall not be exercised in a manner as to result in double recovery of damages incurred. If Landlord elects to relet the Premises for the account of Tenant, Landlord agrees to exert good faith effort to relet the Premises at the then fair market rate and on terms similar to those in effect at the time Tenant's possession terminated. The foregoing remedies are not exclusive; they are cumulative in addition to any remedies now or later allowed by law or to any equitable remedies Lessor may have, and to any remedies Lessor may have under bankruptcy laws or laws affecting creditor's rights generally. The waiver by Lessor of any breach of any term of this Lease shall not be deemed a waiver of such term or of any subsequent breach thereof. 22. Holding Over: If Lessee holds possession of the Premises after the term of this Lease with Lessor's consent, Lessee shall become a tenant from month to month upon the terms specified at a monthly Rent of 125% of the Rent due on the last month of the 7 18 Lease term, payable in advance on or before the first day of each month. All options, if any, granted under the terms of this Lease shall be deemed terminated and be of no effect during said month to month tenancy. Lessee shall continue in possession until such tenancy shall be terminated by either Lessor or Lessee giving written notice of termination to the other party at least thirty (30) days prior to the effective date of termination. 23. Lessor's Default: Lessee agrees to give any holder of a deed of trust encumbering the Premises ("Trust Deed Holders"), by certified mail, a copy of any notice of default served upon the Lessor by Lessee, provided that prior to such notice Lessee has been notified in writing (by way of Notice of Assignment of Rents and Leases, or otherwise) of the address of such Trust Deed Holder. Lessee further agrees that if Lessor shall have failed to cure such default within the time, if any, provided for in this Lease, then the Trust Deed Holders shall have an additional thirty (30) days within which to cure such default or if such default cannot be cured within that time, then such additional time as may be necessary, if within such thirty (30) days, the Trust Deed Holder has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated while such remedies are being so diligently pursued. If default is not cured as herein defined, and such default causes a material business interruption to Lessee, Tenant shall have the right to abate rent until such default is cured. 24. Parking: Lessee shall have the use of the number of undesignated parking spaces set forth on Page 1. Lessor shall exercise its best efforts to insure that such spaces are available to Lessee for its use, but Lessor shall not be required to enforce Lessee's right to use the same. 25. Sale of Premises: In the event of any sale of the Premises by Lessor, Lessor shall be and is hereby released from its obligation to perform under this Lease; and the purchaser, at such sale or any subsequent sale of the Premises shall be deemed, without any further agreement between the parties or their successors in interest or between the parties and any such purchaser, to have assumed and agreed to carry out any and all of the covenants and obligations of the Lessor under this Lease. Nothing herein shall limit Tenant's rights to have a default cured by Landlord or owner(s) in possession at the time the default occurred. 26. Waiver: No delay or omission in the exercise of any right or remedy of Lessor on any default by Lessee shall impair such a right of remedy or be construed as a waiver. The subsequent acceptance of Rent by Lessor after breach by Lessee of any covenant or term of this Lease shall not be deemed a waiver of such breach, other than a waiver of timely payment for the particular Rent payment involved, and shall not prevent Lessor from maintaining an unlawful detainer or other action based on such breach. No payment by Lessee or receipt by Lessor of a lesser amount than the monthly Rent and other sums due hereunder shall be deemed to be other than on account of the earliest Rent or other sums due, nor shall any endorsement or statement on any check or accompanying any check or payment be deemed an accord and satisfaction; and Lessor may accept such check or payment without prejudice to Lessor's right to recover the balance of such Rent or other sum or pursue any other remedy provided in this Lease. 27. Casualty Damage: If the Premises or any part thereof shall be damaged by fire or other casualty, Lessee shall give prompt written notice thereof to Lessor. In case the Building shall be so damaged by fire or other casualty that substantial alteration or reconstruction of the Building shall, in Lessor's sole opinion, be required (whether or not the Premises shall have been damaged by such fire or other casualty), Lessor may, at its option, terminate this Lease by notifying Lessee in writing of such termination within sixty (60) days after the date of such damage, in which event the Rent shall be 8 19 abated as of the date or such damage. If Lessor does not elect to terminate this Lease, Lessor shall within ninety (90) days after the date of such damage commence to repair and restore the Building and shall proceed with reasonable diligence to restore the Building (except that Lessor shall not be responsible for delays outside its control) to substantially the same condition in which it was immediately prior to the happening of the casualty, except that Lessor shall not be required to rebuild, repair or replace any part of Lessee's furniture, furnishings or fixtures and equipment removable by Lessee or any improvements installed by Lessee under the provisions of this Lease. Lessor shall not in any event be required to spend for such work an amount in excess of the insurance proceeds actually received by Lessor as a result of the fire or other casualty. Lessor shall not be liable for any inconvenience or annoyance to Lessee, injury to the business of Lessee, loss of use of any part of the Premises by the Lessee or loss of Lessee's personal property resulting in any way from such damage or the repair thereof, except that, subject to the provisions of the next sentence, Lessor shall allow Lessee a fair diminution of Rent during the time and to the extent the Premises are unfit for occupancy. If the Premises or any other portion of the Building be damaged by fire or other casualty resulting from the fault or negligence of Lessee or any of Lessee's agents, employees, or invitees, the Rent shall not be diminished during the repair of such damage and Lessee shall be liable to Lessor for the cost and expense of the repair and restoration of the Building caused thereby to the extent such cost and expense is not covered by insurance proceeds. In the event of a conflict between a general provision of law and a specific term or condition of this Lease, the specific term or condition of this Lease shall control. 28. CONDEMNATION: If any portion of the Premises, the absence of which would be detrimental to Tenant's business, is taken for any public or quasi-public purpose of any lawful government power or authority or sold to a governmental entity to prevent such taking, the Lessee or the Lessor may terminate this Lease as of the date when physical possession of the Premises is taken by the taking authority. Lessee shall not because of such taking assert any claim against the Lessor or the taking authority for any compensation because of such taking, and Lessor shall be entitled to receive the entire amount of any award without deduction for any estate of interest or interest of Lessee. If a substantial portion of the Building or the Lot is so taken, Lessor at its option may terminate this Lease. If Lessor does not elect to terminate this Lease, Lessor shall, if necessary, promptly proceed to restore the Premises or the Building to substantially its same condition prior to such partial taking, allowing for the reasonable effects of such taking, and a proportionate allowance shall be made to Lessee for the Rent corresponding to the time during which, and to the part of the Premises of which, Lessee is deprived on account of such taking and restoration. Lessor shall not be required to spend funds for restoration in excess of the amount received by Lessor as compensation awarded. 29. HAZARDOUS MATERIALS: Subject to the remaining provisions of this paragraph, Lessee shall be entitled to use and store only those Hazardous Materials (defined below), that are necessary for Lessee's business, provided that such usage and storage is in full compliance with all applicable local, state and federal statutes, orders, ordinances, rules and regulations (as interpreted by judicial and administrative decisions). Lessor shall have the right at all times during the term of this Lease to (i) inspect the Premises, (ii) conduct tests and investigations to determine whether Lessee is in compliance with the provisions of this paragraph, and (iii) request lists of all Hazardous Materials used, stored or located on the Premises; the cost of all such inspections, tests and investigations to be borne by Lessee, if Lessor reasonably believes they are necessary. Lessee shall give to Lessor immediate verbal and follow-up written notice of any spills, releases or discharges of Hazardous Materials on the Premises, or in any common areas or parking lots (if not considered part of the Premises), caused by the acts or omissions of Lessee, or its agents, employees, representatives, invitees, licensees, subtenants, customers or contractors. Lessee covenants to investigate, clean up and otherwise remediate any spill, release or discharge of Hazardous Materials caused by the acts or omissions of Lessee, or its agents, employees, representatives, invitees, licensees, subtenants, customers or contractors at Lessee's cost and expense; such investigation, clean up and remediation to be performed after Lessee has obtained 9 20 Lessor's written consent, which shall not be unreasonably withheld; provided, however, that Lessee shall be entitled to respond immediately to an emergency without first obtaining Lessor's written consent. Lessee shall indemnify, defend and hold Lessor harmless from and against any and all claims, judgments, damages, penalties, fines, liabilities, losses, suits, administrative proceedings and costs (including, but not limited to, attorneys' and consultant fees) arising from or related to the use, presence, transportation, storage, disposal, spill, release or discharge of Hazardous Materials on or about the Premises cause by the acts or omissions of Lessee, its agents, employees, representatives, invitees, licensees, subtenants, customers or contractors. Lessee shall not be entitled to install any tanks under, on or about the Premises for the storage of Hazardous Materials without the express written consent of Lessor, which may be given or withheld in Lessor's sole discretion. As used herein, the term Hazardous Materials shall mean (i) any hazardous or toxic wastes, materials or substances, and other pollutants or contaminants, which are or become regulated by all applicable local, state and federal laws; (ii) petroleum; (iii) asbestos; (iv) polychlorinated biphenyls; and (v) radioactive materials. The provisions of this paragraph shall survive the termination of this Lease. Landlord acknowledges that to the best of his current actual knowledge, without due inquiry, and as disclosed in the Closure Report dated March 1, 2995 by Clayton Environmental Consultants and a Phase One Report Draft dated January 26, 1996 by Dames and Moore and with exception of issues raised in the Asbestos report computed for tenant by tenant's consultant, there is no contamination on the site caused by the use of Hazardous Materials. Subject to Tenant's early occupancy provision in Section 2, and from the date Tenant commences construction of Tenant Improvements, Landlord hereby agrees to defend, indemnify and hold harmless Tenant from and against any loss, claim, liability or damage arising as the result of any prior existence, use, handling, storage, transportation, manufacture, release or disposal of any Hazardous Materials, in, on or under the Property, including costs of experts and attorney's fees and costs directly or indirectly incurred (hereinafter collectively referred to as "Loss"). The foregoing indemnification against Loss includes indemnification against all costs of removal, response and disposal of such Hazardous Materials and shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 30. FINANCIAL STATEMENTS: Within fifteen (15) business days of Lessor's request Lessee shall deliver to Lessor the then current Annual Report and 10K Report of Lessee (including financials for interim periods following the end of the last fiscal year for which such annual statements are available). 31. GENERAL PROVISIONS: (i) TIME. Time is of the essence in this Lease and with respect to each and all of its provisions in which performance is a factor. (ii) SUCCESSORS AND ASSIGNS. The covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties hereto. (iii) RECORDATION. Lessee shall not record this Lease or a short form memorandum hereof without the prior written consent of the Lessor. (iv) LESSOR'S PERSONAL LIABILITY. The liability of Lessor (which, for purposes of this Lease, shall include Lessor and the owner of the Building if other than the Lessor) to Lessee for any default by Lessor under the terms of this Lease shall be limited to the actual interest of Lessor and its present or future partners in the Building and Lessee agrees to look solely to Lessor's or Lessor's present or future partners' actual interest in the Building for the recovery of any judgment against Lessor, it being intended that Lessor shall not be personally liable for any judgment or deficiency. The liability of Lessor under this Lease is limited to its actual period of ownership of title to the Building, and Lessor shall be released from liability upon transfer of title to the Building, 10 21 (v) SEPARABILITY. Any provisions of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provisions hereof and such other provision shall remain in full force and effect. (vi) CHOICE OF LAW. This Lease shall be governed by the laws of the State of California. (vii) ATTORNEYS' FEES. In the event any legal action is brought to enforce or interpret the provisions of this Lease, the prevailing party therein shall be entered to recover all costs and expenses including reasonable attorneys' fees. (viii) This Lease supersedes any prior agreements and contains the entire agreement of the parties on matters covered. No other agreement, statement or promise made by any party that is not in writing and signed by all parties to this Lease shall be binding. (ix) WARRANTY OF AUTHORITY. Each person executing this agreement on behalf of a party represents and warrants that (1) such person is duly and validly authorized to do so on behalf of the entity it purports to so bind, and (2) if such party is a partnership, corporation or trustee, that such partnership, corporation or trustee has full right and authority to enter into this Lease and perform all of its obligations hereunder. (x) NOTICES. All notices and demands required or permitted to be sent to the Lessor or Lessee shall be in writing and shall be sent by United States mail, postage prepaid, certified or by personal delivery or by overnight courier, addressed to Lessor c/o Tarlton Properties Inc., (Property Manager) 300 Second Street, Suite 109, Los Altos, CA 94022, or to Lessee at the Premises, with a copy to: Medtronic, Inc., 7000 Central Ave. N.E., Minneapolis, MN 55432, Attn: Corp. Real Estate, or to such other place as such party may designate in a notice to the other party given as provided herein. Notice shall be deemed given upon the earlier of actual receipt or the third day following deposit in the United States mail. (xi) INTERLINEATION. The use of underlining or strikeouts (strikeouts) within the Lease is for reference purposes only. No other meaning or emphasis is intended by this use, nor should any be inferred. 32. BLANKET ENCUMBRANCE: Lessee is aware of the fact that the Lot may be subject to a deed of trust, mortgage or other lien known as a "Blanket Encumbrance"). According to California law, Lessee could lose its interest through foreclosure of the Blanket Encumbrance or other legal process even though Lessee is not delinquent in Lessee's payments or other obligations under the Lease. 33. QUIET ENJOYMENT: The Landlord agrees that Tenant, upon paying the rentals and other payments herein required from Tenant, and upon Tenant's performance of all of the provisions, covenants and conditions of this Lease on its part to be kept and performed, may quietly have, hold and enjoy the Premises during the term of this Lease. 34. OPTION TO EXTEND: Lessee shall have one (1) three (3) year option to extend said Lease. Lessee shall provide no less than six (6) months and no more than twelve (12) months prior written notice of its intention to extend this Lease. The rent for the option period shall be 100% of the then fair market value, arbitrated if necessary, for comparable facilities and comparable improvements. IN WITNESS WHEREOF, this Lease is executed on the date and year first written above. 11 22 LESSEE: MEDTRONIC, INC., A MINNESOTA CORPORATION By: /s/ [ILLEGIBLE] ------------------------------------ Its: Vice President of Corporate Services LESSOR: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY AN IOWA CORPORATION By: /s/ PAT G. HALTER ------------------------------------ Its: Pat G. Halter Director Commercial Real Estate By: /s/ JOHN N. URBAN ------------------------------------ Its: John N. Urban Assistant Director Commercial Real Estate/Equities 23 EXHIBIT A PREMISES LEGAL DESCRIPTION OF REAL PROPERTY: All that certain real property in the City of Sunnyvale, County of Santa Clara, State of California, described as follows: All of Parcel 4, shown upon that certain Map entitled, "Parcel Map being a resubdivision of Parcel 5 as shown on Map recorded in Book 413 of Maps at Page 53, Santa Clara County Records", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on July 18, 1978 in Book 423 of Maps at Page 13. 13 24 EXHIBIT B WORK LETTER AGREEMENT Lessee and Lessor are executing simultaneously with this Work Letter Agreement, a lease (the "Lease") of even date herewith covering certain Premises described on Page 1 of the Lease. This Work Letter Agreement is incorporated into said Lease as Exhibit "B" thereto. In consideration of the mutual covenants contained in the Lease, Lessee and Lessor hereby agree that the Premises shall be improved as set forth herein. 1. BASE BUILDING: Lessor and Lessee understand and acknowledge that this Work Letter Agreement relates only to the construction of "non-base building" improvements ("Tenant Improvements") for the Premises. 2. PRELIMINARY PLANS AND SPECIFICATIONS: a. PRELIMINARY PLANS: Lessee and Lessor have prepared, using Lessee's architect, a preliminary plan and an outline of specifications ("Preliminary Plans") for the construction of the Tenant Improvements for the Premises. b. PRELIMINARY CONSTRUCTION DRAWINGS: Lessee shall deliver to Lessor, not later than January 30, 1996, a preliminary design for the Premises ("Preliminary Construction Drawings") based upon the Preliminary Plans. c. DESIGN INFORMATION: Lessee shall deliver to Lessor, not later than February 15, 1996, information (the "Design Information") sufficient to permit Lessor to approve the "Plans" described in Paragraph 3 below. Such information to be supplied by Lessee shall include its mark-up of the Preliminary construction Drawings, as well as all necessary design criteria for the construction of the Tenant Improvements, including, without limitation, the following information: a. The locations of doors (including the truck door), partitioning, ceiling layouts, lighting fixtures, electrical outlets and switches, and telephone outlets; b. The location and extent of special floor loading; c. The location and description of plumbing requirements; d. The amount of additional electrical loads and location of areas requiring such additional electrical loads; e. Any structural or architectural installations, including locations for roof-mounted package air-conditioning units; f. The location and dimensions of telephone equipment rooms; and g. Other special requirements. 3. FINAL PLANS: Lessee shall prepare or cause to be prepared final plans and specifications substantially in conformity with the Preliminary Plans and which incorporate the Design Information to be delivered to Lessor pursuant to Paragraph 2(b) above. "Plans" shall hereinafter mean final plans as may be changed from time to time in accordance with Paragraph 6 below. All Plans shall be delivered to Lessor as soon as reasonably possible from the date hereof, subject, however to periods of delay encountered by Lessee in the preparation of Plans resulting from requests by Lessor for changes in the Plans subsequent to the date hereof. Within ten (10) days after delivery of the Plans, Lessor shall set forth in writing with particularity and precision any correction or changes necessary to bring the Plans into substantial conformity with the Preliminary Plans and the Design Information, except that Lessor may not object to any logical development or refinement of the Preliminary Plans and the Design Information. Lessor and Lessee hereby agree to act with diligence to cause the Plans to be approved 14 25 and signed by the parties, in duplicate, by no later than February 28, 1996. Following such approval and execution of the Plans changes may be made only in accordance with Paragraph 8 below. In the event that Lessee fails to approve the Plans pursuant to the provisions of this Paragraph 3 and as a result of such failure this Lease is terminated, unless such failure is due to Lessor's unreasonable interpretation of the Preliminary Plans and Design Information. 4. IMPROVEMENT ALLOWANCE: Lessor hereby agrees to fund an improvement allowance of $9.00/square foot ($489,870.00) as Tenant Improvement Allowance. In addition, Lessor will provide, at its sole cost: i) New roof and roof screen on building, ii) Exterior ADA compliance items, iii) Newly sealed and striped parking lot pavement, iv) A voluntary seismic structural upgrade to building (to the 1991 Uniform Building Code). [Tenant hereby acknowledges that Landlord has satisfactorily completed 4(iii) and 4(iv) above], (v) New factory curb mounted, roof-top, package HVAC units [Tenant shall be responsible for all ducting and distribution of conditioned air] to serve Tenant's approved floor plans for a generic research and development facility [extra costs for HVAC unit/s or capacity to serve Tenant's clean room or other non-generic R&D space will be funded by Tenant]. Tenant shall be responsible for all interior ADA compliance changes. Tenant shall pay to Tarlton Properties, Inc., a fixed Construction Monitoring Fee of $25,000 for Tenant's designing construction work, to insure that Landlord's interests are adequately represented during the design, construction and occupancy. 5. CONSTRUCTION: Upon approval by the parties of the Construction Drawings, Lessee shall use its commercially reasonable best efforts to substantially complete the Improvements on or before the Anticipated Commencement Date set forth in Paragraph 2 of the Lease. Lessor shall not be liable for any direct or indirect damages as a result of delays in construction of the Improvements due to events "force majeure events" which generally affect the progress of construction beyond Lessee's reasonable control, including, but not limited to, fire, earthquake, inclement weather or other acts of God, strikes, boycotts; availability of materials and labor; changes in governmental regulations or requirements; changes in the Plans or Improvement Budget pursuant to Paragraph 6 below; or Lessee Delays defined in Paragraph 4(d) of the Lease. 6. CHANGES IN PLANS: From and after the date on which The Plans have been approved by Lessor and Lessee pursuant to Paragraph 3 above, Lessee shall have the right to request changes in the Plans, provided, however, that; (a) such requests shall not result in any structural or material change in the Tenant Improvements as determined by Lessor; (b) such requests conform to applicable governmental agencies and, if necessary, are approved by the applicable governmental agencies; (c) all additional charges of implementing such changes including, without limitation, architectural fees, increases in construction costs and other related charges shall be included in Lessee's Costs and payable by Lessee in accordance with the provisions of Paragraph 5 above; (d) such requests shall constitute an agreement on the part of Lessee to any delay in completion of the Tenant Improvements caused by reviewing, processing and implementing the changes; and (e) such requests shall constitute "Lessee Delays". Each request for changes in accordance herewith shall be in writing and if approved by Lessor, shall be approved in writing. 7. COMPLETION OF TENANT IMPROVEMENTS: The Premises shall be deemed to be "Ready for Occupancy" when the work of construction of the Tenant Improvements has been substantially completed in accordance with the Plans (subject to the normal so-called "punch list items") as evidenced by the delivery to Lessor and Lessee of a certificate from Lessor's Construction Manager with a copy of a temporary certificate (if legally required as a condition of occupancy) permitting occupancy of the Premises issued by the City of Sunnyvale. Lessee shall diligently complete as soon as reasonably possible any items of work and adjustment not completed when the Premises are Ready for Occupancy. Lessee hereby agrees to indemnify, defend and hold Lessor harmless from and against any liens filed in connection with the construction of the Tenant Improvements. 15 26 8. QUALITY OF CONSTRUCTION: Lessor and Lessee hereby agree that all Tenant Improvements (except HVAC units mounted on roof plus roof screen) shall be constructed by Rudolph & Sletten, Inc. Lessee hereby agrees that the general contractor's construction manager shall have previous experience in similar projects which is reasonably satisfactory to Lessor. Lessee warrants and represents to Lessor that all work shall be done in a good and workmanlike manner and in compliance with all applicable laws and lawful ordinances, by-laws, regulations and orders of governmental authority and the of the insurers of the Building. Lessor makes no representations, warranties or guarantees, expressed or implied, including warranties of merchantability or use of the Premises, except as expressly set forth herein and in the Lease. Upon written request by Lessor in each instance, Lessee shall enforce for the benefit of Lessor all warranties, if any, received by Lessee from Rudolph & Sletten, Inc. or others in connection with the construction of the Tenant Improvements to the extent that said warranties cover any defects in the Improvements which Lessee is required to repair hereunder. 9. CONSTRUCTION REPRESENTATIVE: In connection with the original construction of the Tenant Improvements, each party shall be bound by the acts of its respective Construction Representative appointed by each party upon the execution of this Lease. Lessor's Construction Representative is L. C. (Tig) Tarlton, Jr., or John C. Tarlton and Lessee's Construction Representative is James P. Driessen. A party may designate a substitute Construction Representative by giving written notice to the other party. 10. COURSE OF CONSTRUCTION INSURANCE: Lessee and Lessee's General Contractor shall maintain full course of Construction Insurance, with limits of $5,000,000, with Lessor and Lessor's Agent named as additional insured. 16 27 EXHIBIT B-1 WORK LETTER ADDENDUM: TENANT FINISH WORK: "AS-IS" 1. As the Premises have heretofore been occupied by a prior tenant, then except as set forth in this Exhibit and the Lease, Tenant accepts the Premises in its "as-is" condition on the date that this Lease is entered into, except for any hidden or latent defects. Landlord warrants that, on or before the Commencement Date of this Lease, all building systems, including but not limited to, HVAC, plumbing, roof, electrical, landscaping and parking area (excluding Tenant Work) are in good working order and repair. 2. On or before the date hereof, Tenant shall provide to Landlord for its approval final working drawings, prepared on AutoCAD Release 12, of all improvements that Tenant proposes to install in the Premises; such working drawings shall include the partition layout, ceiling plan, electrical outlets and switches, telephone outlets, drawings for any modifications to the mechanical and plumbing systems of the Building, and detailed plans and specifications for the construction of the improvements called for under this Exhibit in accordance with all applicable governmental laws, codes, rules, and regulations. Further, as Tenant's proposed construction work will affect the Building's HVAC, electrical, mechanical, or plumbing systems, then the working drawings pertaining thereto shall be prepared by a licensed engineer reasonably acceptable to Landlord, whom Tenant shall at its cost engage for such purpose, except for the specification of generic HVAC package units on the roof, which work will be done by Western Allied Air Conditioning Co., Landlord's approval of such working drawings shall not be unreasonably withheld or delayed, provided that (a) they comply with all applicable governmental laws, codes, rules, and regulations, (b) such working drawings are sufficiently detailed to allow construction of the improvements in a good and workmanlike manner, and (c) the improvements depicted thereon conform to the rules and regulations promulgated from time to time by Landlord for the construction of tenant improvements (a copy of which has been delivered to Tenant). As used herein, "Working Drawings" shall mean the final working drawings approved by Landlord, as amended from time to time by any approved changes thereto, and "Work" shall mean all improvements to be constructed in accordance with and as indicated on the Working Drawings. Approval by Landlord of the Working Drawings shall not be a representation or warranty of Landlord that such drawings are adequate for any use, purpose, or condition, or that such drawings comply with any applicable law or code, but shall merely be the consent of Landlord to the performance of the Work. All material changes (defined below) in the Work must receive the prior written approval of Landlord, and in the event of any such approved change Tenant shall, upon completion of the Work, furnish Landlord with (1) an accurate, reproducible "as-built" plan (e.g., sepia) of the improvements as constructed, which plan shall be incorporated into this Lease by reference for all purposes and (2) an accurate "as-built" plan of the improvements as constructed on a computer disk (AutoCAD Release 12). As used herein, a "material change" shall mean any change relating to HVAC, electrical, plumbing or other mechanical systems of the Building; floor and roof loading or the structure of the building; window treatment, signs, graphics and other quality, appearance, or other aesthetic consideration visible outside the Premises. 3. On or before the date hereof, Tenant shall provide to Landlord for its approval all construction documents relating to the Work. If Landlord fails to respond within ten (10) calendar days of Landlord's receipt of such construction documents, Landlord shall be deemed to have granted its approval of such construction documents as submitted. Landlord may reasonably require modifications or clarifications to the construction documents, provided such changes are not related to Tenant's space planning of the Premises or the functional requirements of Tenant's intended use of the Premises. 4. The Work shall be performed only by contractors and subcontractors approved in writing by Landlord, which approval shall not be unreasonably withheld. Prior to the bidding of the Work, Landlord may exclude, using Landlord's reasonable 17 28 discretion, specific subcontractors, and such exclusions shall be included in Tenant's bid documents. For the purposes of this Exhibit, the following contractors are approved by Landlord for the performances of the Work: Rudolph and Sletten, Inc.; Western Allied Air Conditioning; TL Electric; Ramcon Plumbing. All contractors and subcontractors shall be required to procure and maintain insurance against such risks, in such amounts, and with such companies as Landlord may reasonably require. Certificates of such insurance must be received by Landlord before the Work is commenced. The Work shall be performed in a good and workmanlike manner that is free of defects and is in strict conformance with the Working Drawings, and shall be performed in such a manner and at such times as to maintain harmonious rules and regulations of all governmental authorities and the labor relations and not to interfere with the operation of the Building. Tenant may reuse any existing improvements and/or materials located within the Premises at Tenant's discretion. Landlord shall have access at all times to the Building to inspect the Work. Any variance from the construction documents or the rules or regulations of any governmental authority shall be corrected immediately. 5. Tenant shall maintain the exterior of the Building free from clutter and debris at all times during the performance of the Work. Tenant shall immediately clear any clutter or debris from the area surrounding the Building. If such area is not fully clean of debris and clutter within 24 hours of written notification, Landlord may clean such area and invoice Tenant therefor, which invoice shall be payable by Tenant within ten days. 6. Upon substantial completion of the Work, Tenant and Landlord's agent shall conduct a walk-through inspection of the Building and create a mutually agreed upon "punchlist" setting forth any remaining construction items to be completed. If any discrepancies or disputes exist or arise between Tenant and Landlord's agent regarding the punchlist items, DES Architects and Engineers of Redwood City, CA is hereby appointed by Landlord and Tenant as arbitrator of any such dispute. All fees and expenses of DES shall be divided evenly between Landlord and Tenant and DES's decision shall be final. 7. Tenant shall bear the entire cost of performing the Work (including, without limitation, design of the Work and preparation of the Working Drawings, costs of preparation of all construction documentation, Costs of construction labor and materials, electrical and gas usage during Construction, additional janitorial services, general tenant signage, related taxes and insurance costs, all of which costs are herein collectively called the "Total Construction Costs"). Tenant shall cause the Work in the Premises to be promptly completed by the approved contractors. 8. Landlord shall have no liability or responsibility (and Tenant releases Landlord from any and all liability or responsibility) for deficiencies in the Work and/or performance of any equipment, including, without limitation, any problems arising from existing conditions in the Building and any conditions arising from the existing condition of the Premises (other than any hidden or latent defects in the Premises existing as of the date hereof) or from the use of new and recycled materials or equipment in Premises. 9. To the extent not inconsistent with this Exhibit B-1, Exhibit B of this Lease shall govern the performance of the Work and Landlord's and Tenant's respective rights and obligations regarding the improvements installed pursuant thereto. 18 29 EXHIBIT C RULES & REGULATIONS PAGE 1 OF 1 LEASE DATED FEBRUARY 1, 1996 MEDTRONIC, INC. ("LESSEE") AND PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, AND IOWA CORPORATION ("LESSOR") 1. No advertisement, picture or sign of any sort shall be displayed on or outside the Premises without the prior written consent of Lessor. Lessor shall have the right to remove any such unapproved item without notice and at Lessee's expense. 2. Lessee shall not regularly park motor vehicles in designated parking areas after the conclusion of normal daily business activity. 3. Lessee shall not use any method of heating or air conditioning other than that supplied by Lessor without the consent of Lessor. 4. All window covering installed by Lessee and visible from the outside of the building require the prior written approval of Lessor. 5. Lessee shall not use, keep or permit to be used or kept any foul or noxious gas or substance or any flammable or combustible materials on or around the Premises. 6. Lessee shall not alter any lock or install new locks or bolts on any door at the Premises without the prior consent of Lessor. 7. Lessee agrees not to make any duplicate keys without the prior consent of Lessor. 8. Lessee shall park motor vehicles in those general parking areas as designated by lessor except for loading and unloading. During those periods of loading and unloading, Lessee shall not unreasonably interfere with traffic flow within the Project and loading and unloading areas of other Lessees. 9. Lessee shall not disturb, solicit or canvas any occupant of the Building or Project and shall cooperator to prevent same. 10. No person shall go on the roof without Lessor's permission. 11. Business machines and mechanical equipment belonging to Lessee which cause noise or vibration that may be transmitted to the structure of the Building, to such a degree as to be objectionable to Lessor or other Lessee, shall be placed and maintained by Lessee, at Lessee's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. 12. All goods, including material used to store goods, delivered to the Premises of Lessee shall be immediately moved into the Premises and shall not be left in parking or receiving areas overnight. 13. Tractor trailers which must be unhooked or parked with dolly wheels beyond the concrete loading areas must use steel plates or wood blocks under the dolly wheels to prevent damage to the asphalt paving surfaces. No parking or storing of such 19 30 trailers will be permitted in the auto parking areas of the Project or on streets adjacent thereto. 14. Forklifts which operate on asphalt paving areas shall not have solid rubber tires and shall only use tires that do not damage the asphalt. 15. Lessee is responsible for the storage and removal of all trash and surface. All such trash and refuse shall be contained in suitable receptacles stored behind screened enclosures at locations approved by Lessor. 16. Lessee shall not store or permit the storage or placement of goods or merchandise in or around the common areas surrounding the Premises. No displays or sales or merchandise shall be allowed in the parking lots or other common areas. 20 31 ADDENDUM 1 ADJUSTMENTS TO RENT PAGE 1 OF 1 LEASE DATED FEBRUARY 1, 1996 MEDTRONIC, INC. ("LESSEE") AND PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, AN IOWA CORPORATION ("LESSOR") 1. Lessor and Lessee agree that the Base Rent referenced on Page 1 and on Page 2, Paragraph 3 of the lease shall be as follows: MONTH RENT/S.F./MONTH, NET RENT/MONTH 21 32 EXHIBIT D COMMENCEMENT DATE MEMORANDUM LESSOR: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, AN IOWA CORPORATION LESSEE: MEDTRONIC, INC., A MINNESOTA CORPORATION LEASE DATE: February 1, 1996 PREMISES: 1312 Crossman Ave., Sunnyvale, CA Pursuant to Paragraph 2, of the above referenced Lease, the Commencement Date is hereby established as May 1, 1996. LESSOR Dated: 7/10, 1996 PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, AN IOWA CORPORATION By: /s/ Timothy E. Minton ------------------------------------ Its: Director Commercial Real Estate Reporting and Computer Services ----------------------------------- By: /s/ Kurt D. Schaeffer ------------------------------------ Its: Assistant Director Commercial Real Estate ----------------------------------- LESSEE MEDTRONIC, INC., A MINNESOTA CORPORATION Dated 6-26, 1996 By: /s/ [signature illegible] ------------------------------------ Its: V.P. of Corporate Services ----------------------------------- By: /s/ [signature illegible] ------------------------------------ Its: Real Estate Specialist ----------------------------------- 22 33 EXHIBIT E SAMPLE FORM OF TENANT ESTOPPEL CERTIFICATE The undersigned, __________________ ("Lessor"), with a mailing address c/o _______________________________________, and ______________________________ {"Tenant"), hereby certify to __________________________________________, a _________________________________as follows: 1. Attached hereto is a true, correct and complete copy of that certain lease dated ________, 199_ between Lessor and Lessee (the "Lease"), which demises premises located at ________________________________________________. The Lease is now in full force and effect and has not been amended, modified or supplemented, except as set forth in paragraph 4 below. 2. The term of the Lease commenced on _______________, 199__. 3. The term of the Lease shall expire on __________________, 199__. 4. The Lease has: (Initial one) ( ) not been amended, modified, supplemented, extended, renewed or assigned. ( ) been amended, modified, supplemented, extended, renewed or assigned by the following described agreements, copies of which are attached hereto: ____ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ 5. Lessee has accepted and is now in possession of said premises. 6. Lessee and Lessor acknowledge that the Lease will be assigned to ________________________________ and that no modification, adjustment, revision of cancellation of the Lease or amendments thereto shall be effective unless written consent of ______________________ is obtained, and that until further notice, payments under the Lease may continue as heretofore. 7. The amount of fixed monthly rent is $_______________________. 8. The amount of security deposits (if any) is $ ________________. No other security deposits have been made. 9. Lessee is paying the full lease rental, which have been paid in full as of the date hereof. No rent under the Lease has been paid for more than thirty (30) days in advance of its due date. 10. All work required to be performed by Lessor under the lease has been completed. 11. There are no defaults on the part of the Lessor or Lessee under the Lease. 12. Lessee has no defense as to its obligations under the Lease and claims no set-off of counterclaim against Lessor. 13. Lessee has no right to any concession (rental or otherwise) or similar compensation in connection with renting the space it occupies, except as provided in the Lease. All provisions of the Lease and the amendments thereto (if any) referred to above are hereby ratified. The foregoing certification is made with the knowledge that ____________________ is about to fund a loan to Lessor, and that ____________________ is relying upon the representations herein made in funding such loan. 23 34 LESSOR Dated: ______________, 1996 PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, AN IOWA CORPORATION By: ------------------------------------- Its: ------------------------------------- By: ------------------------------------- Its: ------------------------------------- LESSEE Dated: ______________, 1996 MEDTRONIC, INC., A MINNESOTA CORPORATION By: ------------------------------------- Its: ------------------------------------- By: ------------------------------------- Its: ------------------------------------- 24 EX-21.1 4 f70069ex21-1.txt EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT 1. Molecular Devices GmbH, a corporation organized under the Laws of Germany.* 2. Molecular Devices Ltd., a corporation organized under the Laws of England and Wales.* 3. Molecular Devices Skatron, a corporation organized under the Laws of Norway.* 4. Nihon Molecular Devices, a corporation organized under the Laws of Japan.* 5. LJL BioSystems, a corporation organized under the Laws of Delaware.* 6. LJL BioSystems, Ltd., a corporation organized under the Laws of England and Wales.* EX-23.1 5 f70069ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statements (Forms S-8 Numbers 333-86155, 333-86159 and 333-45288) pertaining to the LJL BioSystems, Inc. 1994 Equity Incentive Plan, the LJL BioSystems, Inc. 1997 Stock Plan, the LJL BioSystems, Inc. 1998 Directors' Stock Option Plan, the 1995 Stock Option Plan, the 1995 Non-Employee Directors' Stock Option Plan, and the 1995 Employee Stock Purchase Plan of Molecular Devices Corporation of our report dated January 23, 2001, with respect to the consolidated financial statements and schedule of Molecular Devices Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 2000. /s/ Ernst & Young LLP Palo Alto, California March 27, 2001 EX-23.2 6 f70069ex23-2.txt EXHIBIT 23.2 1 EXHIBIT 23.2 CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Numbers 333-45288, 333-86155 and 333-86159) pertaining to the LJL BioSystems, Inc. 1994 Equity Incentive Plan, the LJL BioSystems, Inc. 1997 Stock Plan, the LJL BioSystems, Inc. 1998 Directors' Stock Option Plan, the 1995 Stock Option Plan, the 1995 Non-Employee Directors' Stock Option Plan, the 1995 Employee Stock Purchase Plan, the 1994 Equity Incentive Plan, the 1997 Stock Plan and the 1998 Directors' Stock Option Plan of Molecular Devices Corporation of our report dated January 25, 2000, except as to Note 11, which is as of February 2, 2000, relating to the consolidated financial statements and schedule of LJL BioSystems, Inc. and its subsidiary at December 31, 1999 and for each of the two years in the period ended December 31, 1999, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP San Jose, California March 27, 2001 -----END PRIVACY-ENHANCED MESSAGE-----