-----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, Ef2HDr+HOMNJaClKvfovPibrUo2i3JCtA4G04NGozzIJrT+DCkzVSaxFOcyqnmfu vON+RZ6hwP19WCyIkevmcw== 0000950147-97-000197.txt : 19970401 0000950147-97-000197.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950147-97-000197 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORTHOLOGIC CORP CENTRAL INDEX KEY: 0000887151 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 860585310 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21214 FILM NUMBER: 97570627 BUSINESS ADDRESS: STREET 1: 2850 S 36TH ST #16 CITY: PHOENIX STATE: AZ ZIP: 85034 BUSINESS PHONE: 6024375520 MAIL ADDRESS: STREET 1: 2850 S 36TH ST STREET 2: SUITE 16 CITY: PHOENIX STATE: AZ ZIP: 85034 10-K 1 ANNUAL REPORT U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 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, 1996 |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _________________ Commission file number: 0-21214 ORTHOLOGIC CORP. (Exact name of registrant as specified in its charter) Delaware 86-0585310 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2850 South 36th Street, Suite 16, Phoenix, Arizona 85034 (Address of principal executive offices) Issuer's telephone number: (602) 437-5520 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which registered: None N/A - -------------------- ------------------------------------------ Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.0005 per share; Rights to purchase 1/100 of a share of Series A Preferred Stock --------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), 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, based upon the closing bid price of the registrant's Common Stock as reported on the Nasdaq National Market on February 21, 1997 was approximately $146,117,400. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive. The number of outstanding shares of the registrant's Common Stock on February 21, 1997 was 25,031,846. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1996 are incorporated by reference in Part II hereof and portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 1997 are incorporated by reference in Part III hereof. ORTHOLOGIC CORP. FORM 10-K ANNUAL REPORT YEAR ENDED DECEMBER 31, 1996 TABLE OF CONTENTS PART I Item 1. Business..................................................................................... 1 Item 2. Properties................................................................................... 11 Item 3. Legal Proceedings............................................................................ 11 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 13 Executive Officers of the Registrant.................................................................. 13 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters..................... 15 Item 6. Selected Financial Data...................................................................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 15 Item 8. Financial Statements and Supplementary Data.................................................. 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 21 PART III Item 10. Directors and Executive Officers of the Registrant........................................... 22 Item 11. Executive Compensation....................................................................... 22 Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 22 Item 13. Certain Relationships and Related Transactions............................................... 22 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 22 SIGNATURES............................................................................................S-1
PART I ------ Item 1. Business General The Company was incorporated as a Delaware corporation in July 1987 as IatroMed, Inc. and changed its name to OrthoLogic Corp. in July 1991. Unless the context otherwise requires, the "Company" or "OrthoLogic" as used herein refers to Orthologic Corp. and its subsidiaries. The Company's executive offices are located at 2850 South 36th Street, Phoenix, Arizona 85034, and its telephone number is (602) 437-5520. OrthoLogic develops, manufactures and markets proprietary, technologically advanced orthopaedic devices for the orthopaedic healthcare market including bone growth stimulation, Continuous Passive Motion ("CPM") devices and ancillary orthopaedic recovery products. OrthoLogic's devices and other rehabilitation products are designed to enhance the healing of diseased, damaged, degenerated or recently repaired musculoskeletal tissue. The Company's products focus on improving the clinical outcomes and cost-effectiveness of orthopaedic procedures that are characterized by compromised healing, high-cost, potential for complication and long recuperation time. The Company entered the CPM business with its acquisition of Sutter Corporation ("Sutter") in August 1996. Sutter manufactures and markets CPM devices. Sutter also offers ancillary orthopaedic products such as bracing and cryotherapy through its CarePlan. CarePlan is a product and service concept that enables a sales representative to offer surgeons a range of ancillary orthopaedic products. The Company has included Sutter's operations in its consolidated financial statements since August 30, 1996. The Company continued to develop its CPM business when its newly formed subsidiary, Toronto Medical Orthopaedics Ltd., a Canada corporation, acquired substantially all of the assets and business of Toronto Medical Corp, an Ontario corporation, and its United States subsidiaries in March 1997. The Company also acquired Danninger Medical Technology, Inc.'s CPM product line in March 1997. OrthoLogic periodically discusses with third parties the possible acquisition of technology, product lines and businesses in the orthopaedic healthcare market and from time to time enters into letters of intent that provide OrthoLogic with an exclusivity period during which it considers possible acquisitions. Products OrthoLogic's primary products include bone growth stimulation and fracture fixation devices ("Fracture Healing Products") and CPM devices and related products ("Orthopaedic Rehabilitation Products"). These products are sold primarily through the Company's direct sales force. For 1996, 1995 and 1994, revenues from Fracture Healing Products and Orthopaedic Rehabilitation Products as a percentage of total revenues were as follows: Percentage of Total Net Revenues, Year Ended December 31, -------------------------------- 1996 1995 1994 ---- ---- ---- Fracture Healing Products 68% 100% 100% Orthopaedic Rehabilitation Products 32% -0- -0- Fracture Healing OrthoLogic(R) 1000. OrthoLogic's bone growth stimulation product is the OrthoLogic 1000. Prescribed by a physician, the OrthoLogic 1000 is a portable, noninvasive magnetic field bone growth stimulator designed for home treatment of patients who have a non-healing fracture. The OrthoLogic 1000 comprises two magnetic field treatment transducers (coils) and a microprocessor-controlled signal generator that delivers highly specific, low energy combined static and alternating magnetic fields. In 1989, the Company received U.S. Food and Drug Administration ("FDA") clearance of an Investigational Device Exemption ("IDE") to conduct a clinical trial of the OrthoLogic 1000 for the treatment of patients with a specific variety of non-healing fracture called a nonunion fracture of certain long bones. A nonunion fracture was defined for the purposes of this study as a fracture that remains unhealed for at least nine months post- injury. The patients enrolled in the Company's clinical trial had very severe nonunion fractures; the average fracture remained non-healing for 2.4 years post-injury and had an average of 2.5 unsuccessful surgical procedures performed prior to enrollment. Based on the data submitted to the FDA in the Company's Pre-Market Approval ("PMA") application, 60.7% of these non-healing fractures healed. In March 1994, the FDA granted the Company PMA approval to market this product for treatment of nonunion fractures of certain long bones. As a condition of the March 1994 PMA approval for the OrthoLogic 1000, the FDA required the Company to maintain a registry of all patients using the device. Based on an initial review of the approximately 400 patients who had nonunion fractures (as defined above) and then completed treatment at the time the Company submitted registry data in July 1996, approximately 72% of the patients have healed. In 1990, the Company received supplemental IDE clearance to conduct human clinical trials of the OrthoLogic 1000 on patients with another type of non-healing fracture called a delayed union fracture. For purposes of this study, a delayed union fracture was defined as a non-healing fracture five to nine months post-injury. This clinical trial was designed as a double-blind, placebo-controlled, randomized study. An analysis of the data has been completed by the Company, and this analysis indicates the benefit of the OrthoLogic 1000 in the treatment of delayed union fractures. However, the Company believes that a larger number of patients is necessary to establish statistical significance. Although the data on the active OrthoLogic 1000 units showed a positive effect, the healing rate in the placebo group was greater than originally anticipated. The Company recently combined the existing data from the study with delayed union data collected in the Company's Post Marketing Clinical Registry. This combined data set has been analyzed and submitted to the FDA to support the Company's request to expand the non-union definition to include patients five months post-injury. There can be no assurance that this data will result in regulatory approval. SpinaLogic(R) 1000. The SpinaLogic 1000 is a portable, noninvasive magnetic field bone growth stimulator being developed to enhance the healing process as either an adjunct to spinal fusion surgery or as treatment for a failed spinal fusion surgery. The Company believes that the SpinaLogic 1000 offers benefits similar to those of the OrthoLogic 1000 in that it is relatively easy to use, requires a small power supply and requires only 30 minutes of treatment per day. The SpinaLogic 1000 consists of one magnetic field treatment transducer and a microprocessor-controlled signal generator, both of which are positioned near the spine through use of an adjustable belt which the patient places around the torso. The Company received approval of an IDE from the FDA in August 1992 and commenced clinical trials for the SpinaLogic 1000 as an adjunct to spinal fusion surgery in February 1993. The Company received approval of an IDE supplement from the FDA in September of 1995 to conduct a clinical trial of the SpinaLogic 1000 as a noninvasive treatment for a failed spinal fusion surgery. The Company commenced this on-going clinical trial in the fourth quarter of 1995. The Company has not yet applied for FDA approval to market the SpinaLogic 1000, and there can be no assurance that the Company will receive such approval if sought. BioLogic(R) Magnetic Field Technology. The natural process of musculoskeletal tissue healing involves a complex interaction of several physiological processes, which include the stimulation of specific cells such as osteoblasts, fibroblasts and endothelial cells. When an injury occurs, growth factors are produced at the healing site which stimulate selected cells to initiate the healing cascade. In most cases, these cells are able to initiate repair in response to an injury and restore the musculoskeletal tissue to its original strength and structure. Cell stimulation is a necessary component of tissue regeneration and is dependent upon certain triggering events that activate the production of connective tissue. The BioLogic technology is a second generation magnetic field technology licensed to the Company and used in the OrthoLogic 1000 and SpinaLogic 1000. The technology utilizes a specific combination of a low energy static magnetic field with a low-energy alternating magnetic field, which the Company believes increases cell stimulation. The technologies employed in first generation electromagnetic bone growth stimulators produce only an alternating magnetic field. The Company believes the use of combined static and alternating magnetic fields in its BioLogic technology increases the potency of the treatment and therefore reduces the required daily treatment time. The BioLogic technology is also a low-energy technology. The strength of the BioLogic magnetic fields are in the range of the earth's magnetic field. By comparison, the strength of the magnetic fields produced by competitive technologies is many times greater than that of the earth's magnetic field. In addition to the OrthoLogic 1000 and the SpinaLogic 1000, the Company is also engaged in research of additional applications of the proprietary BioLogic technology, including cartilage regeneration and osteoporosis treatment. 2 Fracture Fixation. The Company's fracture fixation products consist of the OrthoFrame(R) External Fixator, the OrthoFrame/Mayo Wrist Fixator and the OrthoNail(TM), an intramedullary rod for humeral and tibial fractures. OrthoFrame products are external fixation devices constructed of non-metallic carbon fiber-epoxy composite material. The OrthoFrame offers a versatile design which can be utilized for immobilization of a wide array of fracture types, including tibia, femur, ankle, elbow and pelvic fractures. The OrthoFrame/Mayo Wrist Fixator is a specialized device developed in cooperation with the Orthopaedic Department of the Mayo Clinic, Rochester, Minnesota, for the treatment of complex wrist (Colles) fractures. The Orthopaedic Department of the Mayo Clinic has agreed to provide ongoing clinical input on future design enhancements for the OrthoFrame/Mayo Wrist Fixator. Both products utilize non-metallic carbon fiber-epoxy materials to reduce device weight and are radiolucent (i.e., eliminate the blocking of x-rays caused by metallic devices). The Company believes that the patented fracture alignment mechanism of the OrthoFrame products allows for simpler application, and the radiolucency and light weight composite materials of the OrthoFrame products provide benefits to both surgeon and patient. OrthoFrame products are shipped pre-assembled in sterile packaging to increase ease-of-use for the surgeon and to reduce handling and inventory expenses for the hospital. The OrthoNail is an internal fixation device used to treat fractures of the humerus and tibia. The Company received 510(k) marketing clearance from the FDA in September 1995 and commenced selling the product for humerus fractures in December 1995. In March 1996, the Company received 510(k) marketing clearance from the FDA for the version of the OrthoNail to be used in connection with fractures of the tibia. The Company does not actively market the OrthoNail. Orthopaedic Rehabilitation Continuous Passive Motion. The Company began manufacturing and leasing CPM products upon its acquisition of Sutter in August 1996. CPM devices provide controlled, continuous movement of joints and limbs without requiring the patient to exert muscular effort and are intended to be applied immediately following trauma or surgery to repair or replace joints. The products are designed to reduce pain and swelling, accelerate recovery of joint movement, reduce the length of a hospital stay, and reduce the incidence of complications. The major market for CPM devices is for use immediately following knee and hip joint replacement surgeries. CPM devices are used primarily by post-surgery orthopaedic patients in hospitals and in their homes. CPM devices are also used in nursing homes, sports medicine clinics and private practice physical therapy clinics. The Company's Sutter Legasus Sport CPM(R) and SportLite(R)PB are designed for knee rehabilitation. The Legasus Sport CPM(R) facilitates full extension after knee surgery and has an optional patella mobilizer to prevent scarring. The SportLite(R)PB is an adjustable post-operative knee brace. The Company also offers a LiteLift(R) CPM specifically designed for hospital use. The Company's other CPM products include the WaveFlex(TM)C.F.T. hand CPM device for post-surgical hand rehabilitation and the CPM 9000AT(TM) for ankle rehabilitation. Sutter recently began marketing its Sutter CarePlan(TM) and Sutter CarePlan(TM)II to offer physicians a single source for products required for a patient's rehabilitation and to allow physicians to customize procedures and streamline rehabilitation protocols. The Sutter CarePlan(TM) and Sutter CarePlan(TM)II include the Company's Sutter products as well as products that Sutter purchases from third party suppliers. While the majority of Sutter's products are designed for the lower extremity, the Company's other CPM products acquired in 1997 include a wide range of CPM devices for most human joints on which CPM is used. Ancillary Orthopaedic Products. The Company offers a line of both postoperative and functional braces and ancillary orthopaedic products such as cryotherapy through its CarePlan. Postoperative braces are used in the period immediately following surgery to provide stability, within a controlled range of motion, to the operative site. Functional braces are used in the long-term rehabilitation phase after a patient begins to participate in sporting activities and can be used for a year or longer after surgery/injury. Cryotherapy is a treatment modality that cools the operative site to reduce pain and swelling. There are several types of cryotherapy devices, ranging from ice packs to clinical units. In 1996, Sutter introduced a new cryotherapy device called the Blue Arctic. The device provides temperature-controlled cold therapy using a reservoir of ice water and a pump that circulates the water through a pad placed over the injury/surgical site. 3 Other Product Development OrthoSound(TM). The Company currently is conducting preclinical and a pilot clinical trial relating to the design, development and testing of diagnostic and therapeutic devices utilizing its nonthermal ultrasound technology ("OrthoSound") for use in medical applications that relate to bone, cartilage, ligament or tendon diagnostics and healing. In the area of diagnostics, the OrthoSound research projects address the potential use of ultrasound for the assessment of bone strength and fracture risk in osteoporotic patients and the assessment of fracture healing. In therapeutic applications, the focus of the OrthoSound research is on the potential use of ultrasound for the treatment of at-risk fractures to increase the healing rate and reduce the need for subsequent surgical procedures. The Company has not yet applied for FDA approval to market the OrthoSound, and there can be no assurance that the Company will do so or that it would receive such approval if sought. Marketing and Sales Fracture Healing Products are prescribed by orthopaedic surgeons and podiatrists practicing in private practices, hospitals and orthopaedic and podiatric treatment centers. The Company is focusing its marketing and sales efforts on these groups, with particular emphasis on those clinicians who treat bone healing problems. CPM products are prescribed by orthopaedic surgeons, hospitals, orthopaedic trauma centers and allied health professionals. CPM devices are leased to the patient, typically for a period of one to three weeks. Additionally, the Company utilizes physician-to-physician selling via presentations and scientific and clinical articles published in medical journals. As a result of the Company's transition during 1996 to an internal salesforce, the Company's sales and marketing efforts now are primarily conducted directly through the Company's own sales people. The Company also has retained selling agreements with two orthopaedic specialty dealers. Of the Company's approximately 500 employees at December 31, 1996, approximately 290 are involved in sales and marketing. The Company employs 19 area vice presidents to manage regional sales, each of whom has responsibility for the Company's direct sales and marketing efforts and the activities of the Company's specialty dealers in a designated geographic area. See "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations -- Dependence on Sales force." Through the efforts of the Company's specialized direct sales force servicing third party payors, the Company has contracted with over 320 third party payors, including various Blue Cross/Blue Shield organizations, and the Department of Veteran Affairs. In addition, the Company is an approved Medicare provider and is also an approved Medicaid provider for a majority of states. OrthoFrame and OrthoFrame/Mayo products are sold internationally through distributors located in European and South American countries. Currently, the OrthoLogic 1000 is not marketed internationally. However, the Company has entered into a cooperative business development arrangement with Tokyo-based Mitsubishi Chemical Corporation to collaborate in seeking approval from Japan's Ministry of Health and Welfare for reimbursement and the use of the OrthoLogic 1000 by Japanese national insurance. The Company's March 1997 Toronto acquisition may also increase the Company's access to international markets. Historically, the Company's export sales as a percentage of net sales have been less than 1%. The Company believes that this percentage may increase due to its recent acquisitions of businesses with more significant international sales. See "Item 1 -- Business -- General." While OrthoLogic has not experienced seasonality of revenues for its fracture healing products, the Company believes that revenues of its newly acquired CPM Products may be seasonal. CPM devices are used as adjuncts to surgery and historically the strongest quarter tends to be the fourth quarter of the calendar year. The Company believes this trend may be because (i) individuals tend to put off elective surgical intervention until later in the year when their insurance deductibles have been met, and (ii) sports-related injuries tend to increase in the fall and winter months. OrthoLogic recently entered the CPM business, and it is possible that the Company's future results may be subject to more seasonality. 4 Research and Development The Company's research and development staff presently includes 18 individuals, of whom four hold doctoral (Ph.D. or D.V.M.) degrees. Individuals within the research and development organization have extensive experience in the areas of biomaterials, bioengineering, animal modeling and cell biology. Research and development efforts emphasize product engineering, activities related to the clinical trials conducted by the Company and basic research. With regard to basic research, the research and development staff conducts in-house research projects in the area of fracture healing. The staff also supports and monitors external research projects in biophysical stimulation of growth factors and the potential use of ultrasound technology in diagnostic and therapeutic applications relating to bone, cartilage, ligament or tendon. Both the in-house and external research and development projects also provide technical marketing support for the Company's products and explore the development of new products and also additional therapeutic applications for existing products. Product engineering activities are primarily related to improvements in the CPM devices. The Company also has a clinical regulatory group that initiates and monitors clinical trials at approximately 30 clinical centers in the United States. The Company's research and development expenditures totaled $2.8 million, $2.1 million and $2.2 million in the years ended December 31, 1994, 1995 and 1996, respectively. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations." Manufacturing The Company assembles the OrthoLogic 1000 from parts supplied by third parties, performs tests on both the components and assembled product and calibrates the assembled product to specifications. The Company currently purchases the microprocessor used in the OrthoLogic 1000 from a sole source supplier. The OrthoLogic 1000 is not dependent on this microprocessor and the Company believes that it could be redesigned to incorporate another microprocessor. At any point in time, the Company maintains a supply of the microprocessor on hand to meet its sales forecast for at least one year. In addition, the magnetic field sensor employed in the OrthoLogic 1000 is available from two sources. Establishment of additional or replacement suppliers for these components cannot be accomplished quickly. Other components and materials used in the manufacture and assembly of the OrthoLogic 1000 are available from multiple sources. The Company assembles the OrthoFrame and OrthoNail products from parts supplied by third parties. These products are packaged and sterilized by outside sources and shipped by the Company from its facilities. The composite material components of the OrthoFrame products are currently sourced from two vendors. Establishment of additional or replacement suppliers for these components cannot be accomplished quickly. The Company maintains a supply of these components on hand to meet its sales forecast for at least six months. Other components and materials used in the manufacture and assembly of the OrthoFrame products are readily available from multiple sources. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Dependence on Key Suppliers." The Company assembles CPM devices from parts supplied by third parties. These parts are assembled, calibrated and tested at the Company's facilities. The Company purchases several CPM components, including microprocessors, motors and custom key panels, from sole-source suppliers. The Company believes that these products are not dependent on those components and could be redesigned to incorporate comparable components. The Company places orders for these components to meet its sales forecast for the current year. Other components and materials used in the manufacture and assembly of CPM products are available from multiple sources. The Company purchases its other Orthopaedic Rehabilitation Products fully assembled from third-party suppliers. These products are available from multiple sources. Competition The orthopaedic industry is characterized by rapidly evolving technology and intense competition. With respect to the treatment of bone fractures, the Company believes that patients with non-healing fractures are 5 primarily treated with surgery, and this represents its primary competition although other manufacturers of noninvasive bone growth stimulators also represent competition for the OrthoLogic 1000. The Company's main competitors for these products are Electro-Biology, Inc. ("EBI"), a subsidiary of Biomet, Inc., OrthoFix International N.V. ("OrthoFix") and Biolectron Inc. Exogen, Inc. markets a nonthermal ultrasound device for the acceleration of the time to a healed fracture for closed, cast immobilized, fresh fractures of the tibia and distal radius. With respect to the adjunctive treatment of spinal fusion surgery, the Company expects its primary competitors for its products to be EBI and OrthoFix. With respect to external fixation devices, the Company's primary competitors are OrthoFix, Howmedica, Inc. (a subsidiary of Pfizer, Inc.), EBI, Smith & Nephew Richards, Inc., Synthes, Inc. and ACE Orthopedic Manufacturing (a division of Depuy, Inc.). The same group of companies and Applied OsteoSystems, Inc. represent its primary competition in the internal fixation market. The Company believes that it may now be the largest domestic CPM device provider. The Company's primary competitors in the United States for CPM devices are privately held Thera-Kinetics, Inc., many independent owners/lessors of CPM devices, and suppliers of traditional orthopaedic rehabilitation services including orthopaedic immobilization and follow up physical therapy. The Company also believes that there are several foreign CPM device manufacturers and providers that it will encounter if it expands international sales or as those competitors sell in the United States. Many of the Company's competitors have substantially greater resources and experience in research and development, obtaining regulatory approvals, manufacturing, and marketing and sales of medical devices, and therefore represent significant competition for the Company. The Company is aware that its competitors are conducting clinical trials for other medical applications of their respective technologies. In addition, other companies are developing or may develop a variety of other products and technologies to be used in CPM devices, the treatment of fractures and spinal fusions, including growth factors, bone graft substitutes combined with growth factors, and nonthermal ultrasound. The Company believes that competition is based on, among other factors, the safety and efficacy of products in the marketplace, physician familiarity with the product, ease of patient use, product reliability, reputation, price, sales and marketing capability and reimbursement. Any product developed by the Company that gains any necessary regulatory approval will have to compete for market acceptance and market share in an intensely competitive market. An important factor in such competition may be the timing of market introduction of competitive products. Accordingly, the relative speed with which the Company can develop products, complete clinical testing as well as any necessary regulatory approval processes, and supply commercial quantities of the product to the market will be critical to its competitive success. There can be no assurance the Company can successfully compete on these bases. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Intense Competition" and "-- Rapid Technological Change." Patents, Licenses and Proprietary Rights The Company's practice is to require its employees, consultants and advisors to execute a confidentiality agreement upon the commencement of an employment or consulting relationship with the Company. The agreements provide that all confidential information developed by or made known to an individual during the course of the employment or consulting relationship will be kept confidential and not disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual relating to the Company's business while employed by the Company shall be the exclusive property of the Company. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets in the event of unauthorized use or disclosure of such information. It is also the Company's policy to protect its owned and licensed technology by, among other things, filing patent applications for the technologies that it considers important to the development of its business. The Company uses the Biologic(R) technology through a worldwide exclusive license granted by a corporation owned by university professors who discovered the technology. With respect to the BioLogic technology, the delivery of such technology to the patient and specific applications of such technology, the Company holds title to four United States patents and to patents issued in Australia, Switzerland, Germany, France, and the United Kingdom, as well as to a pending patent application in Japan, and holds an exclusive worldwide license to 28 United States patents, eight Australian 6 patents, five Canadian patents, and one Japanese patent. Currently there are five pending United States patent applications and multiple pending patent applications in Canada, Japan, and Europe. The Company's license for the BioLogic technology extends for the life of the underlying patents (which are due to expire over a period of years beginning in 2006 and extending through 2014) and covers all improvements and applies to the use of the technology for all medical applications in man and animals. The license provides for payment of royalties by the Company from the net sales revenues of products using the BioLogic technology. The license agreement can be terminated for breach of any material provision of the license. See Note 4 of Notes to Consolidated Financial Statements. The Company holds an exclusive worldwide license to four United States patents covering OrthoFrame products. The license, which extends for the life of the underlying patents (the earliest of which was issued in 1986) and covers all improvements, provides for payment of royalties by the Company from the sales revenues of OrthoFrame products. The license provides for minimum royalties of $100,000 per calendar year. The license agreement can be terminated for breach of any material provision of the license and, at the Company's option, upon 60 days' notice to the licensor. The Company has been assigned four United States patents covering methods for ultrasonic bone assessment by noninvasively and quantitatively evaluating the status of bone tissue in vivo through measurement of bone mineral density, strength and fracture risk. Additionally, patent applications are pending for this technology in the United States, Canada, Japan, and Europe as well as two pending international applications. With respect to CPM technology, the Company currently owns sixteen United States patents, three pending United States patent applications, two Canadian patents, three Canadian patent applications, two Japanese patents, and a European patent. The issued United States patents on this technology are due to expire over a period of years beginning in the year 2001 and extending through 2013. These patents could expire at an earlier date if the patents are not maintained by paying certain fees and/or annuities to the United States Patent and Trademark Office and/or appropriate foreign patent offices at certain intervals over the life of the patents. The pending United States patents, if issued, would begin to expire over a period of time beginning around 2015, and could expire at an earlier date, if not maintained as noted in the previous sentence. OrthoLogic(R), OrthoLogic & Design(R), OrthoFrame(R), BioLogic(R), SpinaLogic(R), Tomorrow's Technology Today(R), CaseLog(R), OrthoSonic(R), Legasus Sport CPM(R), LiteLift(R), Sportlite(R), Sutter(R), Danninger Medical(R), Mobilimb(R), and Totalcare(R) are federally registered trademarks of the Company. Additionally, the Company claims trademark rights in PerioLogic(TM), OsteoLogic(TM), OrthoNail(TM), OrthoSound(TM), Quickfix(TM), CPM 9000AT(TM), Legasus CPM(TM), WaveFlex(TM), Sutter CarePlan(TM), Home Rehab System(TM) and Danniflex(TM). The Company has become aware of an assertion in Germany against one of its recently acquired CPM patents. The Company is in the early stages of investigating the assertion, but it does not currently believe that it will have a material effect on the Company. The Company is not aware of any other claims that have been asserted against the Company for infringement of proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims against the Company in the future. Government Regulation The activities of the Company are regulated by foreign, federal, state and local governments. Government regulation in the United States and other countries is a significant factor in the development and marketing of the Company's products and in the Company's ongoing manufacturing and research and development activities. The Company and its products are regulated by the FDA under a number of statutes, including the Medical Device Amendments Act of 1976 to the Federal Food, Drug and Cosmetic Act and the Safe Medical Devices Act of 1990 (collectively, the "FDC Act"). The Company's current BioLogic technology-based products are classified as Class III Significant Risk Devices, which are subject to the most stringent FDA review, and are required to be tested under an IDE clinical trial and approved for marketing under a PMA. 7 To begin human clinical studies the Company must apply to the FDA for an IDE. Generally, preclinical laboratory and animal tests are required to establish a scientific basis for granting of an IDE. Once an IDE is granted, clinical trials can commence which involve rigorous data collection as specified in the IDE protocol. After the clinical trial is completed, the data are compiled and submitted to the FDA in a PMA application. FDA approval of a PMA application occurs after the applicant has established safety and efficacy to the satisfaction of the FDA. The FDA approval process may include review by an FDA advisory panel. Approval of a PMA application includes specific requirements for labeling of the medical device with regard to appropriate indications for use. Among the conditions for PMA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures comply with the FDA regulations setting forth Good Manufacturing Practices ("GMP"). The FDA monitors compliance with these requirements by requiring manufacturers to register with the FDA, which subjects them to periodic FDA inspections of manufacturing facilities. In addition, the Company must comply with post-approval reporting requirements of the FDA. If violations of applicable regulations are noted during FDA inspections, the continued marketing of any products manufactured by the Company may be adversely affected. No significant deficiencies have been noted in FDA inspections of manufacturing facilities under the Company's operation. The Company's external fixation devices, the OrthoFrame and the OrthoFrame/Mayo Wrist Fixator, and the Company's internal fixation product, OrthoNail, are Class II devices. If a medical device manufacturer can establish that a newly developed device is "substantially equivalent" to a device that was legally marketed prior to May 28, 1976, the date on which the Medical Device Amendments Act of 1976 was enacted, the manufacturer may seek marketing clearance from the FDA to market the device by filing a 510(k) pre-market notification with the agency. The Company obtained 510(k) pre-market notification clearances from the FDA for the OrthoFrame and OrthoNail product lines. The Company's CPM devices are Class I devices which do not require 510(k) pre-market notification. However, CPM manufacturers must comply with GMP regulations. The devices must also meet Underwriters Laboratories standards for electrical safety. For sales to the European Community, CPM devices must meet established electromechanical safety and electromagnetic emissions regulations. The Company also expects that the European Community will soon require compliance with quality control standards. The Company believes that it currently complies with these regulations. Manufacturers outside the United States that export devices to the United States may be subject to FDA inspection. The FDA generally inspects companies every few years. The frequency of inspection depends upon the company's status with respect to regulatory compliance. To date, the Company's foreign operations have not been the subject of any inspections conducted by the FDA. Under Canada's Food and Drugs Act and the rules and regulations thereunder (the "Food and Drugs Act"), the CPM devices sold by the Company do not require any Canadian regulatory approvals prior to their introduction to the market. However, the Company must provide Health and Welfare Canada with notice concerning the sale of a device. Notice for all of the CPM devices currently manufactured by the Company in Canada has been provided to Health and Welfare Canada. Subsequent to such notification, Health and Welfare Canada may request the Company to provide it with the results of the testing conducted on the device. If the results of such testing do not substantiate the nature of the benefits claimed to be obtainable from the use of the device or the performance characteristics claimed for such device to the satisfaction of Health and Welfare Canada, the sale of the device in Canada would be prohibited until appropriate results had been submitted. The Company has not been asked to provide such testing results to the Canadian authorities. CPM devices must comply with the applicable provincial regulations regarding the sale of electrical products by receiving the prior approval of either the Canadian Standards Association ("CSA") or the provincial hydro-electric authority, unless the device is otherwise exempt from such requirement. To date, the Company believes that its CPM devices have, unless otherwise exempt, obtained such necessary approvals prior to introduction to the market. 8 The FDC Act regulates the labeling of medical devices to indicate the uses for which they are approved, both in connection with PMA approval and thereafter, including any sponsored promotional activities or marketing materials distributed by or on behalf of the manufacturer or seller. A determination by the FDA that a manufacturer or seller is engaged in marketing of a product for other than its approved use may result in administrative, civil or criminal actions against the manufacturer or seller. In a warning letter issued May 31, 1996, the FDA raised various issues regarding certain promotional literature covering the OrthoLogic 1000 and other issues regarding the marketing and alleged custom configuration of the device. Primarily, the FDA questioned the use in the Company's literature of the patient success rate reflected in the patient registry data for the OrthoLogic 1000, focusing on differences between the patient populations in the original PMA and the subsequent patient registry data with respect to the time from injury to treatment. The FDA did not question the accuracy of the information reported in the patient registry data or the patient success rate reflected in that data. In its May 31, 1996 letter, the FDA also questioned whether changes had been made in the signal frequency of the OrthoLogic 1000, and raised issues with respect to use of the FDA's name in promotional materials, the promotion of the device as having the ability to stimulate the human growth factor IGF-II pathway, as well as an independent distributor's promotion of the device for treatment of the non-appendicular skeleton. The Company responded to the issues addressed in the FDA's letter, including the submission of a PMA supplement that included only registry data for patients who met the original PMA criteria. The Company has agreed not to refer to the IGF-II growth factor data or use the FDA name in its promotional literature, agreed not to promote or inventory devices for indications beyond those currently approved, and instituted a policy covering individual promotional correspondence between sales representatives and customers. The Company also reaffirmed that at no time had the Company modified the signal frequency of the OrthoLogic 1000, and agreed not to promote or inventory reconfigured devices until supplementary PMA approval is received. The Company and the FDA have resolved all of the issues raised in the May 31, 1996 letter. The previous owners of certain of the Company's CPM businesses received correspondence from the FDA regarding operating procedures and deviations from GMP practices. The Company believes that those issues were resolved before it acquired the businesses. Regulations governing human clinical studies outside the United States vary widely from country to country. Historically, some countries have permitted human studies earlier in the product development cycle than the United States. This disparity in regulation of medical devices may result in more rapid product approvals in certain foreign countries than the United States, while approvals in countries such as Japan may require longer periods than in the United States. In addition, although certain of the Company's products have undergone clinical trials in the United States and Canada, such products have not undergone clinical studies in any other foreign country and the Company does not currently have any arrangements to begin any such foreign studies. The process of obtaining necessary government approvals is time-consuming and expensive. There can be no assurance that the necessary approvals for new products or applications will be obtained by the Company or, if they are obtained, that they will be obtained on a timely basis. Furthermore, the Company or the FDA must suspend clinical trials upon a determination that the subjects or patients are being exposed to an unreasonable health risk. The FDA may also require post-approval testing and surveillance programs to monitor the effects of the Company's products. In addition to regulations enforced by the FDA, the Company is also subject to regulations under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state and local regulations. The ability of the Company to operate profitably will depend in part upon the Company obtaining and maintaining all necessary certificates, permits, approvals and clearances from the United States and foreign and other regulatory authorities and operating in compliance with applicable regulations. Failure to comply with regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. Regulations regarding the manufacture and sale of the Company's current products or other products that may be developed or acquired by the Company are subject to change. The Company cannot predict what impact, if any, such changes might have on its business. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Government Regulation" and " -- Condition of Acquired facilities." 9 Third Party Payment Most medical procedures are reimbursed by a variety of third party payors, including Medicare and private insurers. The Company's strategy for obtaining reimbursement authorization for its products is to establish their safety, efficacy and cost effectiveness as compared to other treatments. The Company is an approved Medicare provider and is also an approved Medicaid provider for a majority of states. The Company contracts with over 320 third party payors as an approved provider, including the Department of Veterans Affairs and various Blue Cross/Blue Shield organizations. Because the process of obtaining reimbursement for products through third-party payors is longer than through direct invoicing of patients, the Company must maintain sufficient working capital to support operations during the collection cycle. In addition, third party payors as an industry have undergone consolidation and that trend appears to be continuing. The concentration of such economic power may result in third party payors obtaining additional leverage and thus negatively affecting the Company's margins. As part of the Company's efforts to establish its primary products as treatments of choice among third party payors, the Company has entered into two consulting agreements with practicing physicians. These physicians were retained by the Company to increase product acceptance, respond to inquiries from other clinicians regarding the Company's products or to assist the Company in seeking third party payor endorsement of practice pattern changes. Significant uncertainty exists as to the reimbursement status of newly approved health care products such as of those that may be offered by the Company, and there can be no assurance that adequate third party coverage will continue to be available for the Company's products at current levels. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Limitations on Third Party Payment; Uncertain Effects of Managed Care." Product Liability Insurance The business of the Company entails the risk of product liability claims. The Company maintains a product liability and general liability insurance policy and an umbrella excess liability policy. There can be no assurance that liability claims will not exceed the coverage limit of such policies or that such insurance will continue to be available on commercially reasonable terms or at all. Consequently, product liability claims could have a material adverse effect on the business, financial condition and results of operations of the Company. The Company has not experienced any product liability claims to date resulting from its Fracture Healing Products. To date, liability claims resulting from the Company's CPM Products have not had a material adverse effect on business. Additionally, the agreements by which the Company acquired its CPM businesses generally require the seller to retain liability for claims arising before the acquisition. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk of Product Liability Claims." Employees As of December 31, 1996, the Company had 512 employees, including 290 in sales and marketing, 18 in research and development and clinical and regulatory affairs, 15 in managed care, approximately 71 in reimbursement and 118 in manufacturing, finance and administration. The managed care staff is charged with changing the practice patterns of the orthopaedic community through the influence of third party payors on treatment regimes. The Company believes that the success of its business will depend, in part, on its ability to identify, attract and retain qualified personnel. In the future, the Company will need to add additional skilled personnel or retain consultants in such areas as research and development, manufacturing and marketing and sales. The Company considers its relationship with its employees to be good. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Dependence on Key Personnel; Recent Management Change." 10 Item 2. Properties The Company leases facilities in Arizona and CPM facilities in California, Toronto (Canada) and Ohio. These facilities are designed and constructed for industrial purposes and are located in industrial districts. Each facility is suitable for the Company's purposes and is effectively utilized. The table below sets forth certain information about the Company's principal facilities.
Approx. Location Square Feet Lease Expires Description Principal Activity - -------- ----------- ------------- ----------- ------------------ Phoenix, Arizona 22,500 12/97 2-story Fracture Healing building in Products operations and industrial park executive offices San Diego, California 18,766 8/98 1-story in Sutter CPM Products industrial park assembly 26,970 9/98 2-story in CPM Product industrial park administration Toronto, Ontario, Canada 28,547 2/28/99 1-story in CPM assembly industrial park
The Company believes that each facility is well maintained, except for damage due to excess moisture from water leaking into its San Diego facilities. The Company is currently taking steps to repair the source of the leaks and resulting damage. The Company is working with both the landlord and Sutter's prior owner to allocate the expenses of such repair. In March 1997, the Company began a restructuring plan to consolidate all CPM manufacturing in its Toronto facility and all CPM administrative and service functions in Phoenix. The Company intends to close all of its other CPM facilities. The Company also intends to move its Phoenix operations to a new leased facility in Phoenix before the Company's lease on its current Phoenix facility expires. Item 3. Legal Proceedings On June 24, 1996, and on several days thereafter, lawsuits were filed in the United States District Court for the District of Arizona against the Company and certain officers and directors alleging violations of Sections 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and SEC Rule 10b-5 promulgated thereunder, and, as to other defendants, Section 20(a) of the Exchange Act. See "Item 7 -- Management's Discussion and Analysis of Financial Condition Results of Operations -- Potential Adverse Outcome of Litigation." These lawsuits are: Mark Silveria v. Allan M. Weinstein, Allen R. Dunaway, David E. Derminio and OrthoLogic Corporation, Cause No. CIV 96-1563 PHX EHC, filed in the United States District Court for the District of Arizona (Phoenix Division) on July 1, 1996. Derric C. Chan and Anna Chan as attorney in fact for Moon-Yung Chow, on behalf of themselves and all others similarly situated v. OrthoLogic Corporation, Allan M. Weinstein, Frank P. Magee and David E. Derminio, Cause No. CIV 96-1514 PHX RCB, filed in the United States District Court for the District of Arizona (Phoenix Division) on June 21, 1996. 11 Jeffrey M. Boren and Charles E. Peterson, Jr., on behalf of themselves and all other similarly situated v. Allan M. Weinstein and OrthoLogic Corp., Cause No. CIV 96-1520 PHX RCB, filed in the United States District Court for the District of Arizona on June 24, 1996. Dorothy Cohen, on behalf of herself and all others similarly situated v. OrthoLogic Corp. and Allan M. Weinstein, Cause No. CIV 96-1615 PHX SMM, filed in the United States District Court for the District of Arizona (Phoenix Division) on July 9, 1996. Joseph C. Barton, on behalf of himself and all others similarly situated v. OrthoLogic Corp. and Allan M. Weinstein, Cause No. CIV 96-1643 PHX ROS, filed in the United States District Court for the District of Arizona (Phoenix Division) on July 12, 1996. Jeffrey Draker, on behalf of himself and all others similarly situated v. Allan M. Weinstein and OrthoLogic Corp., Cause No. CIV 96-1667 PHX RCB, filed in the United States District Court for the District of Arizona (Phoenix Division) on July 16, 1996. Edward and Eleanor Katz v. OrthoLogic Corp. and Allan M. Weinstein, Cause No. CIV 96-1668 PHX RGS, filed in the United States District Court for the District of Arizona (Phoenix Division) on July 17, 1996. Mark J. Rutkin, Paul A. Wallace, Malcolm E. Brathwaite, Elaine K. Davies and David G. Davies, Larry E. Carder and Carl Hust, on behalf of themselves and all others similarly situated v. Allan M. Weinstein, Allen R. Dunaway, David E. Derminio and OrthoLogic Corp., Cause No. CIV 96-1678 PHX EHC, filed in the United States District Court for the District of Arizona (Phoenix Division), on July 17, 1996. Frank J. DeFelice, on behalf of himself and all others similarly situated v. OrthoLogic Corp. and Allan M. Weinstein, Cause No. CIV 96-1713 PHX EHC, filed in the United States District Court for the District of Arizona (Phoenix Division), on July 23, 1996. Scott Longacre, Joseph E. Sheedy, Trustee, Rickie Trainor, W. Preston Battle, III, Taylor D. Shepherd, Dianna Lynn Shepherd, Gordon H. Hogan, Trustee, and Dallas Warehouse Corp., Inc., on behalf of themselves and all others similarly situated v. Allan M. Weinstein, Allen R. Dunaway, David E. Derminio, Frank P. Magee and OrthoLogic Corp., Cause No. CIV 96-1891 PHX PGR, filed in the United States District Court for the District of Arizona (Phoenix Division) on August 16, 1996. Jeffrey D. Bailey, Milton Berg, Bryan Boatwright, Charles R. Campbell, Mark and Cathy Daniel, Tom Drotar, Rudy Gonnella, David Gross, Janet Gustafson, Willa P. Koretz, Dr. Richard Lewis, John Maynard, Margaret Milosh, Michelle Milosh, Theresa L. Onn, Ward B. Perry, William Schillings, Darwin and Merle Sen, Nestor Serrano and Larry E. and Gloria M. Swanson v. Allan M. Weinstein, Allen R. Dunaway, David E. Derminio and OrthoLogic Corporation, Cause No. CIV 96-1910 PHX PGR, filed in the United States District Court for the District of Arizona (Phoenix Division) on August 19, 1996. Nancy Z. Kyser and Mark L. Nichols, on behalf of themselves and all others similarly situated v. OrthoLogic Corporation, Allan M. Weinstein, Frank P. Magee and David E. Derminio, Cause No. CIV 96-1937 PHX ROS, filed in the United States District Court for the District of Arizona (Phoenix Division) on August 22, 1996. Plaintiffs in these actions allege generally that information concerning the May 31, 1996 letter received by the Company from the FDA regarding the Company's OrthoLogic 1000 Bone Growth Stimulator, and the matters set forth therein, was material and undisclosed, leading to an artificially inflated stock price. Plaintiffs further allege that the Company's non-disclosure of the FDA correspondence and of the alleged practices referenced in that correspondence operated as a fraud against plaintiffs, in that the Company allegedly made untrue statements of material facts or omitted to state material facts necessary in order to make the statements not misleading. Plaintiffs further allege that once the FDA letter became known, a material decline in the stock price of the Company 12 occurred, causing damage to plaintiffs. All plaintiffs seek class action status, unspecified compensatory damages, fees and costs. Plaintiffs also seek extraordinary, equitable and/or injunctive relief as permitted by law. Pursuant to court orders dated December 17, 1996 and January 19, 1997, the preceding actions have been consolidated for all purposes, and lead plaintiffs and counsel have been appointed. A consolidated complaint has yet to be filed. On or about June 20, 1996, a lawsuit entitled Norman Cooper, et al. v. OrthoLogic Corp., et al., Cause No. CV 96-10799, was filed in the Superior Court, Maricopa County, Arizona. The plaintiffs allege violations of Arizona Revised Statutes Sections 44-1991 (state securities fraud) and 44-1522 (consumer fraud) and common law fraud based upon factual allegations substantially similar to those alleged in the federal court class action complaints. Plaintiffs also seek class action status, unspecified compensatory and punitive damages, fees and costs. Plaintiffs also seek injunctive and/or equitable relief. By agreement of the parties, that action has been stayed while the federal actions proceed. On or about July 16, 1996, Jacob B. Rapoport filed a Shareholder Derivative Complaint for Breach of Fiduciary Duty and Misappropriation of Confidential Corporation Information (based on similar factual issues underlying the above lawsuits) in the Superior Court of the State of Arizona, Maricopa County, No. CV 96-12406 against Allan M. Weinstein, John M. Holliman, Augustus A. White, Fredric J. Feldman, Elwood D. Howse, George A. Oram, Frank P. Magee and David E. Derminio, Defendants and OrthoLogic Corp., Nominal Defendant. On October 29, 1996 the defendants removed the case to the United States District Court for the District of Arizona (Phoenix Division) No. CIV 96-2451 PHX RCB on grounds of diversity pursuant to 28 U.S.C. ss. 1332. Defendants filed a motion to dismiss the complaint. By agreement of the parties, the case has been stayed pending a decision on defendants' anticipated motion to dismiss the consolidated federal class action lawsuits. The Company denies the substantive allegations in the aforesaid lawsuits and plans to defend the actions vigorously. In February 1997, the Company received a letter from the California Department of Industrial Relations Division of Occupational Safety and Health regarding an informal complaint involving certain physical problems with one of Sutter's facilities. The Company responded to the letter in March 1997 and believes that it has addressed or is in the process of addressing the issues raised. See "Item 2 -- Properties" and "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Condition of Acquired Facilities." Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Executive Officers of the Registrant The following table sets forth information regarding the executive officers of the Company:
Name Age Title - ---- --- ----- Allan M. Weinstein, Ph.D. 51 Chairman of the Board, Chief Executive Officer, President and Director Frank P. Magee, D.V.M. 40 Executive Vice President, Research and Development David E. Derminio 44 Vice President, Marketing and Sales Allen R. Dunaway 42 Vice President, Chief Financial Officer and Secretary James B. Koeneman, Ph.D. 60 Vice President, Engineering MaryAnn G. Miller 39 Vice President, Human Resources Nicholas A. Skaff 41 Vice President, Managed Care
13 Allan M. Weinstein, Ph.D. has been the Chairman of the Board, President and Chief Executive Officer and a Director of the Company since its inception in 1987. Dr. Weinstein is a member of the Board of Directors of the Health Industry Manufacturers Association and Raymedica, Inc., a privately held spinal implant company. Frank P. Magee, D.V.M. joined the Company as a Vice President in November 1989 and became Executive Vice President, Research and Development in 1991. David E. Derminio joined the Company in March 1993 as Vice President, Marketing and Sales. From 1984 to 1993 he served as the Vice President of Sales for Med-Tech West, Inc., a distributor of orthopaedic and neurosurgical products. Allen R. Dunaway joined the Company in February 1992 as its Vice President and Chief Financial Officer. From 1991 to 1992, he served as Operations Manager and Chief Financial Officer for Gentron Corporation, an electronics manufacturer. James B. Koeneman, Ph.D. joined OrthoLogic as Director of Engineering in May 1994 and became Vice President, Engineering in September 1994. From 1984 to 1994, Dr. Koeneman was the Head of the Bioengineering Division at Harrington Arthritis Research Center. MaryAnn G. Miller joined the Company as Vice President of Human Resources in October 1996. From November 1995 to June 1996, Ms. Miller was Human Resources Director for Southwestco Wireless, Inc. doing business as CellularOne, a subsidiary of Bell Atlantic Nynex Mobile, a provider of wireless telecommunications services in the Southwest. From October 1992 to July 1995, Ms. Miller was a human resources officer with Firstar Corporation, a Wisconsin-based bank holding company. She was most recently First Vice President and Regional Human Resources Director of Firstar from January 1994 to July 1995. Nicholas A. Skaff joined the Company as Vice President, Managed Care in April 1996. From January 1996 to April 1996, Mr. Skaff was the Southwest Region Area Vice President for Olsten Corp., a home care company, and President of Children's HomeCare, a pediatric home care joint venture between Olsten Corp. and Phoenix Children's Hospital. From January 1995 to December 1995, he was the Area Vice President of Olsten Corp.'s neuro rehabilitation group. From January 1994 to December 1994, he was the President and Chief Executive Officer of RWW Associates, Inc., a neurologic rehabilitation company. From August 1987 to December 1993, Mr. Skaff was the Chief Financial Officer of NeuroCare, a neurologic rehabilitation home care company. 14 PART II ------- Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters The information under the heading "Stockholder Information" on page 15 of the Company's Annual Report to Stockholders for the year ended December 31, 1996 (the "Annual Report") is incorporated herein by reference. On October 15, 1996, the Company issued a warrant to purchase 5,000 shares of the Company's Stock at $2.41 per share to an investor relations consultant in exchange for a previously issued warrant to purchase 50,000 shares at $2.41 per share and as part of the termination of the consultant's services for the Company. The October 1996 warrant is exercisable at any time until March 14, 2001. Exemption for this transaction was claimed pursuant to Section 4(2) of the Securities Act of 1933, as the purchaser was familiar with and capable of evaluating the financial condition and business activities of the Company. Item 6. Selected Financial Data The information on page 15 of the Annual Report under the heading "Selected Financial Data" is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information on pages 13 and 14 of the Annual Report under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by reference. The Company may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission and its reports to stockholders. This Report contains forward-looking statements made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. In connection with these "safe harbor" provisions, the Company identifies important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by or on behalf of the Company. Any such forward-looking statement is qualified by reference to the following cautionary statements. Limited History of Profitability; Quarterly Fluctuations in Operating Results. The Company was founded in 1987 and only began generating revenues from the sale of its primary product in 1994. The Company has experienced significant operating losses since its inception and had an accumulated deficit of approximately $16.9 million at December 31, 1996. While the Company was first profitable in the fourth quarter of 1995, there can be no assurance that the Company will ever generate sufficient revenues to attain operating profitability or retain net profitability on an on-going annual basis. In addition, the Company may experience fluctuations in revenues and operating results based on such factors as demand for the Company's products, the timing, cost and acceptance of product introductions and enhancements made by the Company or others, levels of third party payment, alternative treatments which currently exist or may be introduced in the future, completion of acquisitions, changes in practice patterns, competitive conditions, regulatory announcements and changes affecting the Company's products in the industry and general economic conditions. The development and commercialization by the Company of additional products will require substantial product development, and regulatory, clinical and other expenditures. See "Item 1 -- Business -- Competition." Potential Adverse Outcome of Litigation. The Company is a defendant in a number of investor lawsuits relating generally to correspondence received by the Company from the FDA in mid-1996 regarding the promotion and configuration of the Company's OrthoLogic 1000 Bone Growth Stimulator. See "Item 1 -- Business - -- Governmental Regulation" and "Item 3 -- Legal Proceedings." The Company intends to defend these lawsuits 15 vigorously. However, an adverse outcome in this litigation could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Salesforce. A substantial portion of the Company's sales are generated through the Company's internal salesforce of approximately 290 employees. During 1996, the Company shifted its primary focus from sales through independent orthopaedic specialty dealers to an internal salesforce. This internal salesforce requires the Company to devote greater resources to sales training and management. In addition, the Company is faced with the challenge of managing and effectively motivating a much larger sales force than it has ever had. Moreover, many of those new salespeople are inexperienced in selling the Company's products, and salespeople historically experience a learning curve before they become efficient, if at all. There can be no assurance that the internal salesforce will be able to maintain or exceed the Company's historic sales through independent specialty dealers. The Company's marketing success depends in large part upon the ability of sales and marketing personnel to demonstrate to potential customers the benefits of the Company's products and their advantages over competing products and surgical procedures. See "Item 1 -- Business -- Marketing and Sales." Dependence on Key Personnel; Recent Management Change. The success of the Company is dependent in large part on the ability of the Company to attract and retain its key management, operating, technical, marketing and sales personnel as well as clinical investigators who are not employees of the Company. Such individuals are in high demand, and the identification, attraction and retention of such personnel could be lengthy, difficult and costly. The Company competes for its employees and clinical investigators with other companies in the orthopaedic industry and research and academic institutions. There can be no assurance that the Company will be able to attract and retain the qualified personnel necessary for the expansion of its business. In 1996, the Company hired a new President and Chief Operating Officer who subsequently resigned in February 1997. Such loss of services of one or more members of the senior management group or the Company's inability to hire additional personnel as necessary could have an adverse effect on the Company's business, financial condition and results of operations. See "Item 1 -- Business -- Employees." Dependence on Primary Product and Future Products. Over two-thirds of the Company's 1996 revenues were derived from the sales of the OrthoLogic 1000 for the treatment of non-healing fractures. While the Company believes that revenues from CPM devices will reduce the Company's dependence on revenues from the OrthoLogic 1000, the Company believes that, to sustain long-term growth, it must develop and introduce additional products and expand approved indications for its existing products. The development and commercialization by the Company of additional products will require substantial product development, regulatory, clinical and other expenditures. There can be no assurance that the Company's technologies will allow it to develop new products and/or expand indications for existing products in the future or that the Company will be able to manufacture or market such products successfully. Any failure by the Company to develop new products and/or expand indications could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1 - -- Business -- Products" and "Item 1 -- Business -- Competition." Uncertainty of Market Acceptance. The Company believes that the demand for bone growth stimulators is still developing, and the Company's success will depend in part upon the continued growth of this demand. There can be no assurance that this demand will develop. The long-term commercial success of the OrthoLogic 1000 will also depend in significant part upon its widespread acceptance by a significant portion of the medical community as a safe, efficacious and cost-effective alternative to invasive procedures. The Company is unable to predict how quickly, if at all, its products may be accepted by members of the orthopaedic medical community. The widespread acceptance of the Company's primary products represents a significant change in practice patterns for the orthopaedic medical community and in reimbursement policy for third party payors. Historically, some orthopaedic medical professionals have indicated hesitancy in prescribing bone growth stimulator products such as those manufactured by the Company. Failure of the Company's products to achieve widespread market acceptance by the orthopaedic medical community and third party payors would have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1 -- Business -- Third Party Payment." 16 Selection and Integration of Acquisitions. A key element of the Company's strategy is expansion through acquisitions of products, technologies and businesses. The Company acquired Sutter Corporation in August 1996, and certain assets of Toronto Medical Corp. and Danninger Medical Technology, Inc. in March 1997. See "Item 1 -- Business - General." There can be no assurance, however, that the Company will be successful in identifying additional appropriate opportunities or negotiating favorable terms. In addition, successful integration of such acquisitions is critical to the future financial performance of the combined Company. Complete integration of any acquisition could take several quarters or more to accomplish and will require, among other things, integration of the companies' respective product offerings and coordination of their sales and marketing, manufacturing and research and development efforts. There can be no assurance that present and potential customers of the Company and any acquired entity would continue their historic buying patterns without regard to the acquisition, and any significant delay or reduction in orders could have an adverse effect on the Company's business, financial condition and results of operations. The process of integrating companies may also cause management's attention to be diverted from operating the Company, and any difficulties encountered in the transition process could have an adverse impact on the business, financial condition and operating results of the Company. In addition, the process of combining two organizations could cause the interruption of, or a loss of momentum in, the activities of either or both of the companies' businesses, which could have an adverse effect on their combined operations. The difficulty of combining companies is increased by the need to integrate the personnel and the geographic distance between companies. Changes brought about by any acquisition may cause key employees or distributors to terminate their relationship with the Company. There can be no assurance that the combined Company will retain the employees and dealer relationships or that the Company will realize any potential benefits of any acquisitions. In addition, the Company might incur significant integration or additional operating costs associated with an acquisition. There can be no assurance that such costs will not have an adverse effect upon the Company's operating results, particularly in the fiscal quarters following the consummation of any acquisition, while the operations of the acquired business are being integrated into the Company's operations. There can be no assurance that, following any acquisition, the Company will be able to operate any acquired business on a profitable basis. Limited Combined Operating History and Results. In August 1996, the Company entered the CPM business with its acquisition of Sutter. Financial results of Sutter before August 1996 reflect operations when Sutter was not under current control or management and as such may not be indicative of future operating results. Although the Company does not anticipate incurring significant additional operating costs associated with Sutter, there can be no assurance that such costs will not be incurred or that the purchase, or any other acquisition, will not have an adverse effect upon the Company's operating results, while the operations of the purchased business are being integrated into the Company's operations. There can be no assurance that, following any acquisition, the Company will be able to operate the purchased business on a profitable basis or that the Company will be able to recover any excess of the purchase price of the business acquired over its tangible book value. Condition of Acquired Facilities. In connection with the Company's recent acquisition of Sutter, it determined that the acquired facilities had several physical problems primarily resulting from excess moisture from water leaking into the facility. The Company is currently taking steps to correct the resulting damage. Certain Sutter employees have also reported adverse personal effects resulting from these problems. The Company has notified both the landlord and prior owner of Sutter concerning these claims and the Company is working with the landlord and prior owner to resolve these issues. As the Company seeks to resolve these issues, these damages and claims and any future discoveries regarding the facilities' management under past ownership could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 3 -- Legal Proceedings" and "Item 2 -- Properties." Management of Growth. The Company has experienced a period of rapid growth that has placed, and could continue to place, a significant strain on the Company's financial, management and other resources. The Company's future performance will depend in part on its ability to manage change in its operations, including integration of acquired businesses. In addition, the Company's ability to manage its growth effectively will require it to continue to improve its manufacturing, operational and financial control systems and infrastructure and management information systems, and to attract, train, motivate, manage and retain key employees. If the Company's 17 management were to become unable to manage growth effectively, the Company's business, financial condition, and results of operations could be adversely affected. Limitations on Third Party Payment; Uncertain Effects of Managed Care. The Company's ability to commercialize its products successfully in the United States and in other countries will depend in part on the extent to which acceptance of payment for such products and related treatment will continue to be available from government health administration authorities, private health insurers and other payors. Cost control measures adopted by third party payors in recent years have had and may continue to have a significant effect on the purchasing and practice patterns of many health care providers, generally causing them to be more selective in the purchase of medical products. In addition, payors are increasingly challenging the prices and clinical efficacy of medical products and services. Payors may deny reimbursement if they determine that the product used in a procedure was experimental, was used for a nonapproved indication or was unnecessary, inappropriate, not cost-effective, unsafe, or ineffective. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and there can be no assurance that adequate third party coverage will continue to be available to the Company at current levels. Failure to continue to obtain reimbursement from payors at levels acceptable to the Company could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1 - -- Business -- Third Party Payment." Uncertainty and Potential Negative Effects of Health Care Reform. The health care industry is undergoing fundamental changes resulting from political, economic and regulatory influences. In the United States, comprehensive programs have been proposed that seek to (i) increase access to health care for the uninsured, (ii) control the escalation of health care expenditures within the economy, and (iii) use health care reimbursement policies to help control the federal deficit. The Company anticipates that Congress and state legislatures will continue to review and assess alternative health care delivery systems and methods of payment, and public debate of these issues will likely continue. Due to uncertainties regarding the outcome of reform initiatives and their enactment and implementation, the Company cannot predict which, if any, of such reform proposals will be adopted and when they might be adopted. Other countries also are considering health care reform. The Company's plans for increased international sales are largely dependent upon other countries' adoption of managed care systems and their acceptance of the potential benefits of the Company's products and the belief that managed care plans will have a positive effect on sales. For the reasons identified in this and in the preceding paragraph, however, those assumptions may be incorrect. Significant changes in health care systems are likely to have a substantial impact over time on the manner in which the Company conducts its business and could have a material adverse effect on the Company's business, financial condition and results of operations, and ability to market its products as currently contemplated. Intense Competition. The orthopaedic industry is characterized by intense competition. Currently, there are three major competitors other than the Company selling electromagnetic bone growth stimulation products approved by the FDA for the treatment of nonunion fractures and one large domestic and several foreign manufacturers of CPM devices. The Company also competes with many independent owners/lessors of CPM devices in addition to the providers of traditional orthopaedic immobilization products and rehabilitation services. The Company estimates that one of its competitors has a dominant share of the market for electromagnetic bone growth stimulation products for non-healing fractures in the United States, and another has a dominant share of the market for use of their device as an adjunct to spinal fusion surgery. In addition, there are several large, well-established companies that sell fracture fixation devices similar in function to those sold by the Company. Many participants in the medical technology industry, including the Company's competitors, have substantially greater capital resources, research and development staffs and facilities than the Company. Such participants have developed or are developing products that may be competitive with the products that have been or are being developed or researched by the Company. Other companies are developing a variety of other products and technologies to be used in CPM devices, the treatment of fractures and spinal fusions, including growth factors, bone graft substitutes combined with growth factors, and nonthermal ultrasound. One company has received FDA approval for a nonthermal ultrasound device to treat nonsevere fresh fractures of the lower leg and lower forearm. There can be no assurance that products marketed by these or other companies will not be sold for use in treating non-healing fractures or spinal fusions, even in the absence of regulatory approval to do so. Any such sales could have a 18 material adverse effect on the Company. Many of the Company's competitors have substantially greater experience than the Company in conducting research and development, obtaining regulatory approvals, manufacturing and marketing and selling medical devices. Any failure by the Company to develop products that compete favorably in the marketplace would have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1 - -- Business -- Research and Development" and "Item 1 -- Business -- Competition." Rapid Technological Change. The medical device industry is characterized by rapid and significant technological change. There can be no assurance that the Company's competitors will not succeed in developing or marketing products or technologies that are more effective and/or less costly and which render the Company's products obsolete or non-competitive. In addition, new technologies, procedures and medications could be developed that replace or reduce the value of the Company's products. The Company's success will depend in part on its ability to respond quickly to medical and technological changes through the development and introduction of new products. There can be no assurance that the Company's new product development efforts will result in any commercially successful products. A failure to develop new products could have a material adverse effect on the company's business, financial condition and results of operations. See "Item 1 -- Business -- Research and Develop ment." Government Regulation. The Company's current and future products and manufacturing activities are and will be regulated under the Medical Device Amendments Act of 1976 to the Food, Drug and Cosmetic Act and the 1990 Safe Medical Devices Act. The Company's current BioLogic technology-based products are classified as Class III Significant Risk Devices, which are subject to the most stringent level of FDA review for medical devices and are required to be tested under IDE clinical trials and approved for marketing under a PMA. The Company's fracture fixation devices are Class II devices that are marketed pursuant to 510(k) clearance from the FDA. The Company received PMA approval from the FDA in March 1994 and commenced marketing the OrthoLogic 1000 for the treatment of nonunion fractures. The Company has completed a data analysis of a clinical trial of the OrthoLogic 1000 for the treatment of delayed union fractures, and based on this analysis, the Company believes that a larger number of patients is required to establish statistical significance before it submits a supplement to its existing PMA for such indication. There can be no assurance that the FDA will allow expansion of the study without requiring a new clinical trial. If a new trial is required, there can be no assurance that it will establish statistical significance leading to product approval. However, the Company recently combined the existing data from the study with delayed union data collected in the Company's Post Marketing Clinical Registry. This combined data set has been analyzed and submitted to the FDA to support the Company's request to expand the non-union definition to include patients five months post-injury. There can be no assurance that this data will result in regulatory approval. The Company received approval of an IDE for the SpinaLogic 1000 for use as an adjunct to spinal fusion surgery in August 1992 and commenced clinical trials for this product in February 1993. In September 1995, the Company received an approval of an IDE supplement for the SpinaLogic 1000 for treatment of failed spinal fusions. The Company commenced this study in the fourth quarter of 1995. There can be no assurance that any such clinical trials will be successfully completed or that, if completed, the results of such studies will demonstrate clinical benefits or that the Company will receive regulatory approval for the OrthoLogic 1000 for the treatment of delayed union fractures or other broader indications or for the SpinaLogic 1000 or for any other products. Any significant delay in receiving or failure to receive regulatory approval of the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1 -- Business - -- Products" and "Item 1 -- Business -- Government Regulation." The FDA and comparable agencies in many foreign countries and in state and local governments impose substantial limitations on the introduction of medical devices through costly and time-consuming laboratory and clinical testing and other procedures. The process of obtaining FDA and other required regulatory approvals is lengthy, expensive and uncertain. Moreover, regulatory approvals, if granted, typically include significant limitations on the indicated uses for which a product may be marketed. In addition, approved products may be subject to additional testing and surveillance programs required by regulatory agencies, and product approvals could be withdrawn and labelling restrictions may be imposed for failure to comply with regulatory standards or upon the occurrence of unforeseen problems following initial marketing. 19 The Company is also required to adhere to applicable requirements for FDA Good Manufacturing Practices and to engage in extensive record keeping and reporting and to make available its manufacturing facilities for periodic inspections by governmental agencies, including the FDA, and comparable agencies in other countries. Failure to comply with these and other applicable regulatory requirements could result in, among other things, significant fines, suspension of approvals, seizures or recalls of products, or operating restrictions and criminal prosecutions. The Company has received letters from the FDA regarding its regulatory compliance. The Company believes that all issues raised in the letters have been resolved. See "Item 1 -- Business - Government Regulation." Changes in existing regulations or interpretations of existing regulations or adoption of new or additional restrictive regulations could prevent the Company from obtaining, or affect the timing of, future regulatory approvals. If the Company experiences a delay in receiving or fails to obtain any governmental approval for any of its current or future products or fails to comply with any regulatory requirements, the Company's business, financial condition and results of operations could be materially adversely affected. See "Item 1 -- Business -- Products" and "Item 1 -- Business -- Government Regulation." Dependence on Key Suppliers. The Company purchases the microprocessor used in the OrthoLogic 1000 from a sole source supplier, Phillips N.V. In addition, there are two suppliers for another component used in the OrthoLogic 1000 and two suppliers for the composite material components of the OrthoFrame products. Establishment of additional or replacement suppliers for the components cannot be accomplished quickly. While the Company maintains a supply of certain OrthoLogic 1000 components to meet sales forecasts for one year and OrthoFrame components to meet sales forecasts for six months, any delay or interruption in supply of these components could significantly impair the Company's ability to manufacture its products in sufficient quantities, and therefore, could have a material adverse effect on its business, financial condition and results of operations. See "Item 1 -- Business--Manufacturing." Dependence on Patents, Licenses and Proprietary Rights. The Company's success will depend in significant part on its ability to obtain and maintain patent protection for products and processes, to preserve its trade secrets and proprietary know-how and to operate without infringing the proprietary rights of third parties. While the Company holds title to numerous United States and foreign patents and patent applications, as well as licenses to numerous United States and foreign patents (see "Item 1 -- Business -- Patents, Licenses and Proprietary Rights"), no assurance can be given that any additional patents will be issued or that the scope of any patent protection will exclude competitors or that any of the patents held by or licensed to the Company will be held valid if subsequently challenged. The validity and breadth of claims covered in medical technology patents involves complex legal and factual questions and therefore may be highly uncertain. In addition, although the Company holds or licenses patents for its technologies, others may hold or receive patents which contain claims having a scope that covers products developed by the Company. There can be no assurance that licensing rights to the patents of others, if required for the Company's products, will be available at all or at a cost acceptable to the Company. The Company licenses covering the BioLogic and OrthoFrame technologies provide for payment by the Company of royalties. Each license may be terminated if the Company breaches any material provision of such license. The termination of any license would have a material adverse effect on the Company's business, financial condition and results of operations. See Note 4 of Notes to Consolidated Financial Statements. The Company also relies on unpatented trade secrets and know-how. The Company generally requires its employees, consultants, advisors and investigators to enter into confidentiality agreements which include, among other things, an agreement to assign to the Company all inventions that were developed by the employee while employed by the Company that are related to its business. There can be no assurance, however, that these agreements will protect the Company's proprietary information or that others will not gain access to, or independently develop similar trade secrets or know-how. There has been substantial litigation regarding patent and other intellectual property rights in the orthopaedic industry. Litigation, which could result in substantial cost to, and diversion of effort by, the Company may be necessary to enforce patents issued or licensed to the Company, to protect trade secrets or know-how owned by the 20 Company or to defend the Company against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. There can be no assurance that the results of such litigation would be favorable to the Company. In addition, competitors may employ litigation to gain a competitive advantage. Adverse determinations in litigation could subject the Company to significant liabilities, and could require the Company to seek licenses from third parties or prevent the Company from manufacturing, selling or using its products, any of which determinations could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1 -- Business -- Patents, Licenses and Proprietary Rights." Risk of Product Liability Claims. The Company faces an inherent business risk of exposure to product liability claims in the event that the use of its technology or products is alleged to have resulted in adverse effects. To date, no product liability claims have been asserted against the Company. The Company maintains a product liability and general liability insurance policy with coverage of an annual aggregate maximum of $2.0 million. The Company's product liability and general liability policy is provided on an occurrence basis. The policy is subject to annual renewal. In addition, the Company maintains an umbrella excess liability policy which covers product and general liability with coverage of an additional annual aggregate maximum of $10.0 million. There can be no assurance that liability claims will not exceed the coverage limits of such policies or that such insurance will continue to be available on commercially reasonable terms or at all. If the Company does not or cannot maintain sufficient liability insurance, its ability to market its products may be significantly impaired. In addition, product liability claims could have a material adverse effect on the business, financial condition and results of operations of the Company. See "Item 1 -- Business -- Product Liability Insurance." Possible Volatility of Stock Price. The market price of the Company's Common Stock is likely to be highly volatile. Factors such as fluctuations in the Company's operating results, announcements and timing of potential acquisitions, announcements of technological innovations or new products by the Company or its competitors, FDA and international regulatory actions, actions with respect to reimbursement matters, developments with respect to patents or proprietary rights, public concern as to the safety of products developed by the Company or others, changes in health care policy in the United States and internationally, changes in stock market analyst recommendations regarding the Company, other medical device companies or the medical device industry generally and general market conditions may have a significant effect on the market price of the Common Stock. In addition, the stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. Developments in any of these areas, which are more fully described elsewhere in "Item 1 -- Business," "Item 3 -- Legal Proceedings," and "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 13 and 14 of the Company's 1996 Annual Report to stockholders, each of which is incorporated into this section by reference, could cause the Company's results to differ materially from results that have been or may be projected by or on behalf of the Company. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. Item 8. Financial Statements and Supplementary Data The information on pages 16 through 27 of the Annual Report is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 21 PART III -------- Item 10. Directors and Executive Officers of the Registrant Information in response to this Item is incorporated by reference to (i) the information relating to the Company's directors under the caption "Election of Directors" and the information relating to Section 16 under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for its Annual Meeting of Stockholders to be held May 16, 1997 (the "Proxy Statement"), and (ii) the information under the caption "Executive Officers of the Registrant" in Part I hereof. The Company anticipates filing the Proxy Statement within 120 days after December 31, 1996. Item 11. Executive Compensation The information under the heading "Executive Compensation" and "Compensation of Directors" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information under the heading "Voting Securities and Principal Holders Thereof - Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information under the heading "Certain Transactions" in the Proxy Statement is incorporated herein by reference. PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report: --------------------------------------------------------- 1. Financial Statements The following financial statements of OrthoLogic Corp. and Independent Auditors' Report are incorporated by reference from pages 16 through 27 of the Annual Report: Balance Sheets - December 31, 1996 and 1995. Statements of Operations - Each of the three years in the period ended December 31, 1996. Statements of Stockholders' Equity - Each of the three years in the period ended December 31, 1996. Statements of Cash Flows - Each of the three years in the period ended December 31, 1996. Notes to Financial Statements 2. Financial Statement Schedules Schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Financial Statements or notes thereto. 22 3. Exhibits and Management Contracts, and Compensatory Plans and Arrangements All management contracts and compensatory plans and arrangements are identified by footnote after the Exhibit Descriptions on the attached Exhibit Index. (b) Reports on Form 8-K. -------------------- On September 13, 1996, the Company filed a current report on Form 8-K dated August 30, 1996, to report in Item 2 the consummation of its acquisition of the capital stock of Sutter Corporation. The Form 8-K was amended on November 14, 1996 to include the following financial statements: -- Unaudited Pro-Forma Balance Sheet as of June 30, 1996. -- Unaudited Pro-Forma Statement of Income for the six-month period ended June 30, 1996 -- Unaudited Pro-Forma Consolidated Statement of Operations for the year ended December 31, 1995. -- Audited financial statements of Sutter Corporation for the years ended December 31, 1995, 1994 and 1993 and independent auditor's report. -- Unaudited balance sheet of Sutter Corporation as of June 30, 1996. -- Unaudited statements of income of Sutter for the six-month periods ended June 30, 1996 and 1995. (c) Exhibits -------- See the Exhibit Index immediately following the signature page of this report, which Index is incorporated herein by reference. (d) Financial Statements and Schedules ---------------------------------- See Item 14(a)(1) and (2) above. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ORTHOLOGIC CORP. Date: March 28 , 1997 By /s/ Allan M. Weinstein ------- ------------------------ Allan M. Weinstein 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/ Allan M. Weinstein Chairman of the Board of Directors, March 28, 1997 - --------------------------------- President and Chief Executive Officer Allan M. Weinstein (Principal Executive Officer) March 28, 1997 /s/ Fredric J. Feldman Director - --------------------------------- Fredric J. Feldman March 28, 1997 /s/ John M. Holliman III Director - --------------------------------- John M. Holliman III /s/ Elwood D. Howse, Jr. Director March 28, 1997 - --------------------------------- Elwood D. Howse, Jr. /s/ George A. Oram, Jr. Director March 28, 1997 - --------------------------------- George A. Oram, Jr. /s/ Augustus A. White III, M.D. Director March 28, 1997 - --------------------------------- Augustus A. White III, M.D. /s/ Allen R. Dunaway Vice President and Chief Financial Officer March 28, 1997 - --------------------------------- (Principal Financial and Accounting Allen R. Dunaway Officer)
S-1 ORTHOLOGIC CORP. EXHIBIT INDEX TO REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Exhibit Filed No. Description Incorporated by Reference To: Herewith --- ----------- ----------------------------- -------- 2.1 Stock Purchase Agreement dated Exhibit 2.1 to the Company's Current August 30, 1996 by and among the Report on Form 8-K filed on Company, Sutter Corporation and September 13, 1996 Smith Laboratories, Inc. 2.2 Purchase and Sale Agreement dated as Exhibit 2.1 to the Company's Current of December 30, 1996 by and among Report on Form 8-K filed on March the Company and Toronto Medical 18, 1997 ("March 1997 8-K") Corp., an Ontario corporation 2.3 Amendment to Purchase and Sale Exhibit 2.2 to March 1997 8-K Agreement dated as of January 13, 1997 by and among the Company and Toronto Medical Corp., an Ontario corporation 2.4 Second Amendment to Purchase and Exhibit 2.3 to March 1997 8-K Sale Agreement dated as of March 1, 1997 by and among the Company and Toronto Medical Corp., an Ontario corporation 2.5 Assignment of Purchase and Sale Exhibit 2.4 to March 1997 8-K Agreement dated as of March 1, 1997 by and among the Company, Toronto Medical Orthopaedics Ltd., a Canada corporation and Toronto Medical Corp., an Ontario corporation 2.6 Asset Purchase Agreement dated March Exhibit 2.1 to the Company's Current 12, 1997 by and among the Company, Report on Form 8-K filed on March Danninger Medical Technology, Inc., a 27, 1997 Delaware corporation, and Danninger Healthcare, Inc., an Ohio corporation 3.1 Composite Certificate of Incorporation Exhibit 3.1 to Company's Form 10-Q of the Company, as amended for the quarter ended March 31, 1996 (File No. 0-21214) 3.2 Bylaws of the Company Exhibit 3.4 to Company's Amendment No. 2 to Registration Statement on Form S-1 (No. 33- 47569) filed with the SEC on January 25, 1993 ("January 1993 S-1") 4.1 Articles 5, 9 and 11 of Amended Form Exhibit 3.2 to January 1993 S-1 of Amendment to Certificate of Incorporation of the Company 4.2 Articles II and III.2(c)(ii) of Bylaws of Exhibit 3.4 to January 1993 S-1 the Company
EX-1
Exhibit Filed No. Description Incorporated by Reference To: Herewith --- ----------- ----------------------------- -------- 4.3 Specimen Common Stock Certificate Exhibit 4.1 to January 1993 S-1 4.4 Stock Option Plan of the Company, as Incorporated by reference to Exhibit amended and approved by stockholders 99.1 to the Company's Registration (1) Statement on Form S-8 (No. 333- 09785) filed with the SEC on August 8, 1996 4.5 Stock Purchase Warrant, dated August Exhibit 4.6 to the Company's Form 18, 1993, issued to CyberLogic, Inc. 10-K for the fiscal year ended December 31, 1994 ("1994 10-K") 4.6 Stock Purchase Warrant, dated Exhibit 4.6 to Company's September 20, 1995, issued to Registration Statement on Form S-1 Registered Consulting Group, Inc. (No. 33-97438) filed with the SEC on September 27, 1995 ("1995 S-1") 4.7 Stock Purchase Warrant, dated October 15, 1996, issued to Registered X Consulting Group, Inc. 4.8 Rights Agreement dated as of March 4, Exhibit 4.1 to the Company's 1997 between the Company and Bank Registration Statement on Form 8-A of New York, and Exhibits A, B and C filed with the SEC on March 6, 1997 thereto 10.1 License Agreement dated September 3, Exhibit 10.6 to January 1993 S-1 1987 between the Company and Life Resonances, Inc. 10.2 Invention, Confidential Information and Exhibit 10.7 to January 1993 S-1 Non-Competition Agreement dated September 18, 1987 between the Company and Weinstein 10.3 Lease between the Company and Exhibit 10.8 to January 1993 S-1 MeraBank dated January 26, 1989 10.4 First Amendment to Lease, dated Exhibit 10.8.1 to January 1993 S-1 March 15, 1989 between the Company and MeraBank 10.5 Second Amendment to Lease, dated Exhibit 10.8.2 to January 1993 S-1 September 17, 1990 between the Company and MeraBank 10.6 Third Amendment to Lease, dated Exhibit 10.8.3 to January 1993 S-1 November 4, 1991 between the Company and Cook Inlet Region, Incorporated 10.7 Fourth Amendment to Lease, dated Exhibit 10.9 to the Company's Form March 24, 1992 between the Company 10-Q for the quarter ended September and Cook Inlet Region, Incorporated 30, 1994, File No. 0-21214 ("September 30, 1994 10-Q")
EX-2
Exhibit Filed No. Description Incorporated by Reference To: Herewith --- ----------- ----------------------------- -------- 10.8 Fifth Amendment to Lease, dated Exhibit 10.10 to the Company's September 14, 1993 between the September 30, 1994 10-Q Company and Cook Inlet Region, Incorporated 10.9 Invention, Confidential Information and Exhibit 10.11 to January 1993 S-1 Non-Competition Agreement dated January 10, 1989 between the Company and Frank P. Magee 10.10 Addendum to Lease between the Exhibit 10.8.1 to the Registration Company and Cook Inlet Region, Inc. Statement on Form S-3 (No. 333- commencing April 1, 1996 3082) filed with the SEC on April 2, 1996 ("April 1996 S-3") 10.11 1995 Officer Bonus Plan(1) Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 ("1995 10-K") 10.12 1996 Officer Bonus Plan(1) Exhibit 10.11 to 1995 10-K 10.13 1997 Officer Bonus Plan(1) X 10.14 Form of Indemnification Agreement* Exhibit 10.16 to January 1993 S-1 10.15 License Agreement dated December 2, Exhibit 10.22 to January 1993 S-1 1992 between Orthotic Limited Partnership and Company 10.16 Consulting Agreement dated May 1, Exhibit 10.11 to the Company's 1990 between Augustus A. White III September 30, 1994 Form 10-Q and the Company(1) 10.17 Letter of employment dated March 5, Exhibit 10.29 to the Company's Form 1993 between the Company and David 10-K for the year ended December E. Derminio(1) 31, 1992, File No. 0-21214 10.18 Amendment to Employment Agreement Exhibit 10.18 to 1995 10-K between the Company and David E. Derminio dated July 12, 1995(1) 10.19 Loan Modification Agreement dated Exhibit 10.22 to 1995 S-1 March 23, 1995 between Company and Silicon Valley Bank 10.20 Employment Agreement dated Exhibit 10.9 to January 1993 S-1 December 17, 1992 between Allan M. Weinstein and the Company(1) 10.21 Renewal of Employment Agreement of Exhibit 10.22.1 to 1994 10-K Allan M. Weinstein dated March 28, 1995(1) 10.22 Employment Agreement dated Exhibit 10.10 to January 1993 S-1 December 17, 1992 between Frank P. Magee and the Company(1)
EX-3
Exhibit Filed No. Description Incorporated by Reference To: Herewith --- ----------- ----------------------------- -------- 10.23 Renewal of Employment Agreement of Exhibit 10.23 to 1994 10-K Frank P. Magee dated March 28, 1995(1) 10.24 Employment Agreement dated Exhibit 10.24 to 1995 10-K February 27, 1992 between Allen R. Dunaway and the Company(1) 10.25 Amendment to Employment Agreement Exhibit 10.25 to 1995 10-K between the Company and Allen R. Dunaway dated February 14, 1996(1) 10.26 Underwriting Agreement between the Exhibit 1.1 to 1995 S-1 Company and Volpe, Welty & Co. and Dain Bosworth, Inc., as Representa tives of the Underwriters 10.27 Underwriting Agreement between the Exhibit 1.1 to April 1996 S-3 Company and Volpe, Welty & Company Hambrecht & Quist and Dain Bosworth, Inc., as Representatives of the Underwriters 10.28 Maturity Modification Letter dated Exhibit 10.21 to April 1996 S-3 March 29, 1996, by Silicon Valley Bank 10.29 Employment Agreement dated March Exhibit 10.28 to April 1996 S-3 28, 1996 between the Company and Nicholas A. Skaff(1) 10.30 Employment Agreement dated July 1, Exhibit 10.5 to Company's Quarterly 1996 between the Company and Report on Form 10-Q for the quarter George A. Oram, Jr.(1) ended June 30, 1996 10.34 Lease made March 1997 between X Toronto Medical Corp. and Toronto Medical Orthopaedics Ltd. 10.35 Lease dated September 4, 1991 by and X between Greystone Realty Corporation and Sutter Corporation 10.36 Lease dated February 10, 1988 X between MIC Four Points and Sutter Biomedical, Inc. 10.37 First Addendum to Lease dated X February 15, 1988 by and between MIC Four Points and Sutter Biomedical, Inc. 10.38 October 7, 1988 Second Addendum to X Lease dated February 10, 1988 between MIC Four Points and Sutter Biomedical, Inc.
EX-4
Exhibit Filed No. Description Incorporated by Reference To: Herewith --- ----------- ----------------------------- -------- 10.39 Severance Agreement effective February X 18, 1997 by and between George A. Oram, Jr. and the Company (1) 10.40 Promissory Note dated November 15, X 1996 made by George A. Oram, Jr. in favor of the Company (1) 11.1 Statement of Computation of Net X Income (Loss) per Weighted Average Number of Common and Common Equivalent Shares Outstanding 13.1 Portions of 1996 Annual Report to X Stockholders 21.1 Subsidiaries of Registrant X 23.1 Consent of Deloitte & Touche LLP 27 Financial Data Schedule X
- -------------------------------------- (1) Management contract or compensatory plan or arrangement * The Company has entered into a separate indemnification agreement with each of its current direct and executive officers that differ only in party names and dates. Pursuant to the instructions accompanying Item 601 of Regulation S-K, the Company has filed the form of such indemnification agreement. EX-5 EX-4.7 2 STOCK PURCHASE WARRANT THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION ("BLUE SKY LAWS"), AND CANNOT BE RESOLD UNLESS THEY ARE REGISTERED UNDER THE ACT AND ANY APPLICABLE BLUE SKY LAWS, UNLESS AN EXEMPTION IS AVAILABLE. THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. ORTHOLOGIC CORP. STOCK PURCHASE WARRANT WARRANT TO PURCHASE 5,000 SHARES OF COMMON STOCK AS DESCRIBED HEREIN Dated: October 15, 1996 Warrant No. RCG 2 This certifies that, for valuable consideration received: Name: Registered Consulting Group, Inc. Address: 7373 N. Scottsdale Rd., Suite D-115 Scottsdale, Arizona 85253 Facsimile: 602-998-8804 or its registered permitted assigns are entitled to purchase from OrthoLogic Corp., a Delaware corporation (the "Company"), having its principal office at 2850 South 36th Street, Phoenix, Arizona 85034 (Facsimile: 602-437-5524), five thousand (5,000) fully paid and nonassessable shares of Common Stock, $.0005 par value, of the Company the ("Common Stock"), subject to the terms set forth herein. This Warrant shall be exercisable during the time periods set forth in Section 1 hereof, at the price indicated therein. The holder of this Warrant shall be referred to herein as the "Warrantholder." By accepting this Warrant, Registered Consulting Group, Inc. ("RCG") acknowledges that the issuance of this Warrant satisfies the Company's obligation to issue "options," as described in the Compensation Attachment to the Engagement Agreement dated March 15, 1995 between the Company and RCG (the "Agreement"), as it has been modified and amended through the date of this Warrant and that this Warrant fully replaces Warrant No. RCG 1, which is now void for all purposes. 1. The purchase rights to 5,000 shares of Common Stock as represented by this Warrant may be exercised by the Warrantholder or its duly authorized attorney or representative, to the extent that such purchase rights are vested as described in Section 2 of this Warrant, at any time or from time to time, during the period commencing on the date of this Warrant (the "Commencement Date") and expiring at 4:30 p.m., Mountain Time, on March 14, 2001 (the 1 "Expiration Date"), upon presentation of this Warrant at the principal office of the Company with the purchase form attached hereto duly completed and signed, and upon payment to the Company in cash or by certified check or bank draft of $2.41 per share of Common Stock purchased (the "Warrant Price"). 2. Rights to purchase Common Stock pursuant to this Warrant are fully vested. 3. The issuance and delivery of shares of Common Stock pursuant to the terms of this Warrant shall be subject to and comply with all relevant provisions of law including, without limitation, the Act, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and any applicable state securities or "Blue Sky" law or laws, and the requirements of any stock exchange upon which the Common Stock may then be listed. 4. The Company agrees that the Warrantholder will be deemed the record owner of any shares purchased pursuant to Section 1 hereof as of the close of business on the date on which the Warrant shall have been presented and payment shall have been made for such shares as aforesaid. Certificates for the shares of Common Stock so purchased shall be delivered to the Warrantholder within a reasonable time, not exceeding 20 days, after the exercise in full of the rights represented by this Warrant. 5. The number of shares purchasable upon exercise is subject to adjustment from time to time as follows: (a) In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue by reclassification of its shares of Common Stock other securities of the Company, the number of shares of Common Stock purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Warrantholder shall be entitled to receive the kind and number of shares of Common Stock or other securities of the Company which he would have owned or have been entitled to receive at the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this Section 5(a) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) Whenever the number of shares of Common Stock purchasable upon the exercise of this Warrant is adjusted, as herein provided, the aggregate Warrant Price shall remain unchanged (the Warrant Price calculated on a per share basis, however, shall 2 be adjusted by multiplying such per share Warrant Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of shares of Common Stock purchasable upon the exercise of this Warrant immediately prior to such adjustment, and of which the denominator shall be the number of shares of Common Stock so purchasable immediately thereafter). In the event of any adjustment pursuant to this Section 5, no fractional shares of Common Stock shall be issued in connection with the exercise of this Warrant, but the Company shall, in lieu of such fractional shares, make such cash payment therefor on the basis of the current market price on the date immediately prior to exercise. Irrespective of any adjustments pursuant to this Section 5 to the number of shares or other securities or other property obtainable upon exercise of this Warrant, this Warrant may continue to state the price and the number of shares obtainable upon exercise as the same price and number of shares stated herein. 6. This Warrant shall be void after 4:30 p.m. Mountain Time, on the Expiration Date, except for the provisions of Section 10 which shall survive the termination of this Warrant. 7. The Company covenants and agrees that: (a) During the period during which this Warrant may be exercised, the Company will at all times reserve and keep available, free from preemptive rights out of the aggregate of its authorized but unissued Common Stock, for the purpose of enabling it to satisfy any obligation to issue shares of Common Stock upon the exercise of this Warrant, the number of shares of Common Stock deliverable upon the exercise of this Warrant. If at any time the number of shares of authorized Common Stock shall not be sufficient to effect the exercise of this Warrant, the Company will take such corporate actions as may be necessary to increase its authorized but unissued Common Stock to such number of shares as shall be sufficient for such purpose; (b) All Common Stock that may be issued upon exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid, nonassessable, and free from all taxes, liens, and charges with respect to the issue thereof; and (c) All original issue taxes payable with respect to the issuance of shares upon the exercise of the rights represented by this Warrant will be borne by the Company but in no event will the Company be responsible or liable either for income taxes or for transfer taxes upon the transfer of any Warrant. 8. Until exercised, this Warrant shall not entitle the Warrantholder to any voting rights or other rights as a stockholder of the Company. 3 9. This Warrant may not be sold, transferred, assigned, pledged or hypothecated. The Common Stock issuable upon the exercise hereof may not be sold, transferred, assigned, pledged or hypothecated unless the Company shall have been supplied with evidence reasonably satisfactory to it that such transfer is not in violation of the Securities Act of 1933, as amended (the "Act"), any applicable state laws, and any provision of this Warrant. The Company may place a legend referencing the transfer restrictions on this Warrant or any replacement Warrant and on any certificates representing shares issuable upon exercise of this Warrant. 10. (a) If at any time after November 30, 1995 but before December 31, 2001, the Company proposes to register under the Act and/or any applicable state securities law any of its Common Stock for sale for cash in an offering in which other shareholders will be participating, to the extent not limited by either existing contractual arrangements or by this Warrant, the Warrantholder shall have the right to include any part or all of the shares of Common Stock for which Warrantholder possesses exercisable purchase rights pursuant to this Warrant in any such registration. (b) Notwithstanding (a) above, the Company shall include in any registration made pursuant to this Section 10 only those shares of Common Stock covered by this Warrant as to which it has received assurances reasonably satisfactory to it that all exercise rights as to the Warrant will be exercised and that such Warrant will be converted to Common Stock on or prior to the date on which a registration statement has become effective or the sale thereof to underwriters has been consummated so that only Common Stock shall be distributed to the public under such registration statement. If Common Stock is proposed to be registered pursuant to Section 10(a), the Company shall give written notice to the Warrantholder of the proposed filing not later than one week prior to the date of its intention to do so and, upon the written request of the Warrantholder given to the Company not more than four calendar days later (which request shall state the intended method of disposition of such of its securities to be included in the registration statement by the Warrantholder), the Company shall cause such number of shares of the Common Stock acquired or to be acquired by the Warrantholder pursuant to this Warrant (but not the Warrant itself) to be included in the registration statement to be registered under the Act as provided above. Any request of the Warrantholder for inclusion in any registration of Common Stock pursuant to this Section 10 shall also include the agreement of the Warrantholder to sell the applicable amount of Common Stock only through the underwriters, if applicable, and at the price and upon the terms fixed by the 4 agreement among the Company and the underwriters or brokers for such transaction. Additionally, in connection with any such registration, participation by the Warrantholder will be conditioned upon its execution of the underwriting documents (which shall include standard indemnification provisions) negotiated by the Company or the other selling stockholders, and the execution by the Warrantholder of a lockup of up to 120 days for any shares owned by it and not sold in the offering. (c) Any registration of shares pursuant to Section 10(a) shall be effected at the Company's expense, exclusive of underwriting discounts and commissions and of legal fees and expenses for counsel to the Warrantholder. (d) In connection with any registration of shares pursuant to this Section 10, the persons whose shares are being registered shall furnish the Company with such information concerning such persons and the proposed sale or distribution as shall, in the opinion of counsel for the Company, be required for use in the preparation of the registration statement, and such person shall cooperate fully in the preparation and filing of the registration statement. In addition, Warrantholder shall indemnify the Company, its officers and directors ("Indemnified Persons") against all claims, losses or damages Indemnified Persons incur as a result of any information supplied by such Warrantholder that was included in the registration statement which either contained any untrue statement or alleged untrue statement of material fact or failed to disclose material facts required to make those stated not misleading. (e) The rights represented by this Section 10 shall expire for any shares registered pursuant to this Section 10 or otherwise. (f) The obligations of the Company and the Warrantholder under this Section 10 shall survive the expiration of this Warrant. 11. If this Warrant is lost, stolen, mutilated or destroyed, the Company shall, on such terms as the Company may reasonably impose, including a requirement that the Warrantholder obtain a bond, issue a new Warrant of like denomination, tenor, and date. Any such new Warrant shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by anyone. 12. Any Warrant issued pursuant to the provisions of Section 11 shall set forth each provision set forth in Sections 1 through 18, inclusive, of this Warrant as each such provision is set forth herein, and shall be duly executed on behalf of the Company by an executive officer. 5 13. Upon surrender of this Warrant or upon the exercise hereof, this Warrant shall be canceled by the Company, shall not be reissued by the Company, and no Warrant shall be issued in lieu thereof. Any new Warrant certificate shall be issued promptly but no later than seven days after receipt of the old Warrant certificate; provided, however, that the obligation of the Company to issue the shares of Common Stock upon the exercise of this Warrant shall be subject to compliance with Sections 3 and 9 hereof. 14. This Warrant shall inure to the benefit and be binding upon the Warrantholder, the Company, and their respective successors and assigns, except as provided otherwise herein. 15. All notices required hereunder shall be in writing and shall be deemed received when delivered personally, one business day after delivery to a nationally recognized commercial overnight courier service, or upon sending if sent by confirmed facsimile to the Company or the Warrantholder, at the address or facsimile number of such party as set forth on the first page of this Warrant, or at such other address or facsimile number of which the Company or Warrantholder has been advised by notice hereunder. 16. In the case of any change in the Common Stock through merger, consolidation, reclassification, reorganization, recapitalization, or other change in the capital structure of the Company or in the case of a sale or other transfer of its property, assets, or business substantially as an entirety to another corporation, appropriate adjustment shall be made so that the Warrantholder shall have the right thereafter to receive upon the exercise of this Warrant the amount of shares of Common Stock which such holder would have been entitled to receive if immediately prior to such event, such holder had held the number of shares of Common Stock which were then purchasable upon the exercise of this Warrant. Appropriate adjustment shall be made in the application of the provisions of this Warrant so that the provisions set forth herein shall thereafter be applicable, as nearly as reasonable, to any shares of stock thereafter deliverable upon the exercise of this Warrant. 17. The validity, interpretation, and performance of this Warrant and of the terms and provisions hereof shall be governed by and construed and enforced in accordance of the internal laws of the State of Arizona without giving effect to the principles of conflict of laws, except as otherwise required by the General Corporation Law of the State of Delaware. 18. This Warrant may not be modified, amended or supplemented without the approval of the holder of the Warrant and except upon the execution and delivery of a written agreement executed by the Company and the Warrantholder. 6 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed effective as of October 15, 1996. ORTHOLOGIC CORP. By: /s/ Allan M. Weinstein ---------------------------- Allan M. Weinstein Its: Chairman of the Board, and Chief Executive Officer 7 PURCHASE FORM ------------- To Be Executed Upon Exercise of Warrant The undersigned hereby exercises the right to purchase shares of Common Stock, evidenced by the attached Warrant, according to the terms and conditions thereof, and herewith makes payment of the purchase price in full. The undersigned requests that certificate(s) for such shares shall be issued in the name set forth below. DATED: [NAME OF HOLDER] By _____________________________ (Signature) Name:___________________________ (Please Print) Address: _______________________ _______________________ _______________________ _______________________ Employer Identification No., Social Security No. or other identifying number: ________________________________ 8 EX-10.13 3 1997 EXECUTIVE BONUS PLAN OrthoLogic Corp. Phoenix, Arizona 1997 Executive Bonus Plan Bonus Plan 1997 -- The executive bonus opportunity for 1997 will be based on meeting 100% of objectives as recommended by the Compensation Committee: The bonus eligibility for 1997 is as follows: President/CEO 50% Executive Vice President 45% Vice Presidents 40% The Board will determine the overall Company performance and the individual performance of the President/CEO. The President/CEO will determine the individual performance of the Vice Presidents, subject to review by the Board. EX-10.34 4 LEASE L E A S E --------- THIS LEASE made this day of March, 1997. IN PURSUANCE OF THE SHORT FORMS OF LEASES ACT B E T W E E N: TORONTO MEDICAL CORP., ---------------------- (the "Landlord") OF THE FIRST PART A N D : TORONTO MEDICAL ORTHOPAEDICS LTD., ---------------------------------- (the "Tenant") OF THE SECOND PART WHEREAS the Landlord has agreed to lease to the Tenant, and the Tenant has agreed to lease from the Landlord the lands hereinafter described, together with the building and improvements situate thereon on the terms and provisions hereinafter set forth: 1.00 - GRANT AND TERM - --------------------- .1 Grant ----- In consideration of the rents and covenants herein contained on the part of the Tenant, the Landlord hereby leases to the Tenant the lands and premises municipally known as 901 Dillingham Road, Pickering, Ontario, containing a free standing single storey industrial building (the "Building") with a gross floor area of 28,547 square feet, more or less, as more particularly described in Schedule "A" hereto, and all rights and appurtenances (collectively the "Premises"). .2 Term ---- To hold the Premises for the term of 2 years (the "Term") from March 1, 1997 (the "Commencement Date") until February 28, 1999. 2.00 - RENT - ----------- .1 Rent ---- -2- The Tenant paying therefor yearly during the Term the sum of $142,285.00 of lawful money of Canada in 12 equal monthly instalments of $11,857.00 in advance on the first day of each and every month, the first of such instalments to become due and payable on March 1, 1997 (the "Base Rent"). .2 Prepaid Rent/Security Deposit ----------------------------- The Tenant hereby covenants to pay on the execution of this Lease the sum of: (a) Prepaid Rent ------------ $23,714.00 plus GST, $11,857.00 plus GST of which is to be applied to the account of the first month's rent and the balance on account of the last month's rent. (b) Security Deposit ---------------- INTENTIONALLY DELETED .3 Additional Rent --------------- The Tenant covenants and agrees to pay therefor as additional rent (the "Additional Rent") the moneys and other charges, costs and expenses herein provided to be paid by the Tenant at the several times when they become payable. .4 Rent Past Due ------------- If the Tenant fails to pay when the same is due and payable hereunder any Base Rent, Additional Rent or any other amount payable by the Tenant under this Lease, such unpaid amounts shall bear interest from the due date thereof to the date of payment at a rate per annum, which is three (3) percentage points in excess of the Prime Rate. 3.00 - TENANT'S COVENANTS - ------------------------- The Tenant covenants with the Landlord as follows: .1 Rent ---- -3- During the Term, to pay to the Landlord the Base Rent hereby reserved and all Additional Rent in the manner and at the times herein provided, without deduction, abatement or set-off except as may otherwise be provided herein, all rent in arrears to bear interest at three (3) percentage points in excess of the Prime Rate per annum until paid. During the initial Term (but not during the First Renewal Term or the Second Renewal Term (as hereinafter defined)), Tenant shall have the set-off rights provided for in section 8.1(d) of the Purchase and Sale Agreement dated December 30, 1996, among Tenant as buyer, and Landlord as seller. .2 Additional Rent --------------- As Additional Rent hereunder, to promptly discharge and pay when due (subject to the right of contestation as hereinafter mentioned) before any fine, penalty, interest or cost may be added thereto: all real property taxes, rates, duties, assessments, impost charges, local improvement charges and levies, whether general or specified, and other public charges, excluding any income or capital taxes which shall be payable by the Landlord, which prior to the commencement of the Term have been, or during the Term may be, levied, rated, charged or assessed against the Premises and all equipment and facilities thereon or therein, and any property now or hereafter on the Premises, whether or not owned or brought thereon by the Tenant, and any taxes or other amounts that are imposed on the Landlord in lieu of, in substitution for or in addition to any real property taxes (whether currently contemplated or not) provided that any such taxes, rates, duties, assessments, charges or levies which have been levied prior to the commencement of the Term shall be apportioned such that the Tenant shall be responsible only for the portion of same pertaining to the period following the Commencement Date; any goods and services taxes imposed with respect to Base Rent or Additional Rent, whether characterized as a goods and services tax, value-added tax, sales tax or otherwise; any commercial concentration levy tax or other similar tax; every tax, licence fee, business tax and other public charge which before the commencement of the Term has been or during the Term may be assessed, levied or charged in respect of the Premises, whether or not caused by the occupancy of the Tenant or the business carried on therein by the Tenant or the property of the Tenant therein, whether such taxes, rates, assessments, licence fees and other public charges are assessed, levied or charged by municipal, provincial, federal, school or other public body; and all charges for electric current, gas, telephone, water and other rates in connection with the Premises; and the Tenant shall indemnify the Landlord against the payment of all such tax, rate, duty, assessment, licence fee or other public charge, electric current, rate and other utility charges, and against all loss, liability, cost, charge and expense by reason of the Tenant's failure to pay such sums when due; and the Tenant shall forthwith after payment of the foregoing items and charges produce to the Landlord on request evidence satisfactory to the Landlord of the fact of such payment; PROVIDED that the Tenant may contest, if it has delivered to the Landlord security for such taxes, rates, etc. that the Landlord requires, the validity or the -4- amount of any tax, rate, assessment or other public charge (if meanwhile such contestation will involve no forfeiture, foreclosure, escheat, sale or termination of the Landlord's title to the Premises or any part thereof), but upon a final determination of any such contest, the Tenant shall immediately pay and satisfy the amount of any such tax, rate, assessment or other public charge declared or found to be due, together with all proper costs, penalties, interest or other charges payable in connection therewith; and upon being provided with suitable indemnity or security satisfactory to it, in relation to any costs, charges, rates, assessments or expenses which it may incur or be likely to incur, the Landlord agrees to join in any such contest if the Tenant shall require and if its presence is reasonably necessary to perfect the proceedings in relation thereto, but the Landlord shall not be responsible for the conduct or carriage of such proceedings nor incur any liability whatsoever by reason of having joined therein and the Tenant shall indemnify and save the Landlord against any such liability. The Tenant agrees to provide the Landlord within 10 days after receipt thereof with a copy of any separate tax bills and separate tax notices of assessments for the Premises. The Tenant will promptly deliver to the Landlord evidence of payments satisfactory to the Landlord, acting reasonably, of all such taxes paid to any such taxing authorities aforesaid and will furnish such other information in connection therewith as the Landlord may reasonably require. Notwithstanding the foregoing, Additional Rent should not include any of the following: (a) borrowing costs, depreciation, interest and principal on mortgages and other debt costs, except to the extent included as set forth above; (b) any costs incurred as a result of the gross negligence or wilful misconduct of the Landlord or any of its agents, contractors or employees; (c) costs of all repair and replacement to the structure of the Building including, without limitation, foundations, bearing walls, structural columns and beams, and the roof structure, excluding the roof membrane, whether or not they are paid for from proceeds of insurance or as damages by third parties, save and except those repairs and replacements resulting from the acts or omission of the Tenant or any of its agents, contractors or employees or those for whom it is in law responsible, which shall be the Tenant's responsibility; (d) ground rent and other monies payable under any ground lease of the lands or any part thereof or any lease senior to this Lease, except for amounts which would be included in Additional Rent if incurred under this Lease; (e) proceeds of insurance and damages paid by third parties; and -5- (f) any costs relating to any violation of or costs of compliance with Environmental Laws (as defined in Section 11.1) other than those for which the Tenant is otherwise responsible under this Lease. .3 Maintenance ----------- At its own cost and expense, to operate, maintain and keep the Premises and all equipment and fixtures thereon in good order and condition, reasonable wear and tear excepted, and promptly to make all repairs and replacements of any nature, whether of a capital nature or otherwise, to the Premises when needed (both inside and outside, structural or otherwise), provided, however, that the Tenant shall not be responsible for the costs or expense of operation, maintenance, replacement or repair of those items described in Sections 3.2(b), 3.2(c) or 3.2(f). Subject to Section 7.5 hereof, if the Tenant shall at any time fail to make any such repairs or replacements when needed, the Landlord may make them or cause them to be made and the cost thereof, together with interest thereon computed at the Prime Rate from the date of payment by the Landlord, shall be charged to and paid by the Tenant as Additional Rent due on the next ensuing rent day. The Tenant shall permit the Landlord and its representatives at all reasonable times upon 24 hours prior written notice (except in the case of an emergency) to enter upon and view the Premises and the state of repair and to make such needed repairs and replacements as the Landlord may specify in writing. .4 Condition of Premises --------------------- To keep the Premises and every part thereof in a clean and tidy condition and not to permit waste paper, garbage, ashes or waste or objectionable material to accumulate thereon and, at its expense, to keep the driveways, walks, grounds, sidewalks and curbs forming part of or adjoining the Premises clean and free of snow and ice. .5 Overloading Floors ------------------ Not to bring upon the Premises or any part thereof any machinery, equipment, article or thing that by reason of its weight, size or use might damage the Premises and not at any time to overload the floors of the Premises, and if any damage is caused to the Premises by any machinery, equipment, article or thing or by overloading or by any act, neglect or misuse on the part of the Tenant or any of its servants, agents or employees or any person having business with the Tenant, to forthwith repair or pay to the Landlord the cost of making good such damage. The Tenant shall not bring or permit any heavy vehicles on the Premises which might damage any parking areas or driveways. .6 Heat ---- -6- To heat the Premises at its own expense to the extent required by it for its business purposes with the heating systems currently in the Building, but always to such temperature as may be necessary to prevent damage to the Premises by frost. .7 Compliance with Fire and Other Regulations ------------------------------------------ That the Tenant has inspected the Premises and acknowledges that it is accepting the Premises on an "as is, where is and what is basis" and that the Landlord is making no covenants, agreements, representations, warranties or acknowledgements with respect to the condition of the Premises and finds them to be in a satisfactory condition and that in the maintenance, use and occupation of the Premises, it will at its own cost and expense comply with every applicable regulation or order of the Canadian Fire Underwriters Association, or any body having similar functions, and of any liability or fire insurance company by which the Landlord or the Tenant may be insured, and with all applicable laws, ordinances and regulations of duly constituted public authorities having jurisdiction now or hereafter in any manner affecting the Premises or the use or occupation thereof, whether or not such regulations, orders, laws or ordinances which may hereafter be promulgated, issued or enacted involve a change of policy or require structural or other changes or alterations in or about the Premises. .8 Construction and Other Liens ---------------------------- Not at any time to permit any construction, labourer's, materialman's or similar lien to stand against the Premises for any labour or materials furnished to or with the consent of the Tenant, its agents or contractors, in connection with work of any character performed or claimed to have been performed on the Premises by or at the direction or sufferance of the Tenant; PROVIDED, however, that the Tenant shall have the right to contest, if it has delivered to the Landlord security for such lien, as required by the Landlord, the validity of or the amount claimed under or in respect of any such lien, provided such contestation shall involve no forfeiture, foreclosure or sale of the Premises or any part thereof, but upon a final determination of such contest, the Tenant shall immediately pay and satisfy any judgement or decree rendered against the Tenant, with all proper costs and charges, and cause such lien to be discharged and released of record, all without cost or expense to the Landlord; provided further that on the Tenant's failure promptly to remove or contest any such lien and all amounts paid by or on behalf of the Landlord, together with all expenses incurred in connection therewith and interest thereon at the Prime Rate from the date of payment by or for the Landlord, shall be charged to and paid by the Tenant as Additional Rent due on the next ensuing rent day. .9 Indemnity --------- -7- To indemnify the Landlord against all liability, claims, demands, actions and causes of action of any nature whatsoever, and any expense incident thereto, for injury to or death of persons or loss of or damage to property occurring on the Premises or the adjoining walks, drives, ways or streets or in any manner growing out of or in connection with the Tenant's use or occupation of the Premises or the condition thereof or the adjoining walks, drives, ways or streets during the Term or arising out of any breach of the Tenant's covenants herein or out of any work being done in or about the Premises unless such liability, claims, demands, actions and causes of actions arise as a result of the gross negligence or wilful misconduct of the Landlord or those for whom it is at law responsible. .10 Insurance --------- During the whole of the Term, at its expense: (a) to insure the Premises, excluding foundations, in a stated amount as determined by the Landlord's insurance advisors, but not exceeding the full insurable value thereof, against all risk of loss or damage caused by or resulting from fire, lightning, explosion, collapse of any boilers, pipes or accessories in or about the Premises or any peril defined in a standard fire insurance additional perils supplementary contract normally in use from time to time during the Term or any extension thereof for buildings and structures in the Town of Pickering similar in nature to the Premises. Insurance under this Section shall be maintained at the full replacement value with a by-law compliance endorsement; (b) to maintain public liability and property damage insurance, including personal injury liability, contractual liability, non-owned automobile liability, employers' liability and owners' and contractors' protective insurance coverage with respect to the Premises and the Tenant's use thereof, coverage to include the activities and operation conducted by the Tenant and any other person on the Premises and by the Tenant and any other person performing work on behalf of the Tenant and those for whom the Tenant is in law responsible in any part of the Premises. Such policies shall: (i) be written on a comprehensive basis with inclusive limits of not less than $2,000,000.00 for bodily injury to any one or more persons or property damage or such higher limits as the Landlord, acting -8- reasonably, or any mortgagee of the Premises requires from time to time; and (ii) contain a SEVERABILITY of interests clause and cross- liability clause; (c) to maintain broad form boiler and machinery insurance on a blanket repair and replacement basis with limits for each accident in an amount not less than the replacement cost of all boilers, pressure vessels, air-conditioning equipment and miscellaneous electrical apparatus owned or operated by the Landlord and the Tenant or by others in the Premises or relating to or serving the Premises; (d) to maintain business interruption insurance to reimburse the Tenant for direct or indirect loss of earnings attributable to all perils insured against in Sections 3.10(a) and (c) and other perils commonly insured against by prudent tenants or attributable to prevention of access to the Premises as a result of such perils and, for this purpose, to the extent that such coverage is not provided for in the business interruption insurance, shall maintain the appropriate endorsements to the fire policy (loss of rental income) and to the boiler policy (use and occupancy), the limits of which endorsements shall be equal to the annual rent and Additional Rent calculated by the Landlord or its insurance advisors; (e) to maintain tenants' legal liability insurance for the actual cash value of the Premises, including loss of use thereof; (f) to maintain any other form of insurance as the Landlord, acting as a prudent owner and as is customary practice for landlords of buildings of a similar nature, or any mortgagee of the Premises reasonably requires from time to time in form, in amounts and for insurance risks against which a prudent owner would insure; and (g) to alter or improve any of the insurance policies placed pursuant to this Section 3.10 as the Landlord, acting as a prudent owner, or any mortgagee of the Premises requires from time to time. All such contracts of insurance placed by the Tenant hereunder shall, to the extent available, show the Landlord, Tenant and any mortgagee (to an amount that the Landlord's insurance advisors feel a prudent owner and landlord should be insured for) as joint insured, as their interests may from time to time appear, -9- and shall contain a waiver of any subrogation rights which the Tenant's insurers may have against the Landlord and those for whom the Landlord is at law responsible, whether any such damage is caused by the act, omission or negligence of the Landlord or those for whom the Landlord is at law responsible. To the extent available, and provided that it does not increase the cost otherwise payable by the Landlord for its insurance, the Landlord's insurance in respect of the Premises shall contain a waiver of any subrogation rights which the Landlord's insurers may have against the Tenant and those for whom the Tenant is at law responsible, whether any damage is caused by the act, omission or negligence of the Tenant or those for whom the Tenant is at law responsible. If the Tenant fails to obtain the policies of insurance required hereunder, the Landlord may itself obtain such policies and shall give the Tenant a notice setting out the amount and dates of payment of all costs and expenses incurred by the Landlord in connection therewith to the date of such notice; the Tenant will, with the next instalment of rent which becomes due, pay the same to the Landlord with interest at three (3) percentage points in excess of the Prime Rate per annum calculated on the various amounts from the respective dates of payment thereof by the Landlord to the date of repayment by the Tenant. Any sum so expended by the Landlord, together with such interest as aforesaid, shall constitute rent hereunder and be collectable as such rent and be due and payable on demand by the Landlord. The Tenant shall furnish the Landlord with certified copies of policies or other acceptable evidence of all such insurance promptly upon request, provided no review or approval of any such policies by the Landlord shall derogate from or diminish the Landlord's rights or the Tenant's obligations contained in this Lease or this Article. .11 Surrender at Expiration of Term ------------------------------- At the expiration or earlier termination of this Lease, peaceably to surrender and yield up to the Landlord the Premises in good and substantial repair and condition, subject to reasonable wear and tear. PROVIDED that the Tenant may at the expiration of this Lease, if it shall not then be in default hereunder, remove from the Premises all the Tenant's fixtures, but shall, in such removal, do no damage to the Premises or shall promptly make good any damage which may be occasioned thereto and restore them to their condition prior to such removal. .12 Use of Premises --------------- Not to use the Premises other than for the purposes of manufacturing of orthopaedic medical devices or other medical products related thereto, warehousing inventory and general office use and not to carry on, or permit to be carried on in or upon the Premises any noxious or offensive trade or business which shall be a nuisance at law or by which the buildings or erections on the Premises shall -10- be injuriously affected or by reason of which it shall become impossible to obtain and maintain insurance against fire and the usual perils. .13 Waiver re Distress ------------------ To waive and renounce (so far as it may be permitted to do so by applicable legislation) the benefit of any present or future act in force in the Province of Ontario which takes away or limits the Landlord's right of distress, and that the Landlord may seize and sell the Tenant's goods and chattels for payment of Base Rent and Additional Rent and costs as fully as the Landlord might have done if such act had not been enacted or passed. .14 Roof ---- That it will not place anything on the roof, whether signs or otherwise, or in any way make any opening in the roof for stacks or other purposes, or in any way alter the walls or structure of the Premises without the written consent of the Landlord. .15 Evidence of Payments by Tenant ------------------------------ The Tenant shall from time to time at the request of the Landlord produce to the Landlord satisfactory evidence of the due payment by the Tenant of all payments required to be made by the Tenant under this Lease. .16 Air-Conditioning ---------------- Not to place or attach anything to the outside of the windows or the exterior of the Premises. No air conditioning equipment shall be placed in the windows or shall extend from the exterior of the Premises without the consent in writing of the Landlord, which consent may be arbitrarily withheld. -11- .17 Application to Amend By-Laws ---------------------------- The Tenant will not make any application or representation to or for any governmental body which would have the effect of, in any way, amending or varying the provisions of any governmental by-laws, rules, regulations or requirements affecting the Premises or the building and lands of which the Premises form a part without first obtaining the written consent and authorization of the Landlord, which may be arbitrarily withheld. .18 Financial Statements -------------------- The Tenant will at the request of the Landlord supply copies of its financial statements to the Landlord or to the first mortgagee of the Premises or a prospective first mortgagee or prospective purchaser of the Premises. .19 Additions and Fixtures ---------------------- Subject to Section 3.11, any building, erection or improvement placed or erected upon the Premises shall become a part thereof and shall not be removed and shall be subject to all the provisions of this Lease, but no building, erection or improvement shall be erected upon the Premises without the prior written consent of the Landlord. .20 Inspection by Interested Parties -------------------------------- During the Term, any person or persons may inspect the Premises and all parts thereof at all reasonable times on 24 hours prior written notice on producing a written order to that effect signed by the Landlord or its agents, provided such inspection does not unreasonably interfere with the business of the Tenant. .21 Notices for Sale or to Let -------------------------- The Landlord may at any time during the Term or any renewal thereof enter upon the Premises and affix thereto in some prominent location which will not interfere with the business of the Tenant a notice or sign to the effect that the Premises are for sale and within 6 months prior to the end of the Term a sign to the effect that the Premises are available for leasing, and the Tenant shall not remove the said notice or sign or permit it to be removed unless requested to do so by the Landlord. 4.00 - TRANSFERS - ---------------- .1 Assigning and Subletting ------------------------ -12- (a) The Tenant will not assign this Lease in whole or in part, nor sublet all or any part of the Premises, nor mortgage or encumber this Lease or the Premises or any part thereof, nor suffer or permit the occupation of, or part with or share possession of all or any part of the Premises by any person (all of the foregoing being hereinafter collectively referred to as a "Transfer") without the prior written consent of the Landlord in each instance, which consent shall not be unreasonably withheld or delayed, provided that, notwithstanding any statutory provision to the contrary, it shall not be considered unreasonable for the Landlord to take into account the following factors in deciding whether to grant its consent: (i) whether any such Transfer is in violation or breach of any covenants or restrictions granted by the Landlord to other tenants or occupants or prospective tenants or occupants; and (ii) whether in the Landlord's reasonable opinion the financial background, business history and capability of the proposed Transferee is satisfactory. The consent by the Landlord to any Transfer, if granted, shall not constitute a waiver of the necessity for such consent to any subsequent Transfer. This prohibition against a Transfer is construed so as to include a prohibition against any Transfer by operation of law and no Transfer shall take place by reason of a failure by the Landlord to give notice to the Tenant within 30 days as required by Section 4.2(b). (b) If the Tenant intends to effect a Transfer of all or any part of the Premises or this Lease in whole or in part, or any estate or interest hereunder, then and so often as such event shall occur, the Tenant shall give prior written notice to the Landlord of such intent specifying therein the proposed assignee, subtenant or occupant (all of the foregoing being hereinafter collectively referred to as the "Transferee") and providing such information with respect thereto, including, without limitation, information concerning the principals thereof and as to any credit, financial or business information relating to the proposed Transferee as the Landlord or the mortgagee requires, and the Landlord shall within 30 days after having received such notice and all such necessary information, notify the Tenant in writing either that: -13- (i) it consents or does not consent to the Transfer in accordance with the provisions and qualifications in this Article 4.00; or (ii) it elects to cancel this Lease in preference to giving of such consent. If the Landlord elects to cancel this Lease as aforesaid, the Tenant shall notify the Landlord in writing within 15 days thereafter of the Tenant's intention either to refrain from such Transfer or to accept the cancellation of this Lease. If the Tenant fails to deliver such notice within such period of 15 days, this Lease will thereby be terminated upon the expiration of the said 15-day period. If the Tenant advises the Landlord it intends to refrain from such Transfer, then the Landlord's election to cancel this Lease as aforesaid shall become null and void in such instance. .2 Corporate Ownership ------------------- If the Tenant is a corporation or if the Landlord has consented to a Transfer of this Lease to a corporation, any transfer or issue by sale, assignment, bequest, inheritance, operation of law or other disposition, or by subscription from time to time of all or any part of the corporate shares of the Tenant or of any parent or subsidiary corporation of the Tenant or any corporation which is an associate or affiliate of the Tenant (as those terms are defined pursuant to the Business Corporations Act [Ontario] and amendments thereto (the "OBCA")), which results in any change in the present effective voting control of the Tenant by the person holding such voting control at the date of execution of this Lease (or at the date a Transfer of this Lease to a corporation is permitted) and which does not receive the prior written consent of the Landlord in each instance (which consent may be unreasonably withheld, notwithstanding any statutory provision to the contrary) entitles the Landlord to terminate this Lease upon 5 days' written notice to the Tenant. If the Landlord elects to cancel this Lease as aforesaid, the Tenant shall have the right to advise the Landlord within 15 days after written notice of the Landlord's election, that the Tenant elects to have this Lease reinstated by the transfer, sale, assignment or other disposition (the "Re-Transfer") from the shareholders of the Tenant after such change in control to the shareholders of the Tenant existing as at the Commencement Date (or at the date that a Transfer of this Lease to a corporation is permitted). If the Tenant effects such Re-Transfer within 30 days following the Landlord's election and forthwith thereafter provides the Landlord with evidence satisfactory to the Landlord of such Re-Transfer, this Lease will be reinstated for the balance of the Term as of the date of the termination by the Landlord as aforesaid. If this Lease is terminated as -14- aforesaid, the Landlord may re-enter and take possession of the Premises, whereupon the Landlord's rights and remedies contained in Article 7.00 shall apply. The Tenant shall: (a) when requesting consent to a sale of shares as aforesaid, provide the Landlord with such information as to the proposed purchaser as the Landlord requires, including, without limitation, information concerning credit worthiness, financial standing and business history; and make available to the Landlord or its lawful representatives all corporate books and records of the Tenant for inspection at all reasonable times in order to ascertain whether there has been any change in control of the Tenant corporation.However, this Section 4.2 shall not apply if and so long as the Tenant is a public corporation whose shares are, and after such change in control will continue to be, publicly traded and listed on any recognized stock exchange in Canada or the United States. .3 Transfers by Landlord --------------------- The Landlord, at any time and from time to time, may sell, transfer, lease, assign or otherwise dispose of the whole or any part of its interest in the Premises, and at any time and from time to time may enter into any mortgage of the whole or any of its interest in the Premises. If the party acquiring such interest shall have agreed that so long as it holds such interest, to assume and to perform each of the covenants, obligations and agreements of the Landlord under this Lease in the same manner and to the same extent as if originally named as the Landlord in this Lease, the Landlord shall thereupon be released from all of its covenants and obligations under this Lease. .4 Additional Rent on Sublet or Assignment --------------------------------------- (a) In the event of any subletting by the Tenant by virtue of which the Tenant receives a rental in the form of cash, goods, services or other considerations from the subtenant which is higher than the rental payable hereunder to the Landlord for the premises sublet, the Tenant shall pay 50% of any such excess to the Landlord in addition to all rentals and other costs payable hereunder and such excess for the period of time during which the said subtenant remains in possession of the premises sublet to it. (b) If the Tenant herein shall receive from any assignee of this Lease, either directly or indirectly, any consideration for -15- the assignment of this Lease, either in form of cash, goods or services, the Tenant shall forthwith pay an amount equivalent to 50% of such consideration shall be deemed to be further Additional Rent hereunder. 5.00 - LANDLORD'S COVENANTS - --------------------------- The Landlord covenants with the Tenant as follows: .1 Quiet Enjoyment --------------- That the Tenant, upon paying the Base Rent and Additional Rent hereby reserved and performing and observing all of the covenants and provisions herein contained on its part to be performed and observed, shall peaceably enjoy and possess the Premises for the Term without any interruption or disturbance from the Landlord or any other person or persons lawfully claiming by, from or under it; PROVIDED, however, that nothing herein contained shall be construed as a warranty by the Landlord to the Tenant as against any adverse claims, encumbrances or defects in title to the Premises existing before the Landlord acquired title, or asserted by persons claiming by, from or under a predecessor in title to the Landlord. 6.00 - NET NET LEASE - -------------------- .1 [Intentionally Deleted] ----------------------- .2 Adjustment of Taxes ------------------- The taxes and local improvement rates in respect of the first and last years of the Term shall be adjusted between the Landlord and the Tenant. .3 Net Net Lease ------------- It is the intention of the parties that the rent herein provided to be paid shall be absolute net net to the Landlord and clear of all taxes (except income and capital taxes), costs and charges arising from or relating to the Premises except as otherwise provided in this Lease and that the Tenant shall pay all charges, impositions and expenses of every nature and kind relating to the Premises except as otherwise provided in this Lease, and the Tenant hereby covenants with the Landlord accordingly. -16- .4 [Intentionally Deleted] ----------------------- .5 Non-Liability of Landlord ------------------------- Except in the event of any injury or death caused by the gross negligence or wilful misconduct of the Landlord or those for whom it is at law responsible, the Landlord shall not in any event whatsoever be liable or responsible in any way for any personal injury or death that may be suffered or sustained by the Tenant or any other person who may be upon the Premises or for any loss of or damage or injury to any property belonging to the Tenant or its employees or to any other person while such property is on the Premises and, in particular, the Landlord shall not be liable for any damage to any such property caused by steam, water, rain or snow which may leak into, issue or flow from any part of the building or adjoining Premises or from the water, steam, sprinkler or drainage pipes or plumbing works of the building or from any other place or quarter or for any damage caused by or attributable to the condition or arrangement or any electrical or other wiring. -17- 7.00 - DEFAULT - -------------- .1 Right to Re-Enter ----------------- If and whenever: (a) the Tenant fails to pay any Base Rent or Additional Rent or other sums due hereunder on the day or dates appointed for the payment thereof (provided the Landlord first gives five (5) days' written notice to the Tenant of any such failure); or (b) the Tenant fails to observe or perform any other of the terms, covenants or conditions of this Lease to be observed or performed by the Tenant (other than the terms, covenants or conditions set out in Sections 7.1(c) to (l), inclusive, for which no notice shall be required), provided the Landlord first gives the Tenant 15 days' (or such shorter period of time as is otherwise provided herein) written notice of any such failure to perform and the Tenant within such period of 15 days fails to commence diligently and, thereafter, to proceed diligently to cure any such failure to perform; or (c) the Tenant or any agent of the Tenant falsifies any report or statement required to be furnished to the Landlord pursuant to this Lease; or (d) the Tenant or any guarantor of this Lease or any person occupying the Premises or any part thereof or any licensee, concessionaire or franchisee operating business in the Premises becomes bankrupt or insolvent or takes the benefit of any act now or hereafter in force for bankrupt or insolvent debtors or files any proposal or makes any assignment for the benefit of creditors or any arrangement or compromise; or (e) a receiver or a receiver and manager is appointed for all or a portion of the Tenant's property or any such guarantor's, occupant's, licensee's, concessionaire's or franchisee's property; or (f) any steps are taken or any action or proceedings are instituted by the Tenant or by any other party, including, without limitation, any court or governmental body of competent jurisdiction for the dissolution, winding-up or liquidation of the Tenant or its assets; or -18- (g) the Tenant makes a sale in bulk of any of its assets wherever situate (other than a bulk sale made to an assignee or sublessee pursuant to a permitted assignment or subletting hereunder and pursuant to the Bulk Sales Act (Ontario)); or (h) the Tenant abandons or attempts to abandon the Premises or, other than in the ordinary course of business, sells or disposes of the trade fixtures, goods or chattels of the Tenant or remove them from the Premises so that there would not, in the event of such sale or disposal, be sufficient trade fixtures, goods or chattels of the Tenant on the Premises subject to distress to satisfy all rent due or accruing hereunder for a period of at least 6 months; or (i) the Premises become and remain vacant for a period of 7 consecutive days or are used by any persons other than such as are entitled to use them hereunder; or (j) the Tenant assigns, transfers, encumbers, sublets or, save and except with respect to an affiliate (as that term is defined in the OBCA) with prior written notice to the Landlord, permits the occupation or use or the parting with or sharing possession of all or any part of the Premises by anyone, except in a manner permitted by this Lease; or (k) this Lease or any of the Tenant's assets are taken under any writ of execution; or (l) re-entry is permitted under any other terms of this Lease, then and in every such case the Landlord, in addition to any other rights or remedies it has pursuant to this Lease or by law, has the immediate right of re-entry upon the Premises and it may repossess the Premises and enjoy them as of its former estate and may expel all persons and remove all property from the Premises and such property may be removed and sold or disposed of by the Landlord as it deems advisable or may be stored in a public warehouse or elsewhere at the cost and for the account of the Tenant, all without service of notice or resort to legal process and without the Landlord being considered guilty of trespass or becoming liable for any loss or damage which may be occasioned thereby. .2 Right to Relet -------------- (a) If the Landlord elects to re-enter the Premises as herein provided or if it takes possession pursuant to legal proceedings -19- or pursuant to any notice provided by law, it may either terminate this Lease or it may from time to time without terminating this Lease, make such alterations and repairs as are necessary in order to relet the Premises or any part thereof for such term or terms (which may be for a term extending beyond the Term) and at such rent and upon such other terms, covenants and conditions as the Landlord, in its sole discretion, considers advisable. Upon each such reletting, all rent received by the Landlord from such reletting shall be applied, first, to the payment of any indebtedness other than rent or Additional Rent due hereunder from the Tenant to the Landlord; second, to the payment of any costs and expenses of such reletting, including brokerage fees and solicitor's fees and of costs of such alterations and repairs; third, to the payment of rent and Additional Rent due and unpaid hereunder; and the residue, if any, shall be held by the Landlord and applied in payment of future rent as the same becomes due and payable hereunder. If such rent received from such reletting during any month is less than that to be paid during that month by the Tenant hereunder, the Tenant shall pay any such deficiency which shall be calculated and paid monthly in advance on or before the first day of each and every month. No such re-entry or taking possession of the Premises by the Landlord shall be construed as an election on its part to terminate this Lease, unless a written notice of such intention is given to the Tenant. Notwithstanding any such reletting without termination, the Landlord may at any time thereafter elect to terminate this Lease for such previous breach. (b) If the Landlord at any time terminates this Lease for any breach in addition to any other remedies it may have, it may recover from the Tenant all damages it incurs by reason of such breach, including the cost of recovering the Premises, solicitor's fees (on a solicitor and his client basis) and including the worth at the time of such termination of the excess, if any, of the amount of rent, Additional Rent and charges equivalent to the rent, Additional Rent and other charges required to be paid pursuant to this Lease for the remainder of the Term over the then reasonable rental value of the Premises for the remainder of the Term, all of which amounts shall be immediately due and payable by the Tenant to the Landlord. In any of the events referred to in Section 7.2, in addition to any and all other rights, including the rights referred to in this Article and in Section -20- 7.1, the full amount of the current month's instalment of rent and of all Additional Rent payments for the current month and any other payments required to be made monthly hereunder, together with the next three (3) months' instalments of Base Rent and of all Additional Rent and such other payments for the next 3 months, all of which shall be deemed to be accruing due on a day-to-day basis, shall immediately become due and payable as accelerated rent, and the Landlord may immediately distrain for the same, together with any arrears then unpaid. .3 Expenses -------- If legal action is brought for recovery of possession of the Premises, for the recovery of Base Rent and Additional Rent or any other amount due under this Lease, or because of the breach of any other terms, covenants or conditions herein contained on the part of the Tenant to be kept or performed, and a breach is established, the Tenant shall pay to the Landlord all expenses incurred therefor, including a solicitor's fee (on a solicitor and his client basis) unless a court shall otherwise award. .4 Waiver of Exemption from Distress --------------------------------- The Tenant hereby agrees with the Landlord that, notwithstanding anything contained in section 30 of the Landlord and Tenant Act (Ontario) (the "Act")or any Statute subsequently passed to take the place of or amend the Act, none of the goods and chattels of the Tenant at any time during the continuance of the Term on the Premises shall be exempt from levy by distress for rent or Additional Rent in arrears by the Tenant as provided for by any Sections of the Act or any amendments thereto, and that if any claim is made for such exemption by the Tenant or if a distress is made by the Landlord, this covenant and agreement may be pleaded as an estoppel against the Tenant in any action brought to test the right to the levying upon any such goods as are named as exempted in any sections of the Act or amendments thereto; the Tenant waiving, as it hereby does, all and every benefit that could or might have accrued to the Tenant under and by virtue of any sections of the Act or any amendments thereto but for this covenant. .5 Landlord May Cure Tenant's Default or Perform ----------------------------------------------------- Tenant's Covenants ------------------ If the Tenant fails to pay when due any amounts or charges required to be paid pursuant to this Lease, the Landlord after giving 5 days' notice in writing to the Tenant may, but shall not be obligated to, pay all or any part of the same. If the Tenant is in default in the performance of any of its covenants or obligations hereunder -21- (other than the payment of rent, Additional Rent or other sums required to be paid pursuant to this Lease), the Landlord may, but shall not be obligated to, from time to time after giving such notice as it considers sufficient (or without notice in the case of an emergency) having regard to the circumstances applicable, perform or cause to be performed any of such covenants or obligations, or any part thereof, and for such purpose may do such things as may be required, including, without limitation, entering upon the Premises and doing such things upon or in respect of the Premises or any part thereof as the Landlord reasonably considers requisite or necessary. All expenses incurred and expenditures made pursuant to this Section 7.5, plus a sum equal to 10% thereof representing the Landlord's overhead, shall be paid by the Tenant as Additional Rent forthwith upon demand. Except for Landlord's gross negligence or wilful conduct, the Landlord shall have no liability to the Tenant for any loss or damages resulting from any such action or entry by the Landlord upon the Premises under Articles 7.00 and 8.00 and same is not a re-entry or breach of any covenant for quiet enjoyment contained in this Lease or implied by law. .6 [Intentionally Deleted] ----------------------- -22- .7 Additional Rent --------------- If the Tenant is in default in the payment of any amounts or charges required to be paid pursuant to this Lease, they shall, if not paid when due, be collectible as Additional Rent forthwith on demand, but nothing herein contained is deemed to suspend or delay the payment of any amount of money at the time it becomes due and payable hereunder, or limit any other remedy of the Landlord. The Tenant agrees that the Landlord may, at its option, apply or allocate any sums received from or due to the Tenant against any amounts due and payable hereunder in such manner as the Landlord sees fit. All such moneys payable to the Landlord hereunder shall bear interest at the Prime Rate per annum from the time such sums become due until paid to the Landlord. .8 Remedies Generally ------------------ Mention in this Lease of any particular remedy of the Landlord in respect of the default by the Tenant does not preclude the Landlord from any other remedy in respect thereof, whether available at law or in equity or by statute or expressly provided for in this Lease. No remedy shall be exclusive or dependent upon any other remedy, but the Landlord may from time to time exercise any one or more of such remedies generally or in combination, such remedies being cumulative and not alternative. In the event of a breach or threatened breach by the Tenant of any of the covenants, provisions or terms hereof, the Landlord shall have the right to invoke any remedy allowed at law or in equity (including injunction) as if re-entry and other remedies were not provided for herein. .9 Holding Over ------------ If the Tenant shall hold over after the original Term or any extended term hereof, such holding over shall be construed to be a tenancy from month to month only and shall have no greater effect, any custom, statute, law or ordinance to the contrary notwithstanding. Such month-to-month tenancy shall be governed by the terms and conditions hereof, notwithstanding any statutory provision or rule of law to the contrary; provided, however, that during any such period of holding over, the Tenant shall be required to pay the monthly Base Rent payable during the month immediately preceding the expiration or termination of this Lease plus all Additional Rent payable hereunder. .10 No Waiver --------- The failure of the Landlord to insist upon a strict performance of any of the covenants and provisions herein contained shall not be deemed a waiver of any -23- rights or remedies that the Landlord may have and shall not be deemed a waiver of any subsequent breach or default in the covenants and provisions herein contained, and it is expressly agreed that the rights and remedies of the Landlord hereunder or otherwise available to it at law may be exercised and enforced either concurrently or successively. 8.00 - DAMAGE AND DESTRUCTION - ----------------------------- .1 Destruction ----------- Provided, and it is hereby expressly agreed, that if and whenever during the Term the Premises shall be destroyed or damaged by fire, lightning, tempest or by any of the perils insured against, then and in every such event: (a) if the damage or destruction is such that the Premises are rendered wholly unfit for occupancy or it is impossible or unsafe to use and occupy them and if in either event the damage, in the reasonable opinion of the architect/engineer of the Landlord, acting independently, to be given to the Tenant within 30 days of the happening of such damage or destruction, cannot be repaired with reasonable diligence within 180 days from the date such architect/engineer has given its opinion, then the Landlord or the Tenant may within 5 days next succeeding the giving of the opinion as aforesaid terminate this Lease by giving to the other notice in writing of such termination, in which event this Lease and the Term shall cease and be at an end as of the date of such destruction or damage and the rent and all other payments for which the Tenant is liable under the terms of this Lease shall be apportioned and paid in full to the date of such destruction or damage; in the event that either the Landlord or the Tenant does not so terminate this Lease, then, to the extent that insurance proceeds are available, the Landlord shall repair the Premises with all reasonable speed and the Base Rent hereby reserved shall abate from the date of the happening of the damage until the damage shall be made good to the extent of enabling the Tenant to use and occupy the Premises; (b) if the damage be such that the Premises are wholly unfit for occupancy or if it is impossible or unsafe to use or occupy them, but if in either event the damage, in the reasonable opinion of the architect/engineer of the Landlord, acting -24- independently, to be given to the Tenant within 30 days from the happening of such damage, can be repaired with reasonable diligence within 180 days from the date such architect/engineer has given its opinion, then the Base Rent hereby reserved shall abate from the date of the happening of such damage until the damage shall be made good to the extent of enabling the Tenant to use and occupy the Premises and the Landlord shall repair the damage with all reasonable speed, to the extent that insurance proceeds are available; if in the reasonable opinion of the Landlord the damage can be made good as aforesaid within 180 days from the date the architect/engineer of the Landlord, acting independently, has given its opinion and the damage is such that the Premises are capable of being partially used for the purposes for which they are hereby demised, then until such damage has been repaired the Base Rent shall abate in the proportion that the part of the Premises which is rendered unfit for occupancy bears to the whole of the Premises, and the Landlord shall repair the damage with all reasonable speed, to the extent that insurance proceeds are available. 9.00 - RIGHT OF RENEWAL - ----------------------- .1 Provided that the Tenant shall have given to the Landlord 6 months' notice in writing before the expiration of the Term of its desire to renew, subject to what is set out herein, it is mutually agreed and understood that if the Tenant duly and regularly pays the Base Rent and Additional Rent and performs all of the provisions and agreements contained herein on the part of the Tenant to be performed, and provided further that the Tenant is not habitually (which means, for purposes of Sections 9.1 and 9.2 hereof, on more than two (2) occasions in any consecutive twelve (12) month period) in default under the terms of this Lease and is not in default at the time of the exercise of the option herein, then the Landlord shall at the expiration of the Term, upon written request of the Tenant, grant to the Tenant a renewal of this Lease for a further five (5) year term (the "First Renewal Term") upon the same terms and conditions as contained herein, save as to the rental rate. The Base Rent for the First Renewal Term shall be at the then current market rate at the expiration of the Term and as mutually agreed between the Landlord and the Tenant. In the event that the Landlord and the Tenant are unable to agree upon the Base Rent for the First Renewal Term, the matter shall be submitted to arbitration, pursuant to the Arbitrations Act (Ontario). If the award of the arbitrators is not given before the commencement date of the First Renewal Term, then the Tenant shall commence paying Base Rent at -25- the same rate paid during the Term, which shall be adjusted forthwith after the award of the arbitrators has become final and binding, to be calculated from the commencement date of the First Renewal Term. .2 Provided that the Tenant shall have given to the Landlord 6 months' notice in writing before the expiration of the First Renewal Term of its desire to renew, subject to what is set out herein, it is mutually agreed and understood that if the Tenant duly and regularly pays the Base Rent and Additional Rent and performs all of the provisions and agreements contained herein on the part of the Tenant to be performed, and provided further that the Tenant is not habitually in default under the terms of this Lease and is not in default at the time of the exercise of the option herein, then the Landlord shall at the expiration of the First Renewal Term, upon written request of the Tenant, grant to the Tenant a renewal of this Lease for a further five (5) year term (the "Second Renewal Term") upon the same terms and conditions as contained herein, save as to the rental rate and save as to any further right of renewal. The Base Rent for the Second Renewal Term shall be at the then current market rate at the expiration of the First Renewal Term and as mutually agreed between the Landlord and the Tenant. In the event that the Landlord and the Tenant are unable to agree upon the Base Rent for the Second Renewal Term, the matter shall be submitted to arbitration, pursuant to the Arbitrations Act (Ontario). If the award of the arbitrators is not given before the commencement date of the Second Renewal Term, then the Tenant shall commence paying Base Rent at the same rate paid during the First Renewal Term, which shall be adjusted forthwith after the award of the arbitrators has become final and binding, to be calculated from the commencement date of the Second Renewal Term. 10.00 - GENERAL - --------------- .1 Acknowledgement by Tenant ------------------------- The Tenant further acknowledges that its interest under this Lease is subject to: (a) covenants, restrictions, easements, agreements and reservations of record, provided same does not interfere with the Tenant's intended use of the Premises as described in Section 3.12; (b) all laws, by-laws, ordinances, regulations and orders of the Town of Pickering, the Regional Municipality of Durham, the Province of Ontario, the Government of Canada and of all -25- statutory commissions, boards and bodies having jurisdiction over the Premises; (c) the condition of the Landlord's title existing at the date hereof; and (d) municipal realty taxes, local improvement rates, duties, assessments, water and sewer rates and other impositions accrued or unaccrued. .2 Registration ------------ (a) Neither the Tenant nor anyone on the Tenant's behalf or claiming under the Tenant shall register this Lease or any assignment or sublease of this Lease or any document evidencing any interest of the Tenant in this Lease or the Premises. If either party intends to register a document for the purpose only of giving notice of this Lease or of any assignment or sublease of this Lease, then upon request of such party both parties shall join in the execution of a short form or notice of this Lease (the "Short Form") solely for the purpose of supporting an application for registration of notice of this Lease or of any assignment or sublease against the interests of the Landlord or any part thereof in the Premises. The form of the Short Form and of the application to register notice of this Lease or of any assignment or sublease shall: (i) be prepared by the Tenant or its solicitors at the Tenant's expense; (ii) include therein a provision for, and require consent to, such registration by or on behalf of the Landlord; and (iii) only describe the parties, the Premises and the Commencement Date and the expiration date of the Term. (b) The Short Form shall contain a provision whereby the Tenant constitutes and appoints the Landlord and its nominee as the agent and attorney of the Tenant for the purpose of executing any instruments in writing required from the Tenant to give effect to the provisions of Section 10.4 of this Lease, -27- including the right to make application at any time and from time to time to register postponements of this Lease or the Short Form in favour of any mortgage pursuant to Section 10.4. The Landlord agrees not to register a subordination unless the mortgagee or encumbrancer has provided the non-disturbance agreement provided in Section 10.4. All costs, expenses and taxes necessary to register or file the application to register notice of this Lease or of any assignment or sublease shall be the sole responsibility of the Tenant and the Tenant will complete any necessary affidavits required for registration purposes, including affidavits necessary to register the power of attorney contained in the Short Form. As requested by the Landlord, the Tenant shall execute promptly a power of attorney at any time and from time to time as may be required to give effect to this Section 10.2(b). .3 Status Statement ---------------- Within 10 days after written request therefor by the Landlord or if upon any sale, assignment, lease or mortgage of the Premises by the Landlord a status statement is required from the Tenant, the Tenant shall deliver in a form supplied by the Landlord a status statement or a certificate to any proposed mortgagee or proposed purchaser or to the Landlord stating (if such is the case): (a) that this Lease is unmodified and in full force and effect (or if there have been modifications, that this Lease is in full force and effect as modified and identifying the modification agreements) or if this Lease is not in full force and effect, the certificate shall so state; (b) the Commencement Date; (c) the date to which Base Rent and Additional Rent have been paid under this Lease; (d) whether or not there is any existing default by the Tenant in the payment of any rent or other sum of money under this Lease and whether or not there is any other existing or alleged default by either party under this Lease with respect to which a notice of default has been served and if there is any such default, specifying the nature and extent thereof; and -28- (e) whether there are any defences or counterclaims against enforcement of the obligations to be performed by the Tenant under this Lease. .4 Subordination and Attornment ---------------------------- It is a condition of this Lease and the Tenant's rights granted hereunder that this Lease and all of the rights of the Tenant hereunder are and shall at all times be subject and subordinate to any and all mortgages, trust deeds or the charge or lien resulting from, or any instruments of, any financing, refinancing or collateral financing or any renewals or extensions thereof from time to time in existence against the lands or the Premises. Upon request and provided any mortgagee or encumbrancer agrees to enter a non-disturbance agreement in a form acceptable to the Tenant, acting reasonably, the Tenant shall subordinate this Lease and all of its rights hereunder in such form as the Landlord requires to any and all mortgages, trust deeds or the charge or lien resulting from or any instruments of any financing, refinancing or collateral financing and to all advances made or hereafter to be made upon the security thereof and, if requested, the Tenant shall attorn to the holder thereof. .5 Attorney -------- The Tenant shall upon request of the Landlord or the mortgagee or any other person having an interest in the lands, execute and deliver promptly such instruments and certificates to carry out the intent of Sections 10.3 and 10.4 as are requested by the Landlord. If 10 days after the date of a request by the Landlord to execute and deliver any such instruments and certificates the Tenant has not executed and delivered the same, the Tenant hereby irrevocably appoints the Landlord as the Tenant's attorney with full power and authority to execute and deliver in the name of the Tenant any such instruments or certificates or the Landlord may at its option terminate this Lease without incurring any liability on account thereof and the Term is expressly limited accordingly. 11.00 - ENVIRONMENTAL MATTERS - ----------------------------- .1 The Tenant covenants with the Landlord that the Tenant will not bring upon, permit or use any substance, defined or designated as a hazardous or toxic waste, hazardous or toxic material, a hazardous, toxic or radioactive substance or other similar term, by any applicable federal, provincial, municipal or local statute, regulation, by-law or ordinance now or hereafter in effect (the "Environmental Laws"), or any substance or material, the use or disposition of which is regulated by any such Environmental Laws (hereinafter called "Hazardous Substances") in, on or under the Premises except for de minimis amounts used in the ordinary course of the Tenant's business (as contemplated in Section 3.12) and, in any event, in compliance with Environmental Laws, and the Tenant will promptly comply with all statutes, regulations, by-laws and ordinances and with all orders, decrees or judgements of -29- governmental authorities or courts having jurisdiction, relating to the use, collection, storage, treatment, control, removal or cleanup of Hazardous Substances in, on, or under the Premises if the Premises become contaminated with Hazardous Substances as a result of operations or activities of the Tenant or any of its agents, contractors or employees or those for whom it is at law responsible on the Premises, or incorporated in any Tenant's improvements thereon during the Term or any renewal. The Tenant covenants and agrees to indemnify and hold the Landlord harmless against any and all losses, damages, costs, expenses and liabilities suffered or incurred by the Landlord: (i) by reason of a breach of any of the covenants aforesaid; or (ii) arising out of the actual, alleged or threatened discharge, disbursal, release or escape of Hazardous Substances at or from the Premises by of the Tenant, or any of its agents, contractors or employees, or those for whom it is in law responsible; or (iii) the removal from the Premises at the expiration of the Term of this Lease of all Hazardous Substances brought onto the Premises by the Tenant or any of its agents, contractors or employees or those for whom it is in law responsible, which indemnity shall survive the expiration or any surrender or termination of this Lease. 12.00 - GENERAL - --------------- .1 Amendments ---------- This Lease shall not be modified or amended except by an instrument in writing of equal formality herewith and signed by the parties hereto or by their successors or assigns. .2 Notice ------ Any demand notice or other communication (the "Communication") to be given in connection with this Lease shall be given in writing and shall be given by personal delivery, telecopier transmission or by mailing by registered mail with postage thereon, fully prepaid in a sealed envelope addressed to the intended recipient as follows: -30- (a) to the Landlord, at: Toronto Medical Corp. 1370 Don Mills Road Suite 200 Don Mills, ON M3B 3N7 Attention: J.P. Scheidegger Facsimile: (416) 441-2503 with a copy to: Koskie, Minsky Barristers and Solicitors Suite 900, Box 52 20 Queen Street West Toronto, ON M5H 3R3 Attention: George Dzuro ----------------------- Facsimile No: (416) 977-3316 (b) to the Tenant, at the Premises Attention: President --------------------- with a copy to: Stikeman, Elliott Barristers & Solicitors Suite 5300 Commerce Court West Toronto, ON M5L 1B9 Attention: David McCarthy -------------------------- Facsimile No: (416) 947-0866 or to such other addresses, telecopier number or individual as may be designated by a Communication given by a party to the other parties as aforesaid. Any Communication given by personal delivery shall be conclusively deemed to have been given on the day of actual delivery thereof, if given by registered mail on the 3rd business day following the deposit thereof in the mail and if given -31- by telecopier transmission, on the business day following the day on which it was transmitted. If the party giving any Communication knows or reasonably knows of any difficulties with the postal system which might effect the delivery of mail, any such Communication shall not be mailed but shall be given by personal delivery or by telecopier transmission. For the purposes of this Lease, a "business day" shall mean any day other than a Saturday, Sunday or statutory holiday in the Province of Ontario. .3 Time ---- Time shall in all respects be of the essence of this Lease. .4 Prime Rate ---------- For the purpose of this Lease "Prime Rate" shall mean the prime commercial lending rate charged by the Canadian Imperial Bank of Commerce from time to time on demand in Canadian funds (any change in such rate of interest to be effective from the day that a change in such prime commercial lending rate becomes effective) at its head office in Toronto, Ontario to its largest and most credit-worthy commercial borrowers and excludes the rate of interest charged for small business loans referred to as "Prime Small Business Loan Interest Rate". .5 Successors ---------- All rights and liabilities herein granted to or imposed upon the respective parties hereto extend to and bind the successors and assigns of the Landlord and the heirs, executors, administrators and permitted successors and assigns of the Tenant, as the case may be. No rights, however, shall endure to the benefit of any assignee of the Tenant unless the assignment to such assignee has been approved by the Landlord in writing in accordance with Article 4.00 hereof. If there is more than one Tenant, they are all bound jointly and severally by the terms, covenants and conditions herein. .6 Governing Law ------------- This Lease shall be construed and governed by the Laws of the Province of Ontario. .7 Headings -------- The Section and Article numbers and headings appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of such Sections or Articles of this Lease nor in any way affect this Lease. -32- .8 Entire Agreement ---------------- This Lease and the schedules attached hereto and forming a part hereof set forth all the covenants, promises, agreements, conditions and understandings between the Landlord and Tenant concerning the Premises and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them, other than as are herein set forth. All agreements and promises contained herein on behalf of the Tenant shall be construed as covenants. Except as herein otherwise provided, no subsequent alteration, amendment, change or addition to this Lease shall be binding upon the Landlord or Tenant unless reduced to writing and signed by them. .9 Severability ------------ If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Lease or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby and each term, covenant or condition of this Lease shall be valid and enforced to the fullest extent permitted by law. .10 No Option --------- The submission of this Lease for examination does not constitute a reservation of or option for the Premises and this Lease becomes effective as a lease only upon execution and delivery thereof by Landlord and Tenant. .11 Premises -------- Each obligation or agreement of the Landlord or Tenant expressed in this Lease, even though not expressed as a covenant, is to be considered to be a covenant for all purposes. .12 [Intentionally Deleted] ----------------------- .13 Place for Payments ------------------ All payments required to be made by the Tenant herein shall be made to the Landlord at the Landlord's office in Toronto or to such agent or agents of the Landlord or at such other place as the Landlord shall hereafter from time to time direct in writing. -33- .14 Extended Meanings ----------------- The words "hereof", "herein", "hereunder" and similar expressions used in any section or subsection of this Lease relate to the whole of this Lease and not to that section or subsection only, unless otherwise expressly provided. The use of the neuter singular pronoun to refer to the Landlord or the Tenant is deemed a proper reference, even though the Landlord or the Tenant is an individual, a partnership, a corporation or a group of two or more individuals, partnerships or corporations. The necessary grammatical changes required to make the provisions of this Lease apply in the plural sense where there is more than one Landlord or Tenant and to either corporations, associations, partnerships or individuals, males or females, shall in all instances be assumed as though in each case fully expressed. .15 No Partnership or Agency ------------------------ The Landlord does not in any way or for any purpose become a partner of the Tenant in the conduct of its business or otherwise or a joint venturer or a member of a joint enterprise with the Tenant, nor is the relationship of principal and agent created. .16 Force Majeure ------------- Notwithstanding anything to the contrary contained in this Lease, if either party hereto is bona fide delayed or hindered in or prevented from the performance of any term, covenant or act required hereunder by reason of strikes, labour troubles; inability to procure materials or services; power failure; restrictive governmental laws or regulations; riots; insurrection; sabotage; rebellion; war; act of God; or other reason whether of a like nature or not which is not the fault of the party delayed in performing work or doing acts required under the terms of this Lease, then performance of such term, covenant or act is excused for the period of the delay and the party so delayed shall be entitled to perform such term, covenant or act within the appropriate time period after the expiration of the period of such delay. However, the provisions of this Section do not operate to excuse the Tenant from the prompt payment of rent, Additional Rent or any other payments required by this Lease. .17 Accrual of Rent and Additional Rent ----------------------------------- Rent and Additional Rent shall be considered as annual and accruing from day to day and when it becomes necessary for any reason to calculate such rent for an irregular period of less than one year, an appropriate apportionment and adjustment shall be made. Whenever the calculation of any Additional Rent is not made until after the termination of this Lease, the obligation of the Tenant to pay such -34- Additional Rent shall survive the termination of this Lease and such amounts shall be payable by the Tenant to the Landlord within five (5) days after demand. .18 Accord and Satisfaction ----------------------- No payment by the Tenant or receipt by the Landlord of a lesser amount than the monthly payment of rent herein stipulated is deemed to be other than on account of the earliest stipulated rent, nor is any endorsement or statement on any cheque or any letter accompanying any cheque or payment as rent deemed an acknowledgement of full payment or an accord and satisfaction, and the Landlord may accept and cash such cheque or payment without prejudice to the Landlord's right to recover the balance of such rent or pursue any other remedy provided in this Lease. IN WITNESS WHEREOF the parties hereto have hereunto caused these presents to be executed the day, month and year first above written. TORONTO MEDICAL CORP. Per: -------------------------------------- (Authorized Signing Officer) Per: -------------------------------------- (Authorized Signing Officer) TORONTO MEDICAL ORTHOPAEDICS LTD. Per: -------------------------------------- (Authorized Signing Officer) Per: -------------------------------------- (Authorized Signing Officer) -35- SCHEDULE "A" ------------ EX-10.35 5 STANDARD OFFICE LEASE-NET STANDARD OFFICE LEASE--NET AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Basic Lease Provisions ("Basic Lease Provisions") 1.1 Parties: This Lease, dated, for reference purposes only. September 4 1991 is made by and between Greystone Realty Corporation (herein called "Lessor") and Sutter Corporation, a California Corporation doing business under the name of Sutter Corporation (herein called "Lessee"). 1.2 Premises: Suite Number(s) 9465-A 1 floors, consisting of approximately 18,766 square feet, more or less, as defined in paragraph 2 and as shown on Exhibit "A" hereto (the "Premises"). 1.3 Building: Commonly described as being located at 9465 Farnham Street in the City of San Diego County of San Diego State of California as more particularly described in Exhibit A hereto, and as defined in paragraph 2. 1.4 Use: Production of medical products, research and development, and/or other uses permitted under zoning regulations subject to paragraph 6. 1.5 Term: Eighty-One (81) Months commencing December 1, 1991 (Commencement Date"), and ending August 31, 1998 as defined in paragraph 3. 1.6 Base Rent: See Addendum per month, payable on the 1st day of each month per paragraph 4.1. 1.8 Rent Paid Upon Execution: Seven Thousand Seven Hundred and No/100 Dollars ($7,700.00) for base rent for month one (1) of this lease . 1.9 Security Deposit: -0- . 1.9 Lessee's Share of Operating Expenses: 36.5% as defined in paragraph 4.2. 2. Premises, Parking and Common Areas. 2.1 Premises. The Premises are a portion of an office building project herein sometimes referred to as the "Building" identified in paragraph 1.3 of the Basic Lease Provisions. "Building" shall include adjacent parking structures used in connection therewith. The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon or thereunder, are herein collectively referred to as the "Office Building Project." Lessor hereby leases to Lessee and Lessor leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein, the real property referred to in the Basic Lease Provisions, paragraph 1.2, as the "Premises," including rights to the Common Areas as hereinafter specified. 2.2 Vehicle Parking. So long as Lessee is not in default, and subject to the rules and regulations attached hereto, and as established by Lessor from time to time, Lessee shall be entitled to use 66 parking spaces in the Office Building Project. (See Addendum for Reserved Parking) 2.2.1 If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.2.2 The monthly parking rate per parking space will be $ -0- per month at the commencement of the term of this Lease, and is subject to change upon five (5) days prior written notice to Lessee. Monthly parking fees shall be payable one month in advance prior to the first day of each calendar month. 2.3 Common Areas--Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Office Building Project that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and other lessees of the Office Building Project and their respective employees, suppliers, shippers, customers and invitees, including but not limited to common entrances, lobbies, corridors, stairways and stairwells, public restrooms, elevators, escalators, parking areas to the extent not otherwise prohibited by this Lease, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, ramps, driveways, landscaped areas and decorative walls. 2.4 Common Areas--Rules and Regulations. Lessee agrees to abide by and conform to the rules and regulations attached hereto as Exhibit B with respect to the Office Building Project and Common Areas, and to cause its employees, suppliers, shippers, customers, and invitees to so abide and conform. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to modify, amend and enforce said rules and regulations. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees, their agents, employees and invitees of the Office Building Project. 2.5 Common Areas--Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Building interior and exterior and Common Areas, including, without limitation, changes in the location, size, shape, number, and appearance thereof, including but not limited to the lobbies, windows, stairways, air shafts, elevators, escalators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, decorative walls, landscaped areas and walkways; provided, however, Lessor shall at all times provide the parking facilities required by applicable law; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land and improvements outside the boundaries of the Office Building Project to be a part of the Common Areas, provided that such other land and improvements have a reasonable and functional relationship to the Office Building Project; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Office Building Project, or any portion thereof; (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Office Building Project as Lessor may, in the exercise of sound business judgment deem to be appropriate. 3. Term. 3.1 Term. The term and Commencement Date of this Lease shall be as specified in paragraph 1.5 of the Basic Lease Provisions. 3.2 Delay in Possession. Notwithstanding said Commencement Date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date and subject to paragraph 3.2.2, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof, but in such case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Lessee, as hereinafter defined, provided, however, that if Lessor shall not have delivered possession of the Premises within sixty (60) days following said Commencement Date, as the same may be extended under the terms of a Work Letter executed by Lessor and Lessee. Lessee may, at Lessee's option, by notice in writing to Lessor within ten (10) days thereafter cancel this Lease, in which event the parties shall be discharged from all obligations hereunder provided, however, that as to Lessee's obligations, Lessee first reimburses Lessor for all costs incurred for Non-Standard Improvements and, as to Lessor's obligations, Lessor shall return any money previously deposited by Lessee (less any offsets due Lessor for Non-Standard Improvement, and provided further, that if such written notice by Lessee is not received by lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. 3.2.1 Possession Tendered--Defined. Possession of the Premises shall be deemed tendered to Lessee ("Tender of Possession") when (1) the improvements to be provided by Lessor under this Lease are substantially completed, (2) the Building utilities are ready for use in the Premises, (3) Lessee has reasonable access to the Premises, and (4) ten (10) days shall have expired following advance written notice to Lessee of the occurrence of the matters described in (1), (2), and (3), above of this paragraph 3.2.1. 3.2.2 Delays Caused by Lessee. There shall be no abatement of rent, and the sixty (60) day period following the Commencement Date before which Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended to the extent of any delays caused by acts or omissions of Lessee, its agents, employees and contractors. 3.3 Early Possession. If Lessee occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not change the termination date, and Lessee shall pay rent for such occupancy. 3.4 Uncertain Commencement. In the event commencement of the Lease term is defined as the completion of the improvements, Lessee and Lessor shall execute an amendment to this Lease establishing the date of Tender of Possession (as defined in paragraph 3.2.1) or the actual taking of possession by Lessee, whichever first occurs, as the Commencement Date. 4. Rent. 4.1 Base Rent. Subject to adjustment as hereinafter provided in paragraph 4.3, and except as may be otherwise expressly provided in this Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.5 of the Basic Lease Provisions, without offset or deduction. Lessee shall pay Lessor upon execution hereof the advance Base Rent described in paragraph 1.7 of the Basic Lease Provisions. Rent for any period during the term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 4.2 Operating Expenses. See Paragraph 50. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined, of all Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: (a) "Lessee's Share" is defined, for purposes of this Lease, as the percentage set forth in paragraph 1.9 of the Basic Lease Provisions, which percentage has been determined by dividing the approximate square footage of the Premises by the total approximate square footage of the rentable space contained in the Office Building Project. It is understood and agreed that the square footage figures set forth in the Basic Lease Provisions are approximations which Lessor and Lessee agree are reasonable and shall not be subject to revision except in connection with an actual change in the size of the Premises or a change in the space available for lease in the Office Building Project. (b) "Operating Expenses" is defined, for purposes of this Lease, to include all costs, if any, incurred by Lessor in the exercise of its reasonable discretion for: (i) The operation, repair, maintenance, and replacement, in neat, clean, safe, good order and condition, of the Office Building Project, including but not limited to, the following: (aa) The Common Areas, including their surfaces, coverings decorative items, carpets, drapes and window coverings, and including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, stairways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities, building exteriors and roofs, fences and gates; (bb) All heating, air conditioning, plumbing, electrical systems, life safety equipment, telecommunication and other equipment used in common by, or for the benefit of, lessees or occupants of the Office Building Project, including elevators and escalators, tenant directories, fire detection systems including sprinkler system maintenance and repair. (ii) Trash disposal, janitorial and security services; (iii) Any other service to be provided by Lessor that is elsewhere in this Lease stated to be an "Operating Expense"; (iv) The cost of the premiums for the liability and property insurance policies to be maintained by Lessor under paragraph 7 hereof; (v) The amount of the real property taxes to be paid by Lessor under paragraph 9.1 hereof; (vi) The cost of water, sewer, gas, electricity, and other publicly mandated services to the Office Building Project; (vii) Labor, salaries and applicable fringe benefits and costs, materials, supplies and tools, used in maintaining and/or cleaning the Office Building Project and accounting and a management fee attributable to the operation of the Office Building Project; (viii) Replacing and/or adding improvements mandated by any governmental agency and any repairs or removals necessitated thereby amortized over its useful life according to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then reasonable in the judgment of Lessor's accountants); (ix) Replacements of equipment or improvements that have a useful life for depreciation purposes according to Federal income tax guidelines of five (5) years or less, as amortized over such life. (c) Operating Expenses shall not include the costs of replacements of equipment or improvements that have a useful life for Federal income tax purposes in excess of five (5) years unless it is of the type described in paragraph 4.2(b)(viii), in which case their cost shall be included as above provided. (d) Operating Expenses shall not include any expenses paid by lessee directly to third parties, or as to which Lessor is otherwise reimbursed by any third party, other tenant, or by insurance proceeds. (e) Lessee's Share of Operating Expenses shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's Share of annual Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate during each calendar year of the Lease term, on the same day as the Base Rent is due hereunder in the event that Lessee pays Lessor's estimate of Lessee's Share of Operating Expenses as aforesaid. Lessor shall deliver to Lessee within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Operating Expenses incurred during the preceding year. If Lessee's payments under this paragraph 4.2(e) during said preceding calendar year exceed Lessee's Share as indicated on said statement, Lessee shall be entitled to credit the amount of such overpayment against Lessee's Share of Operating Expenses next falling due. If Lessee's payments under this paragraph during said preceding calendar year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor Lessee of said statement. 6. Use. 6.1 Use. The Premises shall be used and occupied only for the purpose set forth in paragraph 1.4 of the Basic Lease Provisions or any other use which is reasonably comparable to that use and for no other purpose. 6.2 Compliance with Law. (a) Lessor warrants to Lessee that the Premises, in the state existing on the date that the Lease term commences, but without regard to alterations or improvements made by Lessee or the use for which Lessee will occupy the Premises, does not violate any covenants or restrictions of record, or any applicable building code, regulation or ordinance in effect on such Lease term Commencement Date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's able cost and expense, rectify any such violation. (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises. Lessee shall conduct its business in a lawful manner and shall not use or permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Office Building Project. 6.3 Condition of Premises. (a) Lessor shall deliver the Premises to Lessee in a clean condition on the Lease Commencement Date (unless Lessee is already in possession) and Lessor warrants to Lessee that the plumbing, lighting, air conditioning, and heating system in the Premises shall be in good operating condition. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises and the Office Building Project in their condition existing as of the Lease Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any easements, covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that it has satisfied itself by its own independent investigation that the Premises are suitable for its intended use, and that neither Lessor nor Lessor's agent or agents has made any representation or warranty as to the present or future suitability of the Premises, Common Areas, or Office Building Project for the conduct of Lessee's business. 7. Maintenance, Repairs, Alterations and Common Area Services. 7.1 Lessor's Obligations. Lessor shall keep the Office Building Project, including the Premises, exterior walls, roof, and common areas, and the equipment whether used exclusively for the Premises or in common with other premises, in good condition and repair; provided, however, Lessor shall not be obligated to paint, repair or replace wall coverings, or to repair or replace any improvements that are not ordinarily a part of the Building or are above then Building standards except as provided in paragraph 9.5 there shall be no abatement of rent or liability of Lessee on account of any injury or interference with Lessee's business with respect to any improvements, alterations or repairs made by Lessor to the Office Building Project or any part thereof. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. 7.2 Lessee's Obligations. (a) Notwithstanding Lessor's obligation to keep the Premises in good condition and repair, Lessee shall be responsible for payment of the cost thereof to Lessor as additional rent for this portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings and to repair or replace any Premises improvements that are not ordinarily a part of the Building or that are above then Building standards. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the cost of which is otherwise Lessee's responsibility hereunder. (b) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Lessee. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishings and equipment. Except as otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, air conditioning, window coverings, wall coverings, carpets, wall panelling, ceilings and plumbing on the Premises and in good operating condition. 7.3 Alterations and Additions. (a) Lessee shall not, without Lessor's prior written consent, make any alterations, improvements, additions, Utility Installations or repairs in, on or about the Premises, or the Office Building Project. As used in this paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and wall coverings, power panels, electrical distribution systems, lighting fixtures, air conditioning, plumbing and telephone and telecommunication wiring and equipment. At the expiration of the term, Lessor may require the removal of any or all of said alterations, improvements, additions or Utility Installations, and the restoration of the Premises and the Office Building Project to their prior condition, at Lessee's expense. Should Lessor permit Lessee to make its own alterations, improvements, additions, or Utility Installations, Lessee shall use only such contractor as has been expressly approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor may, at any time during the term of this Lease, require that Lessee remove any part or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Premises or the Office Building Project that Lessee shall desire to make shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent to Lessee's making such alteration, improvement, addition or Utility Installation, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from the applicable governmental agencies, furnishing a copy thereof to Lessor prior to the commencement of the work and the compliance by Lessee with all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, the Building or the Office Building Project, or any interest therein. (d) Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises by Lessee, and Lessor shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then lessee shall at its sole expense defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor the Premises, the Building or the Office Building Project, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises, the Building and the Office Building Project free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's reasonable attorneys fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest to do so. (e) All alterations, improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which made be made to the Premises by Lessee, including but not limited to, floor coverings, panelings, doors, drapes, built- ins, moldings, sound attenuation, and lighting and telephone or communication systems, conduit, wiring and outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided Lessee is not in default, notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal property and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises of the Building, and other than Utility Installations shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2. (f) Lessee shall provide Lessor with as-built plans and specifications for any alterations, improvements, additions or Utility Installations. 7.4 Utility Additions. Lessor reserves the right to install new or additional utility facilities throughout the Office Building Project for the benefit of Lessor or Lessee, or any other lessee of the Office Building Project, including, but not by way of limitation, such utilities as plumbing, electrical systems, security systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. Insurance; Indemnity. 8.1 Liability Insurance--Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Comprehensive General Liability insurance utilizing an Insurance Services Office standard form with Broad Form General Liability Endorsement (GL0404), or equivalent, in an amount of not less than $1,000,000.00 per occurrence of bodily injury and property damage combined or in a greater amount as reasonably determined by Lessor and shall insure Lessee with Lessor as an additional Insured against liability arising out of the use, occupancy or maintenance of the Premises. Compliance with the above requirement shall not, however, limit the liability of Lessee hereunder. 8.2 Liability Insurance--Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Broad Form Property Damage Insurance, plus coverage against such other risks Lessor deems advisable from time to time, insuring Lessor, but not Lessee, against liability arising out of the ownership, use, occupancy or maintenance of the Office Building Project in an amount not less than $5,000,000.00 per occurrence. 8.3 Property Insurance--Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease for the benefit of Lessee, replacement cost fire and extended coverage insurance, with vandalism and malicious mischief, sprinkler leakage and earthquake sprinkler leakage endorsements, in an amount sufficient to cover not less than 100% of the full replacement cost, as the same may exist from time to time, of all of Lessee's personal property, fixtures, equipment and tenant improvements. 8.4 Property Insurance--Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy of insurance covering loss or damage to the Office Building Project improvements, but not Lessee's personal property, fixtures, equipment or tenant improvements, in the amount of the full replacement cost thereof, as the same may exist from time to time, utilizing Insurance Services Office standard form, or equivalent, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, plate glass, and such other perils as Lessor deems advisable or may be required by a lender having a lien on the Office Building Project. In addition, Lessor shall obtain and keep in force, during the term of this Lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall also cover all Operating Expenses for said period. Lessee will not be named in any such policies carried by Lessor and shall have no right to any proceeds therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain such deductibles as Lessor or the aforesaid lender may determine. In the event that the Premises shall suffer an insured loss as defined in paragraph 9.1(f) hereof, the deductible amounts under the applicable insurance policies shall be deemed an Operating Expense. Lessee shall not do or permit to be done anything which shall invalidate the insurance policies carried by Lessor. Lessee shall pay the entirety of any increase in the property insurance premium for the Office Building Project over what it was immediate prior to the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 Insurance Policies. Lessee shall deliver to Lessor copies of liability insurance policies required under paragraph 8.1 certificates evidencing the existence and amounts of such insurance within seven (7) days after the Commencement Date of this Lease. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals thereof. 8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other, for direct or consequential loss or damage arising out of or incident to the perils covered by property insurance carried by such party, whether due to the negligence of Lessor Lessee or their agents, employees, contractors and/or invitees. If necessary all property insurance policies required under this Lease shall be endorsed to so provide. 8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor and its agents, Lessor's master or ground lessor, partners and lenders, from and against any and all claims for damage to the person or property of anyone or any entity arising from Lessee's use of the Office Building Project, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claims, costs and expenses arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or omission of Lessee, or any of Lessee's agents, contractors, employees or invitees and from and against all costs, attorney's fees, expenses and liabilities incurred by Lessor as the result of any such use, conduct, activity, work, things done, permitted or suffered, breach, default or negligence, and in dealing reasonably therewith, including but not limited to the defense or pursuit of any claim or any action or proceeding involved therein; and in case any action or proceeding be brought against Lessor by reason of any such matter, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Office Building Project arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. 8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for loss of or damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Office Building Project, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from theft, fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Office Building Project, or from other sources or places, or from new construction or the repair, alteration or improvement of any part of the Office Building Project, or of the equipment, fixtures or appurtenances applicable thereto, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible, Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user of the Office Building Project, nor from the failure of Lessor to enforce the provisions of any other lease of any other lessee of the Office Building Project. 8.9 No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified in this paragraph 8 are adequate to cover Lessee's property or obligations under this Lease. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Damage" shall mean if the Premises are damaged or destroyed to any extent. (b) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent (50%) of the then Replacement Cost of the Building. (c) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent (50%) or more of the then Replacement Cost of the Building. (d) "Office Building Project Buildings" shall mean all of the buildings on the Office Building Project site. (e) "Office Building Project Buildings Total Destruction" shall mean if the Office Building Project Buildings are damaged or destroyed to the extent that the cost of repair is fifty percent (50%) or more of the then Replacement Cost of the Office Building Project Buildings. (f) "Insured Loss" shall mean damage or destruction which was caused by an event required to be covered by the insurance described in paragraph 7. The fact that an insured Loss has a deductible amount shall not make the loss an uninsured loss. (g) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring, excluding all improvements made by lessees, other than those installed by Lessor at Lessee's expense. 9.2 Premises Damage; Premises Building Partial Damage. (a) Insured Loss. Subject to the provisions of paragraphs 9.4 and 9.5. If at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of either Premises Damage or Premises Building Partial Damage, then Lessor shall, as soon as reasonably possible and to the extent the required materials and labor are readily available through usual commercial channels, at Lessor's expense, repair such damage (but not Lessee's fixtures, equipment or tenant improvements originally paid for by Lessee) to its condition existing at the time of the damage, and this Lease shall continue in full force and effect. (b) Uninsured Loss. Subject to the provisions of paragraphs 9.4 and 9.5. If at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from making any substantial use of the Premises, Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage, in which event this Lease shall terminate as of the date of the occurrence of such damage. 9.3 Premises Building Total Destruction; Office Building Project Total Destruction. Subject to the provisions of paragraphs 9.4 and 9.5. If at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, which falls into the classification of either (i) Premises Building Total Destruction, or (ii) Office Building Project Total Destruction, then lessor may at Lessor's option either (i) repair such damage or destruction as soon as reasonably possible at Lessor's expense (to the extent the required materials are readily available through usual commercial channels) to its condition existing at the time of the damage, but not Lessee's fixtures, equipment or tenant improvements, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall terminate as of the date of the occurrence of such damage. 9.4 Damage Near End of Term. (a) Subject to paragraph 9.4(b). If at any time during the last twelve (12) months of the term of this Lease there is substantial damage to the Premises, Lessor may at Lessor's option cancel and terminate this lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an Insured Loss falling within the classification of Premises Damage during the last twelve (12) months of the term of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to the contrary. 9.5 Abatement of Rent; Lessee's Remedies. (a) In the event Lessor repairs or restores the Building or Premises pursuant to the provisions of this paragraph 9, and any part of the Premises are not usable (including loss of use due to loss of access or essential services), the rent payable hereunder (including Lessee's Share of Operating Expenses) for the period during which such damage, repair or restoration continues shall be abated, provided (1) the damage was not the result of the negligence of Lessee, and (2) such abatement shall only be to the extent the operation and profitability of Lessee's business as operated from the Premises is adversely affected. Except for said abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises or the Building under the provisions of this paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such occurrence, or if Lessor shall not complete the restoration and repair within six (6) months after such occurrence, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement or completion, respectively, of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. (c) Lessee agrees to cooperate with Lessor in connection with any such restoration and repair, including but not limited to the approval and/or execution of plans and specifications required. 9.6 Termination--Advance Payments. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee as much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.7 Waiver. Lessor and Lessee waive the provisions of any statute which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 10. Real Property Taxes. 10.1 Payment of Taxes. Lessor shall pay the real property tax, as defined in paragraph 10.3 applicable to the Office Building Project subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2. 10.2 Additional Improvements. Lessee shall not be responsible for paying any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Office Building Project by other lessees or by Lessor for the exclusive enjoyment of any other lessee. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirety of any increase in real property tax if assessed solely by reason of additional improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 Definition of "Real Property Tax." As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income to estate taxes) imposed on the Office Building Project or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Office Building Project or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Office Building Project. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax," or (ii) the nature of which was hereinbefore included within the definition of "real property tax," or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a change in ownership, as defined by applicable local statutes for property tax purposes, of the Office Building Project or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such change of ownership, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. 10.4 Joint Assessment. If the improvements or property, the taxes for which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not separately assessed, Lessee's porion of that tax shall be equitably determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information (which may include the cost of construction) as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Personal Property Taxes. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities. 11.1 Services Provided by Lessor. Lessor shall provide heating, ventilation, air conditioning, and as reasonably required, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use. 11.2 Services Exclusive to Lessee. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building. 11.4 Excess Usage by Lessee. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security services, over standard office usage for the Office Building Project. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's expense supplemental equipment and/or separate metering applicable to Lessee's excess usage or loading. 11.5 Interruptions. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet or otherwise transfer or encumber all or any part of Lessee's interest in the Lease and the Premises without Lessor's prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void, and shall constitute a material default and breach of this Lease without the need for notice to Lessee under paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall include the transfer or transfers aggregating (a) if Lessee is a corporation, more than twenty-five percent (25%) of the voting stock of such corporation, or (b) if Lessee is a partnership, more than twenty-five percent (25%) of the profit and loss participation in such partnership. 12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, to any corporation which controls or controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate"; provided that before such assignment shall be effective, (a) said assignee shall assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall be given written notice of such assignment and assumption. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, no assignment or subletting shall release Lessee of Lessee's obligations hereunder or after the primary liability of Lessee to pay the rent and other sums due Lessor hereunder including Lessee's Share of Operating Expenses, and to perform all other obligations to be performed by Lessee hereunder. (b) Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. (c) Neither a delay in the approval of disapproval of such assignment or subletting, nor the acceptance of rent, shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this paragraph 11 of this Lease. (d) If Lessee's obligations under this Lease have been guaranteed by third parties, then an assignment or sublease, and Lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof. (e) The consent by Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability under this Lease or said sublease; provided, however, such persons shall not be responsible to the extent any such amendment or modification enlarges or increases the obligations of the Lessee or sublessee under this Lease or such sublease. (f) In the event of any default under this Lease, lessor may proceed directly against Lessee, any guarantors or any one else responsible for the performance of this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (g) Lessor's written consent to any assignment or subletting of the Premises by Lessee shall not constitute an acknowledgement that no default then exists under this Lease of the obligations to be performed by Lessee nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Lessor at the time. (h) The discovery of the fact that any financial statement relied upon by Lessor in giving its consent to an assignment or subletting was materially false shall, at Lessor's election, render Lessor's said consent null and void. 12.4 Additional Terms and Conditions Applicable to Subletting. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a default shall occur in the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a default exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents due and to become due under the sublease. Lessee agrees that such sublessee shall have the right to rely upon any such statement and request from Lessor, and that such sublessee shall pay such rents to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee or Lessor for any such rents so paid by said sublessee to Lessor. (b) No sublease entered into by Lessee shall be effective unless and until it has been approved in writing by Lessor. In entering into any sublease, Lessee shall use only such form of sublease as is satisfactory to Lessor, and once approved by Lessor, such sublease shall not be changed or modified without Lessor's prior written consent. Any sublessee shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every obligation herein to be performed by Lessee other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) In the event Lessee shall default in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to atone to Lessor, in which event Lessor shall undertake the obligations of Lessee under such sublease form the time of the exercise of said option to the termination of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to Lessee or for any other prior defaults of Lessee under such sublease. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) With respect to any subletting to which Lessor has consented, Lessor agrees to deliver a copy of any notice of default by Lessee to the sublessee. Such sublessee shall have the right to cure a deal of Lessee within three (3) days after service of said notice of default upon such sublessee, and the sublessee shall have a right of reimbursement and offset from and against Lessee for any such defaults cured by the sublessee. 12.5 Lessor's Expenses. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable costs and expenses incurred in connection therewith, including attorneys, architects, engineers or other consultants' fees. 12.6 Conditions to Consent. Lessor reserves the right to condition any approval to assign or sublet upon Lessor's determination that (a) the proposed assignee or sublessee shall conduct a business on the Premises of a quality substantially equal to that of Lessee and consistent with the general character of the other occupants of the Office Building Project and not in violation of any exclusives or rights then held by other tenants, and (b) the proposed assignee or sublessee be at least as financially responsible as Lessee was expected to be at the time of the execution of this Lease or of such assignment or subletting, whichever is greater. 13. Default; Remedies. 13.1 Default. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: (a) The vacation or abandonment of the Premises by Lessee. Vacation of the Premises shall include the failure to occupy the Premises for a continuous period of sixty (60) days or more, whether or not the rent is paid. (b) The breach by Lessee of any of the covenants, conditions or provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.1(f) (false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33 (auctions), or 41.1 (easements), all of which are hereby deemed to be material, non-curable defaults without the necessity of any notice by Lessor to Lessee thereof. (c) The failure by Lessee to make any payment of real or any other payment required to be made by Lessee hereunder as and when due, where such failure shall continue for a period of three (3) days of written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to application Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (d) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee other than those referenced in subparagraphs (b) and (c) above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently pursues such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (e) (i) The making by Lessee of any general arrangement of general assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days; (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. In the event that any provision of this paragraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's obligation hereunder was materially false. 13.2 Remedies. In the event of any material default or breach of this Lease by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default. (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to paragraph 13 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such thirty (30) day period and thereafter diligently pursues the same to completion. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Share of Operating Expenses or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Office Building Project. Accordingly, if any installment of Base Rent, Operating Expenses, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 8% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 14. Condemnation. If the Premises or any portion thereof or the Office Building Project are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs; provided that if so much of the Premises or the Office Building Project are taken by such condemnation as would substantially and adversely affect the operation and profitability of Lessee's business conducted from the Premises, Lessee shall have the option, to be exercised only in writing within thirty (30) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent and Lessee's Share of Operating Expenses shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. Common Areas taken shall be excluded from the Common Areas usable by Lessee and no reduction of rent shall occur with respect thereto or by reason thereof. Lessor shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority, by giving written notice to Lessee of such election within thirty (30) days after receipt of notice of a taking by condemnation of any part of the Premises or the Office Building Project. Any award for the taking of all or any part of the Premises or the Office Building Project under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any separate award for loss of or damage to Lessee's trade fixtures, removable personal property and unamortized tenant improvements that have been paid for by Lessee. For that purpose the cost of such improvements shall be amortized over the original term of this Lese excluding any options in the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. Broker's Fee. (a) The brokers involved in this transaction are SCHER-VOIT Commercial Brokerage Company, Inc. as "listing broker" and CB Commercial Brokerage Company as "cooperating broker," licensed real estate broker(s). A "cooperating broker" is defined as any broker other than the listing broker entitled to a share of any commission arising under this Lease. Upon execution of this Lease by both parties, Lessor shall pay to said brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate agreement between Lessor and said broker(s), or in the event there is no separate agreement between Lessor and said broker(s), the sum of $ Per Agreement for broker's services rendered by said brokerage to Lessor in this transaction. (b) Lessor further agrees that (i) if Lessee exercises any Option, as defined in paragraph 39.1 of this Lease, which is granted to Lessee under this Lease, or any subsequently granted option which is substantially similar to an Option granted to Lessee under this Lease, or (ii) if Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to Lessee been exercised, or (iii) if Lessee remains in possession of the Premises after the expiration of the term of this Lease after having failed to exercise an Option, or (iv) if said broker(s) are the procuring cause of any other lease or sale entered into between the parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, or (v) if the Base Rent is increased whether by agreement or operation of an escalation clause contained herein, then as to any of said transactions or rent increases, Lessor shall pay said broker(s) a fee in accordance with the schedule of said broker(s) in effect at the time of execution of this Lease. Said fee shall be paid at the time such increased rental is determined. (c) Lessor agrees to pay said fee not only on behalf of Lessor but also on behalf of any person, corporation, association, or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this paragraph 14. Each listing and cooperating broker shall be a third party beneficiary of the provisions of this paragraph 14 to the extent of their interest in any commission arising under this Lease and may enforce that right directly against Lessor; provided, however, that all brokers having a right to any part of such total commission shall be a necessary party to any suit with respect thereto. (d) Lessee and Lessor each represent and warrant to the other that neither has had any dealings with any person, firm, broker, or finder (other than the person(s), if any, whose names are set forth in paragraph 15(a) above), in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and no other broker or other person, firm or entity is entitled to any commission or finder's fee in connection with said transaction and Lessee and Lessor do each hereby indemnify and hold the other harmless from and against any costs, expenses, attorneys' fees or liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying party. 16. Estoppel Certificate. (a) Each party (as "responding party") shall at any time upon not less than ten (10) days prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Office Building Project or of the business of Lessee. (b) At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. (c) If Lessor desires to finance, refinance, or sell the Office Building Project, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title or a lessee's interest in a ground lease of the Office Building Project, and except as expressly provided in paragraph 14. In the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. Severability. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 19. Interest on Past-due Obligations. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law or judgments from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 20. Time of Essence. Time is of the essence with respect to the obligations to be performed under this Lease. 21. Additional Rent. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expense and any other expenses payable by Lessee hereunder shall be deemed to be rent. 22. Incorporation of Prior Agreements; Amendments. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in paragraph 14 hereof nor any cooperating broker on this transaction nor the Lessor any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Office Building Project and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease. 23. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified or registered mail, and shall be deemed sufficiently given if delivered or addressed to Lessee or to Lessor at the address noted below or adjacent to the signature of respective parties, as the case may be. Mailed notices shall be deemed given upon actual receipt at the address required, or forty-eight (48) hours following deposit in the mail, postage prepaid, whichever first occurs. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. Waivers. No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a "short form" memorandum of this Lease for recording purposes. 26. Holding Over. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, except that the rent payable shall be two hundred percent (200%) of the rent payable immediately preceding the termination date of this Lease, and all Options, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of paragraph 16, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Office Building Project is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Office Building Project is located. 30. Subordination. (a) This Lease, and any Option or right of first refusal granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Office Building Project and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents required to effectuate an attornment, a subordination, or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within ten (10) days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). 31. Attorneys' Fees. 31.1 If either party or the broker(s) named herein bring an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, trial or appeal thereon, shall be entitled to his reasonable attorneys' fees to be paid by the losing party as fixed by the court in the same or a separate suit, and whether or not such action is pursued to decision or judgment. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. 31.2 The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred in good faith. 31.3 Lessor shall be entitled to reasonable attorneys' fees and all other costs and expenses incurred in the preparation and service of notices of default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such default. 32. Lessor's Access. 32.1 Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, performing any services required of Lessor, showing the same to prospective purchasers, lenders, or lessees, taking such safety measures, erecting such scaffolding or other necessary structures, making such alterations, repairs, improvements or additions to the Premises or to the Office Building Project as Lessor may reasonably deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. 32.2 All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. 32.3 Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files, vaults and safes, and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forcible or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. The holding of any auction on the Premises or Common Areas in violation of this paragraph shall constitute a material default of this Lease. 34. Signs. Lessee shall not place any sign upon the Premises or the Office Building Project without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Office Building Project. 35. Merger. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. Consents. Except for paragraphs 33 (auctions) and 34 (signs) hereof, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 37. Guarantor. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. Quiet Possession. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's party to be observed and performed hereunder. Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions to this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Office Building Project. 39. Options. 39.1 Definitions. (1) the right or option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (2) the option or right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Office Building Project or other property of Lessor or the right of first offer to lease other space within the Office Building Project or other property of Lessor; (3) the right or option to purchase the Premises or the Office Building Project, or the right of first refusal to purchase the Premises or the Office Building Project or the right of first offer to purchase the Premises or the Office Building Project, or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 Options Personal. Each Option granted to Lessee in this Lease is personal to the original Lessee and may be exercised only by the original Lessee while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises or any portion thereof, and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Lessee; provided, however, that an Option may be exercised by or assigned to any Lessee Affiliate as defined in paragraph 11.2 of this Lease. The Options, if any, herein granted to Lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple options to extend or renew this Lease a later option cannot be exercised unless the prior option to extend or renew this Lease has been so exercised. 39.4 Effect of Default on Options: (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance alleged in said notice of default is cured, or (ii) during the period of time commencing on the day after a monetary obligation to Lessor is due from Lessee and unpaid (without any necessity for notice thereof to Lessee) and continuing until the obligation is paid, or (iii) in the event that Lessor has given to Lessee three or more notices of default under paragraph 13.1(c) or paragraph 12.1(d), whether or not the defaults are cured, during the twelve (12) month period of time immediately prior to the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants or conditions of this Lease. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option. If, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1(d) within thirty (30) days after the date that Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion, (iii) Lessor gives to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants and conditions of this Lease. 40. Security Measures--Lessor's Reservations. 40.1 Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Office Building Project. Lessee assumes all responsibility for the protection of Lessee, its agents, and invitees and the property of Lessee and of Lessee's agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, form providing security protection for the Office Building Project or any part thereof, in which event the cost thereof shall be included within the definition of Operating Expenses, as set forth in paragraph 4.2(b). 40.2 Lessor shall have the following rights: (a) To change the name, address, or title of the Office Building Project or building in which the Premises are located upon not less than ninety (90) days prior written notice; (b) To, at Lessee's expense, provide and install Building standard graphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; (c) To permit any lessee the exclusive right to conduct any business as long as such exclusive does not conflict with any rights expressly given herein; (d) To place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the buildings or the Office Building Project or on pole signs in the Common Areas. 40.3 Lessee shall not: (a) Use a representation (photographic or otherwise) of the Building or the Office Building Project or their name(s) in connection with Lessee's business; (b) Suffer or permit anyone, except in emergency, to go upon the roof the Building. 41. Easements. 41.1 Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications, Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 42.2 The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor. 42. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 43. Authority. If Lessee is a corporation, trust, or general or limited partnership, Lessee and each individual executing this Lease on behalf of such entity, represent and warrant that such individual is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 44. Conflict. Any conflict between the printed provisions, Exhibits or Addenda of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 45. No Offer. Preparation of this Lease by Lessor Lessor's agent and submission of same to Lessee shall not be deemed an offer to Lessee to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by both parties. 46. Lender Modification. Lessee agrees to make such reasonable modifications to this Lease as may be reasonably required by an institutional lender in connection with the obtaining of normal financing or refinancing of the Office Building Project. 47. Parties. If more than one person or entity is named as either or Lessee herein, except as otherwise expressly provided herein, the obligations of the Lessor or Lessee herein shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee, respectively. 48. Work Letter. This Lease is supplemented by that certain Work Letter of even date executed by Lessor and Lessee attached hereto as Exhibit C and incorporated herein by this reference. 49. Attachments. Attached hereto are the following documents which constitute a part of this Lease: Addendum to Lease; Paragraphs 49 through 57 Rules & Regulations LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL, NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSOR LESSEE Greystone Realty Corporation, as Agent for Sutter Corporation, a California New York Life Insurance Company Corporation By By ---------------------------------------- ------------------------------ Charles Lauckhardt Tim Wollaeger Its Senior Asset Manager Its President --------------------------------------- ----------------------------- By By ---------------------------------------- ------------------------------ Its Its ---------------------------------------- ------------------------------ Executed at Executed at on on ---------------------------------------- ------------------------------ Address Address ----------------------------------- ------------------------- RULES AND REGULATIONS FOR STANDARD OFFICE LEASE Dated: September 4, 1991 By and Between: Sutter Corporation, a California Corporation (Lessee), and Greystone Realty Corporation, as Agent for New York Life Insurance Company (Lessor) GENERAL RULES 1. Lessee shall not suffer or permit the obstruction of any Common Areas, including driveways, walkways, and stairways. 2. Lessor reserves the right to refuse access to any persons Lessor in good faith judges to be a threat to the safety, reputation, or property of the Office Building Project and its occupants. 3. Lessee shall not make or permit any noise or odors that annoy or interfere with other lessees or persons having business within the Office Building Project. 4. Lessee shall not keep animals or birds within the Office Building Project, and shall not bring bicycles, motorcycles, or other vehicles into areas not designated as authorized for same. 5. Lessee shall not make, suffer or permit litter except in appropriate receptacles for that purpose. 6. Lessee shall not alter any lock or install new or additional locks or bolts. 7. Lessee shall be responsible for the inappropriate use of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein. 8. Lessee shall not deface the walls, partitions or other surfaces of the Premises or Office Building Project. 9. Lessee shall not suffer or permit anything in or around the Premises or Building that causes excessive vibration or floor loading in any part of the Office Building Project. 10. Furniture, significant freight and equipment shall be moved into or out of the building only with the Lessor's knowledge and consent, and subject to such reasonable limitations, techniques, and timing as may be designated by Lessor. Lessee shall be responsible for any damage to the Office Building Project arising from any such activity. 11. Lessee shall not employ any service or contractor for services or work to be performed in the Building, except as approved by Lessor. 12. Lessor reserves the right to close and lock the Building on Saturdays, Sundays and legal holidays and on other days between the hours of P.M. and A.M. of the following day. If Lessee uses the Premises during such periods, Lessee shall be responsible for securely locking any doors it may have opened for entry. 13. Lessee shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any keys that are lost. 14. No window coverings or shades shall be installed or used by Lessee. 15. No Lessee, employee or invitee shall go upon the roof of the Building. 16. Lessee shall not suffer or permit smoking or carrying of lighted cigars or cigarettes in areas reasonably designated by Lessor or by applicable governmental agencies as non-smoking areas. 17. Lessee shall not use any method of heating or air conditioning other than as provided by Lessor. 18. Lessee shall not install, maintain or operate any vending machines upon the Premises without Lessor's written consent. 19. The Premises shall not be used for lodging or manufacturing, cooking, or food preparation. 20. Lessee shall comply with all safety, fire protection, and evacuation regulations established by Lessor or any applicable governmental agency. 21. Lessor reserves the right to waive any one of these rules or regulations, and/or as to any particular Lessee, and any such waiver shall not constitute a waiver of any other rule or regulation or any subsequent application thereof to such Lessee. 22. Lessee assumes all risks from theft or vandalism and agrees to keep its Premises locked as may be required. 23. Lessor reserves the right to make such other reasonable rules and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Office Building Project and its occupants. Lessee agrees to abide by these and such rules and regulations. PARKING RULES 1. Parking areas shall be used only for parking by vehicles no longer than full size, passenger automobiles herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles." 2. Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 3. Parking stickers or identification devices shall be the property of Lessor and be returned to Lessor by the holder thereof upon termination of the holder's parking privileges. Lessee will pay such replacement charge as is reasonably established by Lessor for the loss of such devices. 4. Lessor reserves the right to refuse the sale of monthly identification devices to any person or entity that willfully refuses to comply with the applicable rules, regulations, laws, and/or agreements. 5. Lessor reserves the right to relocate all or a part of parking spaces from floor to floor, within one floor, and/or to reasonably adjacent offsite location(s), and to reasonably allocate them between compact and standard size spaces, as long as the same complies with applicable laws, ordinances, and regulations. 6. Users of the parking area will obey all posted signs and park only in the areas designated for whole parking. 7. Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle. Lessor will not be responsible for any damage to vehicles, injury to persons, or loss of property, all of which risks are assumed by the party using the parking area. 8. Validation, if established, will be permissible only by such method or methods as Lessor and/or its licenses may establish at rates generally applicable to visitor parking. 9. The maintenance, washing, waxing or cleaning of vehicles in the parking structure or Common Areas is prohibited. 10. Lessee shall be responsible for seeing that all of its employees, agents, and invitees comply with the applicable parking rules, regulations, laws, and agreements. 11. Lessor reserves the right to modify these rules and/or adopt such other reasonable and non-discriminatory rules and regulations as it may deem necessary for the proper operation of the parking lot. 12. Such parking use as is herein provided is intended merely as a license only and no bailment is intended or shall be created hereby. EXHIBIT "E" COMMENCEMENT DATE MEMORANDUM Sutter Corporation 9465 Farnham Street San Diego, CA 92123 Dear Tenant: This is to give you notice, pursuant to Section 3 of that certain Lease Agreement (the "Lease"), dated September 4, 1991, between New York Life Insurance Company, a New York Corporation, as Lessor, and Sutter Corporation , as Lessee, that all conditions of Paragraph 3.2.1 of the Lease have been met as of the date hereof and thus, the "Commencement Date" pursuant to Section 3 of the Lease is February 10, 1992, and the ending date is November 9, 1998. NEW YORK LIFE INSURANCE COMPANY, a New York Corporation By: Greystone Realty Corporation, for New York Life Insurance Company By: ------------------------------------------ Name: Greg Colshin ------------------------------- Title: Asset Manager ------------------------------- By: Sutter Corporation, a California Corporation By: ------------------------------------------ Name: Timothy J. Wollaeger ------------------------------- Title: President ------------------------------- Page 1 of 1 ADDENDUM TO THAT CERTAIN LEASE DATED SEPTEMBER 4, 1991, BY AND BETWEEN BUTTER CORPORATION, A CALIFORNIA CORPORATION (LESSEE) AND GREYSTONE REALTY CORPORATION, AS AGENT FOR NEW YORK LIFE INSURANCE COMPANY (LESSOR) 50. Rental Schedule: Lessee shall pay the following base rent fee per month: Months Base Monthly Rent ------ ----------------- 1* $7,700.00 Triple Net 13-20 $7,700.00 Triple Net 21-24 $10,321.30 Triple Net 26-35 $10,696.62 Triple Net 37-48 $11,295.60 Triple Net 49-80 $11,364.92 Triple Net 61-72 $12,010.24 Triple Net 73-81 $12,573.22 Triple Net * Months two (2) through twelve (12) shall be free of Base Rent. 51. Operating Expenses. In months one (1) through twenty-four (24) of this lease term, the Operating Expenses (as defined in Paragraph 4.2) shall be limited to a maximum of $.19 per square foot per month. This monthly per square foot expense shall be paid by Lessee based on 14,000 square feet for months one (1) through ten (10) of this lease term and on the entire 10,766 square feet for the remainder of the term. Beginning in the twenty- fifth (25th) month except for uncontrollable expenses (taxes, insurance and utilities), Lessor agrees to limit the Operating Expenses to an annual increase of four percent (4%) per year over the previous year, of the actual cost, whichever is less. 52. Tenant Improvement Allowance. Landlord agrees to spend up to a total of $281,490.00 ($15.00 per square foot of leased space) to improve the entire premises prior to the lease Commencement Date in accordance with plans and specifications (tenant improvements) to be mutually agreed upon by both parties. This allowance shall be in addition to the Premise's existing restrooms and HVAC system, each of which the Landlord shall warrant is in good working order as of the commencement date of the lease. Additionally, Landlord agrees to pay for the cost of all space planning and construction documents up to a maximum of $14,074.50 ($.75 per square foot). Any additional costs per said work shall be attributable to the tenant improvement allowance stated above. 53. Signage. Tenant at Tenant's sole cost, shall be granted signage on the building, including two (2) large signs, one (1) at the north side of the building and one (1) at the south side of the building. Landlord reserves the right to review and approve or disapprove said signage. Said signage shall be compatible with Futura Business Park's signage criteria. In addition, Landlord, at Landlord's sole cost, agrees to provide a monument sign, at the entrance to the project, with no more than four (4) Tenants listed, and Sutter Corporation shall be granted priority signage. ADDENDUM TO THAT CERTAIN LEASE DATED SEPTEMBER 4, 1991, BY AND BETWEEN BUTTER CORPORATION, A CALIFORNIA CORPORATION (LESSEE) AND GREYSTONE REALTY CORPORATION, AS AGENT FOR NEW YORK LIFE INSURANCE COMPANY (LESSOR) 54. Option to Expand. Tenant shall be given the option to expand anytime during the first forty-eight (48) months of this lease, into an additional 10,000 square feet of contiguous space in the Office Project under the following terms and conditions: A. The term shall be shortened approximately to make it co-terminus with the original lease, B. The Rental rate for the expansion space shall be $.59 per square foot per month, net of operating expenses (additional rent) for the entire term. C. Should Tenant exercise this expansion right within the first thirty-six (36) months, the amount of the Tenant Improvement Allowance provided by Landlord shall be $15.00 per square foot. Should the Tenant exercise this option to expand after the thirty-sixth (36th) month the Tenant Improvement Allowance provided by the Landlord will be calculated at follows: $15.00 per square foot times the number of months remaining on the expansion term divided by 81 months. Furthermore, Landlord shall have the obligation of notifying Tenant when the last 10,000 square foot of contiguous space is being encroached on by an additional tenant. Such notice shall be given when the Landlord has mutually agreed upon preparatory terms and conditions for a least (Letter of Agreement) for all or a portion of the last remaining 10,000 square feet. Upon Tenant receiving written notice of said encroachment, Tenant shall have five (5) business days to notify Landlord in willing of its desire to exercise this Option to Expand. Should Tenant not elect to exercise its option on the 10,000 square feet at that time, Landlord shall have the right to consummate a lessee with that prospective Tenant and Sutter Corporation shall have an option to expand under the same terms and conditions as listed above on the remaining portion of that 10,000 square feet. This same process shall take place in the remaining portion of that 10,000 square feet of space until the Tenant exercises its option, the balance of that space is leased, or the end of the forth-eighth (48th) month of this lease expires, at which time this option to expand will expire. 55. Right of First Refusal. Tenant shall be granted the right of first refusal on all available space between month sixty (60) and eighty-one (81) of this lease. Landlord shall be obligated to notify Tenant of any prospective Tenants in which Landlord has mutually agreed upon preparatory terms and conditions (Letter of Agreement) for any space available during this period. This excludes all options to renew rights by existing Tenants. Upon written notice by Landlord to Tenant of these terms and conditions, Tenant has five (5) business days to accept these terms and conditions in writing to Landlord. This Right of First Refusal shall expire upon the earlier of: (1) the eighty-first (81st) month of this lease or, (2) upon Tenant's exercising this right of first refusal on combined square footage of 5,000 square feet or more. ADDENDUM TO THAT CERTAIN LEASE DATED SEPTEMBER 4, 1991, BY AND BETWEEN BUTTER CORPORATION, A CALIFORNIA CORPORATION (LESSEE) AND GREYSTONE REALTY CORPORATION, AS AGENT FOR NEW YORK LIFE INSURANCE COMPANY (LESSOR) 56. Landlord's Warranties: To the best of its knowledge, Landlord warrants, in accordance with California State warranty requirements, that as of the execution of the lease, the roof does not leak and that it, along with all structural elements of the Building, are sound and are in good state of repair. If, on the commencement date of the lease, the roof leaks or the building otherwise requires repairs, Landlord will repair such leaks and make such repairs at Landlord's sole expense. Furthermore, to the best of its knowledge, Landlord shall warrant that the systems within the Building, prior to the addition of Tenant Improvements, including electrical, heating, air conditioning, water and sewers are in good working order and adequate for the service of the entire building. If on the commencement date of the lease, it is determined that the systems within the Building are not in good working order or not sufficient to service the building, Landlord, and Landlord's sole expense will correct the situation. 57. Parking: Lessee shall receive twenty-two (22) reserved parking spaces along the north and south side of the premises to be mutually agreed upon by Lessee and Lessor, in addition, Lessee shall be entitled to forty-four (44) additional unreserved parking spaces. 58. Trash Enclosure: Tenant and Landlord agree that the reasonable cost of improving the existing trash enclosure, or constructing an additional enclosure, will be split on a 50% / 50% basis. 59. Option to Extend: A. Lessor hereby grants to lessee the option to extend the term of this lease for two (2) 5-year periods commencing when the prior term expires upon each and all of the following terms and conditions. I. Lessee gives to Lessor, and Lessor actually receives, on a date which is prior to the date that the option period would commence (if exercised) by at least six (6) and not more than nine (9) months, a written notice of the exercise of the option to extend this lease for said additional term, time being of the essence. If said notification of the exercise of said option is not so given and received, this option shall automatically expire. II. The provisions of Paragraph 39, including the provision relating to default of Lessee set forth in Paragraph 39.4 of this lease are conditions of this option. III. All of the terms and conditions of this lease except where specifically modified by this option shall apply. ADDENDUM TO THAT CERTAIN LEASE DATED SEPTEMBER 4, 1991, BY AND BETWEEN BUTTER CORPORATION, A CALIFORNIA CORPORATION (LESSEE) AND GREYSTONE REALTY CORPORATION, AS AGENT FOR NEW YORK LIFE INSURANCE COMPANY (LESSOR) IV. The monthly rent for each month of the option period shall be calculated as follows: a. For the first 5-year option, the base monthly rental shall begin at $.69 per square foot and escalate on each anniversary date at a rate of four percent (4%). b. For the second 5-year option period, the base monthly rent shall be at the then prevailing market rate for similar properties in the area. All the other terms, within the lease shall remain the same. LESSEE: SUTTER CORPORATION, A CALIFORNIA CORPORATION By: Date: -------------------------------------------- ------------- Tom Wollaeger, President LESSOR: GREYSTONE REALTY CORPORATION, AS AGENT FOR NEW YORK LIFE INSURANCE COMPANY By: Date: -------------------------------------------- ------------- Charles Lauckhardt, Senior Asset Manager EX-10.36 6 BASIC LEASE INFORMATION FOUR POINTS BUSINESS PARK MIC Four Points, as Landlord and SUTTER BIOMEDICAL INC. , as Tenant -------------------------- 2-10-88 -------------- Date of Lease BASIC LEASE INFORMATION Four Points Business Park 1. Lease Date: February 10 , 1988 . -------------------------- --- 2. Landlord: MIC FOUR POINTS, a California limited partnership 3. Address of Landlord: c/o McLachlan Investment Company 9868 Scranton Road, Suite 120 San Diego, California 92121 4. Tenant: SUTTER BIOMEDICAL INC. 5. Address of Tenant: 9425 Chesapeake Drive San Diego, California 92123 6. Contact: Charles Cashion Telephone: 569-4941 --------------------------- ------------ 7. Section 1.1 Building: 9425 Chesapeake Drive -------------------------------- Floor(s): N/A -------------------------------- Suite No(s): N/A ----------------------------- 8. Section 1.3 Parking Spaces: 82 -------------------------- 9. Section 1.4 Rentable Area of Premises: 26,970 Total Square Feet --------- 10. Section 2.1 Term Commencement Date: Aug. 1, 1988 ----------------------- Term Expiration Date: Sept. 30, 1998 ------------------------- Term: 10 years ---------------------- 11. Section 3.1 Basic Rent (per month): $ See Addendum ---------------------- 12. Section 4.1 Building's Share (of Common Expenses: 55 % for R&D Park) --------- 13. Section 4.1.2 Tenant's Share (of Taxes and Operating Expenses 100% for building)----------- % 14. Section 6.1 Use: Office / R&D --------------------------- 15. Section 29 Security Deposit: $ 26,970 ------------------- 16. Section 31 Broker: Glenn Karp ------------------------- Grubb & Ellis ------------------------- ------------------------- ------------------------- The foregoing Basic Lease Information is hereby incorporated into and made a part of this Lease. Each reference in this Lease to any of the Basic Lease Information shall mean the respective information hereinabove set forth and shall be construed to incorporate all of the terms provided under the particular Lease section pertaining to such information. In the event of any conflict between any Basic Lease Information and the Lease, the latter shall control. LANDLORD TENANT -------- ------ MIC FOUR POINTS, SUTTER BIOMEDICAL, a California limited partnership a California Corporation By: Signature Illegible By: /s/ Charles T. Cashion ---------------------------- -------------------------- Its: Its: President ------------------------- ---------------------- By: By: ---------------------------- -------------------------- Its: Its: ------------------------- ---------------------- FOUR POINTS BUSINESS PARK INDUSTRIAL LEASE THIS LEASE is entered into as of February 10, 1988 , by and between MIC FOUR POINTS, a California limited partnership , ("Landlord"), and SUTTER BIOMEDICAL INC. ("Tenant"). In consideration of the mutual covenants and agreements set forth herein, Landlord and Tenant agree as follows: 1. Premises. 1.1 Upon and subject to the terms, covenants, and conditions hereinafter set forth, Landlord hereby leases to Tenant and Tenant hereby hires from Landlord the premises described in the Basic Lease Information, located in that certain Building specified in the Basic Lease Information as the Building, included in the business park commonly known as Four Points Business Park, City of San Diego, County of San Diego, State of California, and more particularly described in Exhibit "A" attached hereto (herein called the "Park"), such Premises comprising the area substantially as shown on the floor plan or plans that have been signed by Landlord and Tenant and that are attached hereto as Exhibit "B." The land is leased by Landlord pursuant to a ground lease (the "Ground Lease") dated September 12, 1985 with R.E. Hazard Contracting Co., a California corporation, as "lessor." The party possessing the rights of the "lessor" under the Ground Lease shall hereinafter be referred to as the "Owner." The Premises are leased and shall be used and occupied subject to all terms and conditions of the Ground Lease, any and all existing restrictive covenants, encumbrances, conditions, rights, covenants, easements, restrictions and rights-of-way of record, and other matters of record, if any, applicable zoning and building laws, regulations and codes, and such matters as may be disclosed by inspection or survey. For purposes of this Lease, the phrase "Adjoining Buildings" shall mean all commercial and office buildings and related improvements now or hereafter located in the Park, except for the Building. 1.2 Tenant shall have the right, for the benefit of Tenant and its employees, suppliers, shippers, customers and invitees, to the non-exclusive use of all areas and facilities outside the Premises and within the exterior boundary line of the Park that are provided and designated by Landlord from time to time for the general non-exclusive use of Landlord, Tenant, and the other tenants of the Park and their respective employees, suppliers, shippers, customers and invitees, including parking areas, loading and unloading areas, drives, walkways, roadways, trash areas, and landscaped areas (herein called "Common Areas"). 1.3 Tenant shall have the right, for the benefit of Tenant and its employees, customers, and invitees, to the use of the number of vehicle parking spaces specified in the Basic Lease Information on those portions of the Common Areas designated for parking by Landlord from time to time. Such spaces shall be used by all tenants of the Park on an unassigned basis. 1.4 As used herein, the term "Rentable Area" shall be computed in accordance with the schedule attached hereto as Exhibit "C." 2. Term. 2.1 The Premises are leased for a term (herein called the "Term") to commence and end on the dates respectively specified in the Basic Lease Information, unless the Term shall sooner terminate as hereinafter provided. If, on or prior to the Term Commencement Date set forth in the Basic Lease Information, Landlord fails to deliver possession of the Premises, either (a) because Landlord's Work (as hereinafter defined in Article 5.1) shall not have been substantially completed, or (b) because a previous occupant is holding over, or (c) because of any other cause or reason beyond the reasonable control of Landlord, the following provisions shall apply: (i) the Term shall not commence on the Term Commencement Date set forth in the Basic Lease Information but shall, instead, commence on a date fixed by Landlord in a notice to Tenant, which notice shall state that the Premises are, or prior to the commencement date fixed in such notice will be, substantially completed and ready for occupancy by Tenant; provided, however, that Landlord may from time to time, by notice to Tenant, change the commencement date fixed in a prior notice; (ii) neither the validity of this Lease nor the obligations of Tenant under this Lease shall be affected by such failure to deliver possession, except that the Term shall begin as provided in clause (i) above; (iii) Tenant shall have no claim against Landlord because of Landlord's failure to deliver possession of the Premises on the date originally fixed therefore; and (iv) in no event shall the expiration date of the Term be extended beyond the Term Expiration Date specified in the Basic Lease Information. 2.2 The dates upon which the Term shall commence and terminate pursuant to this Article 2 are herein called the "Commencement Date" and the "Expiration Date," respectively. 2.3 Notwithstanding anything to the contrary herein contained, in the event that the Term shall not have commenced on or before such date as shall be one (1) year from the date specified in the Basic Lease Information, then this Lease shall be automatically terminated without any further act of either party hereto and both parties hereto shall be released from all obligations hereunder. 3. Rent: Additional Charges. 3.1 Tenant shall pay to Landlord during the Term the Basic Rent specified in the Basic Lease Information subject to adjustments as provided in Section 3.5 below, which sum shall be payable by Tenant in equal consecutive monthly installments on or before the first day of each month, in advance, at the address specified for Landlord in the Basic Lease Information or such other place as Landlord shall designate, without any prior demand therefore and without any deduction or setoff whatsoever. If the Term Commencement Date should occur on a day other than the last day of a calendar month, then the rent for such fractional month shall be prorated on a daily basis based upon a 30-day calendar month. 3.2 Tenant shall pay to Landlord all charges and other amounts whatsoever as provided in this Lease (herein called "Additional Charges") including, without limitation, any increase in the Basic Rent resulting from the provisions of Article 4. All such amounts and charges shall be payable to Landlord at the place where the Basic Rent is payable. Landlord shall have the same remedies for a default in the payment of Additional Charges as for a default in the payment of Basic Rent. 2 Initials CTC DRB 3.3 Any installment of Basic Rent or any other monies due under this Lease not paid within seven days of the date when due shall bear interest, to the extent enforceable by law, at the rate not exceeding the higher of (i) 5% per annum, or (ii) % per annum plus the rate prevailing on the 25th day of the month preceding the date of execution of this Lease established by the Federal Reserve Bank of San Francisco on advances to member banks under Section 13 or 13(a) of the Federal Reserve Act as in effect as of that date from the date due and payable until the same shall have been fully paid, but the payment of such interest shall not excuse or cure any default by Tenant under this Lease. 3.4 Tenant hereby acknowledges that the late payment by Tenant to Landlord of Basic Rent or any other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by the terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent, or any other sum due from Tenant, shall not be received by Landlord or Landlord's designated agent within seven days after such amount shall be due, Tenant shall pay to Landlord, in addition to the interest provided above, a late charge equal to five percent (5%) of such overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no way constitute a waiver of Tenant's default with respect to such overdue amount nor prevent Landlord from exercising any other right or remedy of Landlord resulting from such late payment. 4. Additional Charges for Taxes and Operating Expenses. 4.1 For purposes of this Article 4, the following terms shall have the meanings hereinafter set forth: 4.1.1. "Computation Year" shall mean each 12 consecutive month period commencing January 1 of each year during the Term, provided that Landlord, upon notice to Tenant, may change the Computation Year from time to time to any other 12 consecutive month period and, in the event of any such change, Tenant's Share or excess Taxes (as hereinafter defined) shall be equitably adjusted for the Computation Years involved in any such change. 4.1.2. "Tenant's Share" shall mean the percentage figure so specified in the Basic Lease Information. Tenant's Share has been computed by dividing the square footage of the Premises by the total square footage of the Building and, in the event that either the square footage of the Premises or the total square footage of the Building is changed, Tenant's Share will be appropriately adjusted, and, as to the Computation Year in which such change occurs, for purposes of this Section 4, Tenant's Share shall be determined on the basis of the number of days during such Computation Year at each such percentage. 4.1.3. "Operating Expenses" for the Computation Year is defined as the sum of (i) all "Building Common Expenses" (defined below) incurred for that Computation Year plus (ii) that percentage of "Land Common Expenses" (defined below) for that Computation Year which is equal to the Building's Share, as set forth in the Basic Lease Information. 4.1.4. "Building Common Expenses" for the Computation Year is defined as all "Common Expenses" (defined below) incurred for that Computation Year which the Landlord reasonably determines to pertain exclusively to the Building. 4.1.5. "Land Common Expenses" for the Computation Year is defined as all Common Expenses incurred for that Computation Year except for Common Expenses which the Landlord reasonably determines pertain exclusively to a single Building located in the Park. 4.1.6. "Taxes" shall mean the Building's Share, as set forth in the Basic Lease Information, of all taxes, assessments and charges levied upon or with respect to the Park or any personal property of Landlord used in the operation thereof or Landlord's interest in the Park or such personal property. Taxes shall include, without limitation, all general real property taxes and general and special assessments, charges, fees or assessments for transit, housing, police, fire or other governmental services or purported benefits to the Park, service payments in lieu of taxes, and any tax, fee or excise on the act of entering into this Lease or any other lease of space in the Park, or on the use of occupancy of the Park or any part thereof, or on the rent payable under any lease or in connection with the business or renting space in the Park that are now or hereafter levied or assessed against Landlord by the United States of America, the State of California, or any political subdivision, public corporation, district or other political or public entity, and shall also include any other tax, fee or other excise, however described, that may be levied or assessed as a substitute for or as an addition to, as a whole or in part, any 3 Initials CTC DRB Taxes, whether or not now customary or in the of the parties on the date of this Lease. Taxes do not include franchise, transfer, inheritance or capital stock taxes or income taxes measured by the net income of Landlord from all sources unless, due to a change in the method of taxation, any of such taxes is levied or assessed against Landlord as a substitute for or as an addition to, as a whole or in part, any other tax that would otherwise constitute a tax. Taxes shall also include reasonable legal fees, costs, and disbursements incurred in connection with proceedings to contest, determine or reduce Taxes. 4.1.7. "Common Expenses" shall include all direct costs of the operation and maintenance of the Building, the Adjoining Buildings, the Park, Common Areas, and parking areas, including without limitation the following: costs of (1) utilities, (2) supplies, (3) insurance (including public liability, property damage and fire) and extended coverage insurance for the full replacement cost as required by Landlord or its lenders, (4) services of independent contractors, (5) compensation (including employment taxes and fringe benefits) of all persons who perform duties connected with the operation, maintenance, repair or overhaul of the Building, Adjoining Buildings, Park, Common Areas and parking areas, and equipment, improvements and facilities, including without limitation engineers, janitors, painters, floor waxers, window washers, security and parking personnel and gardeners, (6) management of the Building, Adjoining Buildings, Park, Common Area and parking areas, whether managed by Landlord or an independent contractor (including, without limitation, an amount equal to the fair market value of any on-site manager's office), (7) rental expenses for (or a reasonable depreciation allowance on) personal property used in the maintenance, operation or repair of the Building, Adjoining Buildings, Park, Common Areas and parking areas, (8) the maintenance and repairs described in Paragraph 7 hereof, and (9) any other costs or expenses incurred by Landlord under this Lease and not otherwise reimbursed by tenants of the Building, Adjoining Buildings, Park, Common Areas and parking areas. Common Expenses shall also include the costs of any capital improvements made to the Building, Adjoining Buildings, Park, Common Areas, and parking areas by Landlord that reduce other Common Expenses, or that are required under any governmental law or regulation, such costs to be amortized over such reasonable period as Landlord shall determine at an interest rate the greater of ten percent (10%) per annum or the interest rate paid by Landlord on funds borrowed for the purpose of constructing such capital improvements. Common Expenses shall not include depreciation on the Building or the Adjoining Buildings or equipment therein, interest, executive salaries, advertising or real estate broker's commissions. Common Expenses shall be adjusted to reflect a ninety-five percent (95%) occupancy of the Building and the Adjoining Buildings during any period in which the Building and the Adjoining Buildings are not on the average at least ninety-five percent (95%) occupied. Management fees included in "Common Expenses" are charged at a rate of 5.5% for net leases and 4.5% for gross leases, and these percentages shall be considered a cap for that share of the total that the Tenant shares. 4.2 Tenant shall pay to Landlord as Additional Charges 1/12th of Tenant's Share of the Taxes for each Computation Year, on or before the first day of each month during such Computation Year, in advance, in an amount estimated by Landlord and billed by Landlord to Tenant; provided that Landlord shall have the right initially to determine monthly estimates and to revise such estimates from time to time. With reasonable promptness after Landlord has received the tax bills for any Computation Year, Landlord shall furnish Tenant with a statement (herein called "Landlord's Tax Statement") setting forth the amount of Taxes for such Computation Year and Tenant's Share of such Taxes. If the actual Taxes for such Computation Year exceed the estimated Taxes paid by Tenant for such Computation Year, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the actual Taxes within 15 days after the receipt of Landlord's Tax Statement and, if the total amount paid by Tenant for any such Computation Year shall exceed the actual Taxes for such Computation Year, such excess shall be credited against the next installments of Taxes due from Tenant to Landlord hereunder. 4.3 Tenant shall pay to Landlord as Additional Charges 1/12th of Tenant's share of the Operating Expenses for each Computation Year, on or before the first day of each month of such Computation Year, in advance, in an amount estimated by Landlord and billed by Landlord to Tenant; provided that Landlord shall have the right initially to determine monthly estimates and to revise such estimates from time to time. With reasonable promptness after the expiration of each Computation Year, Landlord shall furnish Tenant with a statement "herein called "Landlord's Expense Statement") setting forth in reasonable detail the Operating Expenses for such Computation Year and Tenant's Share of such Operating Expenses. If the actual Operating Expenses for such Computation Year exceed the estimated Operating Expenses paid by Tenant for such Computation Year, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the actual Operating Expense within 15 days after the receipt of Landlord's Expense Statement and, if the total amount paid by Tenant for any such Computation Year shall exceed the actual Operating Expenses for such Computation Year, such excess shall be credited against the next installments of the estimated Operating Expenses due from Tenant to Landlord hereunder. 4.4 If the Commencement Date shall occur on a date other than the first day of a Computation Year, Tenant's Share of Taxes and Operating Expenses for the Computation Year in which the Commencement Date occurs shall be in the proportion that the number of days from and including the Commencement Date to and including the last day of the Computation Year in which the Commencement Date occurs bears to 365. Similarly, if the Expiration Date shall occur on a date other than the last day of a Computation Year, Tenant's Share of Taxes and Operating Expenses for the Computation Year in which the Expiration Date occurs shall be in the proportion that the number of days from and including the first day of the Computation Year in which the Expiration Date occurs to and including the Expiration Date bears to 365. Notwithstanding the foregoing, Landlord may, pending the determination of the amount of Taxes and Operating Expenses for such partial Computation Year, furnish Tenant with statements of estimated Taxes, estimated Operating Expenses, and Tenant's Share of each thereof for such partial Computation Year. Within 15 days after receipt of such estimated statements Tenant shall remit to Landlord, as Additional Charges, the amount of Tenant's Share of such Taxes and Operating Expenses. After such Taxes and Operating Expenses have been finally determined and Landlord's Tax Statement and Landlord's Expense Statement have been furnished to Tenant pursuant to Sections 4.2 and 4.3 hereof, respectively, and if there shall have been an underpayment of Tenant's Share of Taxes or Operating Expenses, Tenant shall remit the amount of such underpayment to Landlord within 15 days after receipt of such statements and if there shall have been an overpayment, Landlord shall remit the amounts of any such overpayment to Tenant within 15 days after the issuance of such statements. 5. Construction of Building, Premises and Common Areas. 5.1 Prior to the Commencement Date, Landlord will construct the Building and the Premises and perform the work and make the installations in the Premises substantially as set forth in Exhibit "D" attached hereto (such work and installations being herein called "Landlord's Work"). Landlord's obligation to perform Landlord's Work shall not require Landlord to incur overtime costs and expenses and shall be subject to unavoidable delays due to acts of God, governmental restrictions, strikes, labor disturbances, shortages of material and supplies, and due to any other cause or event beyond Landlord's reasonable control. Landlord shall, when construction progress so permits, notify Tenant in advance of the approximate date on which Landlord's Work will be substantially completed in 3 Initials CTC DRB accordance with Exhibit "D" and will notify Tenant when Landlord's Work is in fact completed, which latter notice will constitute delivery of possession of the Premises to Tenant. If any dispute shall arise as to whether the Premises are substantially completed and ready for Tenant's occupancy, a certificate furnished by Landlord's architect certifying the date of substantial completion shall be conclusive of the fact and date and shall be binding upon Landlord and Tenant. It is understood and agreed by Tenant that any minor changes from any plans or from said Exhibit "D" that may be necessary during construction of the Park, the Building, the Common Areas or the Premises shall not affect or change this Lease or invalidate same. It is agreed that by occupying the Premises as a tenant, Tenant formally accepts same and acknowledges that the Premises are in the condition called for hereunder. Failure of Landlord to deliver possession of the Premises within the time and in the condition provided for in this Lease will not give rise to any claims for damages by Tenant against Landlord or Landlord's contractor. 5.2 The manner in which the Common Areas are maintained and operated and the expenditures therefore shall be at the sole discretion of Landlord, and the use of such areas and facilities shall be subject to such rules and regulations as Landlord shall make from time to time. Landlord shall not be responsible for the nonperformance of any such rules and regulations by any other tenant or occupant of the Park. 5.3 The purpose of attached Exhibit "B" is only to show the approximate location of the Premises in the Building, and such exhibit is not meant to constitute an agreement as to the construction of the Premises, the Rentable Area thereof, or the specific location of the Common Areas or the elements hereof or of the accessways to the Premises or the Park. Landlord hereby reserves the right, at any time and from time to time, to (i) make alterations in or additions to the Park and the Common Areas including, without limitation, changes in the location, size, shape, and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, landscaped areas and walkways, as such changes shall alter or affect the basic configuration and access to Tenant's building without Tenant's prior written approval, except for those changes that are required by Landlord to comply with any laws or ordinances. (ii) close temporatrily any of the Common Areas for maintenance purposes as long as reasonable access to the Premises remains available, (iii) designate property outside the Park to be part of the Common Areas, (iv) add additional buildings and improvements to the Park and Common Areas and (v) use the Common Areas while engaged in making alterations in or additions or repairs to the Park. 6. Conduct of Business by Tenant. 6.1 Tenant shall use and occupy the Premises during the Term of this Lease solely for the use specified in the Basic Lease Information and for no other use or uses without the prior written consent of Landlord. 6.2 Tenant shall not use or occupy or permit the use or occupancy of the Premises or any part thereof for any use other than the use specifically set forth in Section 6.1, or in any manner that, in Landlord's judgment, would adversely affect or interfere with (i) any services required to be furnished by Landlord to Tenant or to any other tenant or occupant of the Park, (ii) the proper and economical rendition of any such service of (iii) the use or enjoyment of any part of the Park by any other tenant or occupant. 6.3 The parking spaces to be provided to Tenant pursuant to Section 1.3 shall be used for parking only by vehicles no larger than full-sized passenger automobiles or pickup trucks. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, customers or invitees to be loaded or parked in areas other than those designated by Landlord for such activities. If tenant permits or allows any of the prohibited activities described in this Section 6.3, Landlord shall have the right, in addition to all other rights and remedies that it may have under this Lease, to remove or tow away the vehicle involved without prior notice to Tenant, and the cost thereof shall be paid by Tenant to Landlord as Additional Charges within five days after delivery to Tenant of bills therefore. 6.4 Tenant shall not store any property in the Common Areas without the prior written consent of Landlord. In the event that any unauthorized storage shall occur, Landlord shall have the right, in addition to all other rights and remedies that Landlord may have under this Lease, to remove the property without prior notice to Tenant, and the cost thereof shall be paid by Tenant to Landlord within five days after delivery to Tenant of bills therefore. 6.5 Tenant shall not do anything or permit anything to be done in or about the Premises that shall (i) invalidate or be in conflict with the provisions of any fire or other insurance policies covering the Building or the Park or any property located therein, (ii) result in a refusal by fire insurance companies of good standing to insure the Building or the Park or any such property in amounts reasonably satisfactory to Landlord, (iii) subject Landlord to any liability or responsibility for injury to any person or property by reason of any business operation being conducted in or about the Premises or (iv) cause any increase in the fire insurance rates applicable to the Building or property located therein at the beginning of the Term or at any time thereafter. Tenant, at Tenant's expense, shall comply with all rules, orders, regulations and requirements of the American Insurance Association (formerly the National Board of Fire Underwriters) and of any similar body that shall hereafter perform the function of such Association. 7. Alterations and Tenant's Property. 7.1 Tenant shall make no structural alterations at any time nor any installations, additions, or improvements (collectively "Alterations") which exceed three thousand dollars ($3,000.00) in or to the premises without Landlords prior written consent, which shall not be unreasonably withheld. All Alterations shall be done at Tenant's expense at such times and in such manner as Landlord may designate and only by such contractors or mechanics as are approved by Landlord, and such approval shall not be unreasonably withheld. 7.2 All appurtenances, fixtures, improvements, additions and other property attached to or installed in the Premises whether by the Landlord or by or on behalf of Tenant, and whether at Landlord's expense or Tenant's expense, or at the joint expense of the Landlord and Tenant, shall be and remain the property of Landlord. Any furnishings and personal property installed in the Premises that are removable without material damage to the Building or the Premises, whether the property of Tenant or leased by Tenant, are herein sometimes called "Tenant's Property." Any replacements of any property of Landlord, whether made at Tenant's expense or otherwise, shall be and remain the property of Landlord. 7.3 Any of Tenant's Property remaining on the Premises at the expiration of the Term shall be removed by Tenant at Tenant's cost and expense and Tenant shall, at its cost and expense, repair any damage to the premises in excess of Two Thousand Dollars ($2,000.00) or any damage to the Building caused by such removal. Any of Tenant's Property not removed from the Premises prior to the expiration of the Term shall, at Landlord's option, become the property of Landlord, or Landlord may remove such Tenant's Property and Tenant shall pay to Landlord Landlord's costs of removal within ten days after delivery of a bill therefore. 8. Landlord's Repairs. Except for damage or wear and tear resulting from the omission, negligence or willful misconduct of Tenant or any person claiming through or under Tenant, or any of Tenant's employees, suppliers, shippers, 5 Initials CTC DRB customers or invitees, Landlord shall keep in good condition and repair the foundations, exterior walls, structural condition of interior bearing walls, and roof of the Premises, as well as the parking lots, walkways, driveways, landscaping, fences, signs, and utility installations of the Common Areas. Landlord shall not, however, be obligated to paint he exterior or interior surface of exterior walls, nor shall Landlord be required to maintain, repair or replace windows, doors or plate glass of the Premises. Landlord shall not be liable for, and except as provided in Article 16 hereof there shall be no abatement of Rent with respect to, any injury to or interference with Tenant's business arising from any repair, maintenance, alteration, or improvement in or to (i) any portion of the Park or the Building including the Premises, or (ii) the fixtures, appurtenances, and equipment therein. Tenant hereby waives and releases its right to make repairs at Landlord's expense under Sections 1941 and 1942 of the California Civil Code or under any similar law, statute or ordinance now or hereafter in effect. 9. Tenant's Repairs. 9.1 Subject to the provisions of Article 8, Tenant, at Tenant's cost and expense, shall make all repairs and replacements, structural and otherwise, as and when Landlord deems necessary to preserve in good working order and condition, the Premises and every part thereof including, without limitation, all plumbing, heating, ventilating, and air conditioning systems, electrical and lighting facilities and equipment with in the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, windows, doors, plate glass and skylights located within the Premises. At Landlord's option, either Tenant shall procure and maintain, at Tenant's expense, a ventilating and air conditioning system maintenance contract satisfactory to Landlord, or Landlord shall procure and maintain a ventilating and air conditioning system maintenance contract. If Landlord elects to procure and maintain the ventilating and air conditioning system maintenance contract, Tenant shall pay to Landlord from time to time, within 15 days after deliver of a statement therefore, the cost of such contract. 9.2 All repairs and replacements made by or on behalf of Tenant or any persona claiming through or under Tenant shall be made and performed (i) at Tenant's cost and expense and at such time and in such manner as Landlord may designate, (ii) by contractors or mechanics approved by Landlord, (iii) so that same shall be at least equal in quality, value and utility to the original work or installation and (iv) in accordance with the rules and regulations for the Park adopted by Landlord from time to time and in accordance with all applicable laws and regulations of governmental authorities having jurisdiction over the Premises. 10. Abandonment. Tenant shall not vacate or abandon the Premises at any time during the term of this Lease, and if Tenant shall abandon, vacate or surrender the Premises or be dispossessed by process of law or otherwise, any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned, at the option of Landlord, except such property as may be mortgaged to or otherwise subject to a security interest in favor of Landlord. 11. Liens. Tenant shall keep the Premises free from any liens arising out of any work performed, materials furnished, or obligations by or for Tenant or any person or entity claiming through or under Tenant. In the event that Tenant shall not, within ten days following the imposition of any such lien, cause the same 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 such lien 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, shall be considered Additional Charges and shall be payable by Tenant to Landlord on demand. Landlord shall have the right at all times to post and keep posted on the Premises, the Building, and any other party having an interest therein, from mechanics' and materialmens' liens and Tenant shall give to Landlord at least five business days' prior notice of commencement of any construction on the Premises. 12. Assignment and Subletting. 12.1 Tenant shall not directly or indirectly, voluntarily or by operation of law, sell, assign, encumber, pledge, or otherwise transfer or hypothecate all or any part of the Premises or Tenant's leasehold estate hereunder (collectively, "Assignment"), or permit the Premises to be occupied by anyone other than Tenant or sublet the Premises (collectively, "Sublease") or any portion thereof without Landlord's prior written consent in each instance, which consent shall not be unreasonably withheld. 12.2 If Tenant desires at any time to enter into an Assignment of this Lease or a Sublease of the Premises or any portion thereof, it shall first give written notice to Landlord of its desire to do so, which notice shall contain (i) the name of the proposed assignee, subtenant or occupant, (ii) the nature of the proposed assignee's subtenant's or occupant's business to be carried on in the Premises, (iii) the terms and provisions of the proposed Assignment or Sublease, and (iv) such financial information as Landlord may reasonably request concerning the proposed assignee, subtenant or occupant. Tenant shall reimburse Landlord for Landlord's reasonable attorneys fees incurred in connection with the processing and documentation of any requested Assignment of this Lease or Sublease of the Premises. Any notice by Tenant to Landlord pursuant to this Section 12.2 of a proposed assignment or sublease shall be accompanied by a payment of $500 as a non-refundable fee to compensate Landlord for its time and the processing of Tenant's request for Landlord's consent. 12.3 At any time within 10 days after Landlord's receipt of any notice specified in Section 12.2, Landlord may, by written notice to Tenant, elect to (a) take an Assignment of Tenant's leasehold estate specified in Tenant's notice hereunder, or any portion thereof, (b) terminate this Lease as to the portion (including all) of the premises that is specified in Tenant's notice, with a proportionate abatement in the Rent, (c) consent to the Sublease of Assignment, or (d) disapprove the Sublease or Assignment. In the event Landlord elects to Sublease or take an Assignment from Tenant as described in Subsection (a) above, the rent payable by Landlord shall be in the lower of that set forth in Tenant's notice or the Rent payable by Tenant under this Lease at the time of the Assignment or Sublease). In the event Landlord elects any of the options set forth in Subsections (a) or (b) above, with respect to a portion of the Premises, (i) Tenant shall at all times provide reasonable and appropriate access to such portion of the Premises and use of any common facilities and (ii) Landlord shall have the right to use such portion of the Premises for any legal purpose in its sole discretion and the right to further assign or sublease the portion of the Premises subject to Landlord's election without the consent of Tenant. If Landlord consent to the Sublease or Assignment within said 60-day period, Tenant may thereafter, within 90 days after Landlord's consent but not later than the expiration of said 90 days, enter into such Assignment or Sublease of the Premises or portion thereof upon the terms and conditions set forth in the notice furnished by Tenant to Landlord pursuant to Section 12.2. 12.4 No consent by Landlord to any Assignment or Sublease by Tenant shall relieve Tenant of any obligation to the performed by Tenant under this Lease whether arising before or after the Assignment or Sublease. The consent by Landlord to any Assignment or Sublease shall not relieve Tenant of the obligation to obtain Landlord's 6 Initials CTC DRB prior written consent to any other Assignment or Sublease. Any Assignment or Sublease that is not in compliance with Article 12 shall be void and, at the option of Landlord, shall constitute a material default by Tenant under this Lease. The acceptance of Rent or Additional Charges by Landlord from a proposed assignee or sublessee shall not constitute the consent by Landlord to such Assignment or Sublease. 12.5 Any sale or other transfer, including transfer by consolidation, merger or reorganization, of a majority of the voting stock of Tenant, if Tenant is a corporation, or any sale or other transfer of a majority of the partnership interest in Tenant, if Tenant is a partnership, shall be an Assignment for purposes of this Article 12. As used in this Section 12.5, the Term "Tenant" shall also mean any entity that has guaranteed Tenant's obligations under this Lease, and the prohibition hereof shall be applicable to any sales or transfers of the stock or partnership interest of said guarantor. 12.6 Each assignee, sublessee or other transferee other than Landlord shall assume, as provided in this Section 12.6, all obligations of Tenant under this Lease and shall be and remain liable jointly and severally with Tenant for the payment of Rent and Additional Charges and for the performance of all of the terms, covenants, conditions and agreements herein contained on Tenant's part to be performed for the Term; provided, however, that the assignee, sublessee or other transferee shall be liable to Landlord for rent only in the amount set forth in the Assignment or Sublease. No Assignment shall be binding on Landlord unless the assignee or Tenant shall deliver to Landlord a counterpart of the Assignment and an instrument in recordable form that contains a covenant of assumption by the assignee satisfactory in substance and form to Landlord consistent with the requirements of this Section 12.6, but the failure or refusal of the assignee to execute such instrument of assumption shall not release or discharge the assignee from its liability as set forth above. 12.7 Landlord and Tenant acknowledge that the foregoing provisions concerning assignment and subletting, including without limitation Landlord's right to withhold its consent to any proposed assignment or sublease (i) are critical to Landlord's determination to enter into this Lease, and (ii) have bee included in this Lease as a result of specific negotiation between the Landlord and Tenant. 13. Compliance with Laws. Tenant, at Tenant's cost and expense, shall comply with all laws, orders and regulations of federal, state, county, and municipal authorities and with all directions, pursuant to law, of all public officers, that shall impose any duty upon Landlord or Tenant with respect to the Premises or the use or occupancy thereof, except that Tenant shall not be required to make any structural alterations in order to comply unless such Alterations shall be necessitated or occasioned, as a whole or in part, by the act, omission, or negligence of Tenant or any person claiming through or under Tenant or any of their employees, supplies, shippers, customers, or invitees, or by the use of occupancy or manner of use or occupancy of the Premises by Tenant or any such person. Any work or installation made or performed by or on behalf of Tenant or any person claiming through or under Tenant pursuant to the provisions of this Article 13 shall be made in conformity with, and subject to the provisions of, Section 9.2. 14. Subordination and Attornment. 14.1 At Landlord's option, this Lease shall be subordinated to any ground lease, mortgage, deed of trust or any other hypothecation for security now or hereafter placed upon the Land, the Building, the Premises, or any part thereof, and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements, and extensions thereof. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed if Tenant is not in default and so long as Tenant shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. In the event of (i) the termination of any ground lease upon the Land, or (ii) any foreclosure, transfer in lieu of foreclosure or exercise of power of sale under any mortgage or deed of trust upon the Land, and on each such event Tenant shall, at the request of the party acquiring the interests of Landlord under this Lease following such event, attorn to such party and recognize such party as the Landlord under this Lease. If any mortgagee, trustee or ground lessor shall elect to have this Lease prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Tenant, this Lease shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease is dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. 14.2 Tenant agrees to execute any documents required to effectuate an attornment or a subordination, or to make this Lease prior to the lien of any mortgage, deed of trust or ground lease, as the case may be, in accordance with the provisions of Section 14.1 above. Tenant's failure to execute such documents within ten (10) days after written demand shall constitute a material default by Tenant hereunder and without further notice to Tenant or, at Landlord's option, Landlord shall execute such document on behalf of Tenant as Tenant's attorney-in-fact and in Tenant's name, place and stead to execute such documents in accordance with this Section 14.2. 15. Inability to Perform. If, by reason of the occurrence of any of the unavoidable delay specified in Section 5.1, Landlord is unable to furnish or is delayed in furnishing any utility or service required to be furnished by Landlord under the provisions of this Lease or of any collateral instrument, or is unable to perform or make or is delayed in performing or making any installations, repairs, alterations, additions or improvements, whether required to be performed or made under this Lease or under any collateral instrument, or is unable to fulfill or is delayed in fulfilling any of Landlord's other obligations under this Lease or any collateral instrument, no such inability or delay shall constitute an actual or constructive eviction, as a whole or in part, or entitle Tenant to any abatement of diminution of Rent or Additional Charges, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Landlord or its agents by reason of inconvenience or annoyance to Tenant or by reason of injury to or interruption of Tenant's business, or otherwise. Tenant hereby waives and releases its right to terminate this Lease under Section 1932 (1) of the California Civil Code or under any similar law, statute or ordinance now or hereafter in effect. 16. Destruction. 16.1 If the Premises shall be damaged by fire or other casualty insured against by Landlord's fire and extended coverage insurance policy covering the Building, and if Tenant shall give prompt notice to Landlord of such damage, Landlord, at Landlord's expense, shall repair such damage; provided, however, that Landlord shall have no obligation to repair any damage to or to replace Tenant's property, Alterations, or any other property or effects of Tenant. Except as otherwise provided in this Article 16, if the entire Premises shall be rendered untenantable by reason of any such damage, Rent and Additional Charges shall abate for the period from the date of such damage to the date when such damage to the Premises shall have been repaired, and if only a part of the Premises shall be rendered untenantable, Rent and Additional Charges shall abate for the period in the proportion that the area of the part of the Premises so rendered untenantable bears to the total area of the Premises; provided, however, if prior to the date when all of such damage shall have been repaired, any part of the Premises so damaged 7 Initials CTC DRB shall be rendered tenantable or shall be used or occupied by Tenant or any person or person claiming through or under Tenant, then the amount by which Rent and Additional Charges shall abate shall be equitably apportioned for the period from the date of any such use or occupancy to the date when all such damage shall have been repaired. 16.2 Notwithstanding the provisions of Section 16.1, if, prior to or during the Term, (1) the Premises shall be totally damaged or rendered wholly untenantable by fire or other casualty, and if Landlord shall decide not to restore the Premises, or (ii) the Building shall be so damaged by fire or other casualty that, in Landlord's opinion, have been damaged or rendered untenantable, then, in any of such events, Landlord at Landlord's option, may give to Tenant within 90 days after such fire or other casualty 30 days' notice of termination of this Lease and, in the event such notice is given, this Lease and the Term shall terminate upon the expiration of such 30 days with the same effect as if the date of expiration of such 30 days were the Expiration Date; and Rent and Additional Charges shall be apportioned as of such date, and any prepaid portion of Rent or Additional Charges for any period after such date shall be refunded by Landlord to Tenant. 16.3 Landlord and Tenant shall each obtain from their respective insurers under all policies of fire, theft, public liability, workers' compensation and other insurance maintained by either of them at any time during the Term insuring or covering the Building, the Park or any portion thereof or operations therein, a waiver of all rights of subrogation that the insurer of one party might otherwise, if at all, have against the other party, and Landlord and Tenant shall each indemnify and defend the other party against and hold the other party harmless from any and all loss, cost, damage, liability or expense, including reasonable attorneys fees, resulting from the failure to obtain such waiver. 16.4 Except to the extent expressly provided in Section 16.3, nothing contained in this Lease shall relieve Tenant of any liability to Landlord or to its insurance carriers that Tenant may have under law or under the provisions of this Lease in connection with any damage to the Premises of the Building by fire or other casualty. 16.5 Notwithstanding the provisions of Section 16.1, if any such damage is due to the fault or neglect of Tenant, any person claiming through or under Tenant or any of their employees, suppliers, shippers, customers or invitees, then there shall be no abatement of Rent or Additional Charges by reason of such damage, unless Landlord is reimbursed for such abatement of Rent or Additional Charges pursuant to any rental insurance policies that Landlord may, in its sole discretion, elect to carry. 16.6 The provisions of this Lease, including this Article 16, constitute an express agreement between Landlord and Tenant with respect to any and all damages to, or destruction of, all or any part of the Premises, the Building or any other portion of the Park and any statute or regulation of the State of California including, without limitation, Sections 1932 (2) and 1933(4) of the California Civil Code with respect to any rights or obligations concerning damage or destruction in the absence of an express agreement between the parties and any similar statute or regulation now or hereafter in effect shall have no application to this Lease or to any damage to or destruction of all or any part of the Premises, the Building or any other portion of the Park. 17. Eminent Domain. 17.1 If all of the Premises is condemned or taken in any manner for public or quasi-public use including, but not limited to, a conveyance or assignment in lieu of a condemnation or other taking, this Lease shall automatically terminate as of the earlier of the date of the vesting of title or the date of dispossession of Tenant as a result of such condemnation or other taking. If a part of the Premises is so condemned or taken, this Lease shall automatically terminate as to the portion of the Premises so taken as of the earlier of the date of the vesting of the title or the date of dispossession of Tenant as a result of such condemnation or taking. If such portion of the Building or Park is condemned or otherwise taken so as to require, in the opinion of Landlord, a substantial alteration or reconstruction of the remaining portions thereof, this Lease may be terminated by Landlord as of the earlier of the date of the vesting of title or the date of dispossession of Tenant as a result of such condemnation or taking by written notice to Tenant within 60 days following notice to Landlord of the date on which said vesting or dispossession will occur. I such portion of the Premises is taken so as to render the remaining portion untenantable and unusable by Tenant, this Lease may be terminated by Tenant as of the earlier of the date of the vesting of title or the date of dispossession of Tenant as a result of such condemnation or taking by written notice to Landlord within 60 days following notice to Tenant of the date on which said vesting or dispossession will occur. 17.2 Landlord shall be entitled to the entire award in any condemnation proceeding or other proceeding (for taking for public or quasi-public use) including, without limitation, any award made for the value of the leasehold estate created by this Lease. No award for any partial or entire taking shall be apportioned and Tenant hereby assigns to Landlord any award that may be made in such condemnation or other taking together with any and all rights of Tenant now or hereafter arising in or to same or any part thereof; provide,d however, that nothing contained herein shall be deemed to give Landlord any interest in, or to require Tenant to assign to Landlord any award made to Tenant specifically for its relocation expenses, the taking of personal property and fixtures belonging to Tenant or the interruption of or damage of Tenant's business. 17.3 In the event of a partial condemnation or other taking that does not result in a termination of this Lease as to the entire Premises, the Rent and Additional Charges shall abate in proportion to the portion of the Premises taken by such condemnation or other taking. 17.4 If all or any portion of the Premises is condemned or otherwise taken for public or quasi-public use for a limited period of time, this Lease shall remain in full force and effect and Tenant shall continue to perform terms, conditions, and covenants of this Lease; provided, however, that Rent and Additional Charges shall abate during such limited period in proportion to the portion of the Premises that is rendered untenantable and unusable as a result of such condemnation or other taking. Landlord shall be entitled to receive the entire award made in connection with any such temporary condemnation or other taking. 18. Utilities. 18.1 Tenant shall pay for all water, gas, heat, light, power, telephone, and other utilities and services supplied for the Premises together with any taxes thereon. If any such services are not separately metered to the Premises, Tenant shall pay, at Landlord's option, either Tenant's Share or a reasonable proportion, to be determined by Landlord, of all charges jointly metered with other premises in the Building. Landlord makes no representation with respect to the adequacy or fitness of the air conditioning or ventilation equipment in the Building to maintain temperatures that may be required for, or because of, any equipment of Tenant other than normal fractional horsepower office equipment, and Landlord shall have no liability for loss or damage in connection therewith. 8 Initials CTC DRB 18.2 In the event any governmental entity promulgates or revises any statute, ordinance or building, fire or other code or imposes mandatory or voluntary controls or guidelines on Landlord or the Park or any part thereof, relating to the use of conservation of energy, water, gas, light or electricity, or the reduction of automobile or other emissions, or the provision of any other utility or service provided with respect to this Lease, or in the event Landlord is required or elects to make alterations to the Building or any other part of the Park in order to comply with such mandatory or voluntary controls or guidelines or Landlord may, in its sole discretion, make such alterations to the Building or any other part of the Park related thereto. Such compliance and the making of such alterations shall in no event entitle Tenant to any damages, relieve Tenant of the obligation to pay the full Rent and Additional Charges reserved hereunder or constitute or be construed as a constructive or other eviction of Tenant. 19. Default. 19.1 The failure of Tenant to perform or honor any covenant, condition or representation made under this Lease shall constitute a default, hereunder by Tenant upon expiration of the appropriate grace period hereinafter provided. Tenant shall have a period of ten (10) days from the date of written notice from Landlord within which to cure any default in te payment of Rent or Additional Charges. Tenant shall have a period of ten days from the date of written notice from Landlord within which to cure any other default under this Lease; provided, however, that with respect to any default other than the payment of Rent or Additional Charges that cannot reasonably be cured within ten days, the default shall not e deemed to be uncured if Tenant commences to cure within ten days from Landlord's notice and continues to prosecute diligently the curing thereof to completion within a reasonable time. 19.2 Upon the occurrence of a default by Tenant that is not cured by Tenant within the grace periods specified in Section 19.1 hereof, Landlord shall have the following rights and remedies in addition to all other rights and remedies available to Landlord at law or in equity. 19.2.1 The rights and remedies provided by California Civil Code Section 1951.2, including but not limited to, the right to terminate Tenant's right to possession of the Premises and to recover the worth at the time of award of the amount by which the unpaid Rent and Additional Charges for the balance of the Term after the time of award exceed the amount of rental loss for the same period that Tenant proves could be reasonably avoided, as computed pursuant to Subsection (b) of said Section 1951.2. 19.2.2 The rights and remedies provided by California Civil Code Section 1951.4 which allows Landlord to continue this Lease in effect and to enforce all of its rights and remedies under this Lease including the right to recover Rent and Additional Charges as they become due, for as long as Landlord does not terminate Tenant's right to possession; provided, however, if Landlord elects to exercise its remedies described in this Subsection 19.2.2 and Landlord does not terminate this Lease, and if Tenant requests Landlord's consent to an Assignment of this Lease or a Sublease of the Premises at such time as Tenant is in default, Landlord shall not unreasonably withhold its consent to such Assignment or Sublease. Acts of maintenance or preservation, efforts to relet the Premises or the appointment of a receiver upon Landlord's initiative to protect its interest under this Lease shall not constitute a termination of Tenant's right to possession. 19.2.3 The right to terminate this Lease by giving notice to Tenant in accordance with applicable law. 19.2.4 The right and power, as attorney-in-fact for Tenant, to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant, and to sell such property and apply the proceeds therefrom pursuant to applicable California law. Landlord, as attorney-in-fact for Tenant, may from time to time sublet the Premises or any part thereof for such term or terms (which may extend beyond the Term) and at such rent and such other terms as Landlord in its sole discretion may deem advisable, with the right to make alterations in and repairs to the Premises. Upon each such subletting, (i) Tenant shall be immediately liable for payment to Landlord of, in addition to indebtedness other than Rent and Additional Charges due hereunder, the cost of such subletting and such alterations and repairs incurred by Landlord and the amount, if any, by which the Rent and Additional Charges for the period of such subletting (to the extent such period does not exceed the Term) exceed the amount to be paid as Rent and Additional Charges for the Premises for such period or (ii) at the option of the Landlord, rents received from such subletting shall be applied, first to payments of any costs of such subletting and of such alterations and repairs; second, to payment of Rent and Additional Charges due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment to Landlord within which to cure any default in the payment of Rent or Additional Charges. Tenant shall have a period of ten days from the date of written notice from Landlord within which to cure any other default under this Lease; provided, however, that with respect to any default other than the payment of Rent or Additional Charges that cannot reasonably be cured within ten days, the default shall not be deemed to be incurred if Tenant commences to cure within ten days from Landlord's notice and continues to prosecute diligently the curing thereof to completion within a reasonable time. 19.2.5 The right to have a receiver appointed for Tenant, upon application by Landlord, to take possession of the Premises and to apply any Rent collected from the Premises and to exercise all other rights and remedies granted to Landlord as attorney-in-fact for Tenant pursuant to Subsection 19.2.4. 20. Insolvency of Bankruptcy. The appointment of a receiver to take possession of all or substantially all of the assets of Tenant, or an assignment by Tenant for the benefit of creditors, or any action taken or suffered by Tenant under any insolvency, bankruptcy, reorganization, moratorium, or other debtor relief act or statute, whether now existing or hereafter amended or enacted, shall at Landlord's option constitute a breach of this Lease by Tenant. Upon the happening of any such event or at any time thereafter, this Lease shall terminate five days after written notice of termination from Landlord to Tenant. In no event shall this Lease be assigned or assignable by operation of law or by voluntary or involuntary bankruptcy proceedings or otherwise, and in no event shall this Lease or any rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency, reorganization of other debtor relief proceedings. 21. Landlord's Performance of Tenant's Obligations. If Tenant shall default in the performance of its obligations under this Lease, at any time thereafter and without notice, may remedy such default for Tenant's account and at Tenant's expense, without thereby waiving any other rights or remedies of Landlord with respect to such default. Upon demand therefore from Landlord, Tenant shall reimburse Landlord for the cost to Landlord of performing such obligations plus interest at the maximum rate allowed by law. 9 Initials CTC DRB 22. Indemnification. 22.1 With the sole exception of damage resulting from the negligence or willful misconduct of the Landlord, its affiliates or agents, Tenant agrees to indemnify Landlord against and save Landlord harmless from any and all loss, cost, liability, damage, and expense including, without limitation, penalties, fines, and reasonable attorney's fees, incurred in connection with or arising from any cause whatsoever in, on, or about the Premises including, without limited the generality of the foregoing, (i) any default by Tenant in the observance or performance of any of the terms, covenants or conditions of this Lease on Tenant's part to be observed or performed, (ii) the use or occupancy or manner of use or occupancy of the Premises by Tenant or any person claiming through or under Tenant, (iii) the condition of the Premises or any occurrence of happening on the Premises from any cause whatsoever, or (iv) any act, omission or negligence of Tenant or any person claiming through or under Tenant, or of the employees, suppliers, shippers, customers or invitees of Tenant or any such person, in, on, or about the Premises or Park, whether prior to, during, or after the expiration of the Term including, without limitation, any act, omission or negligence in the making or performing of any Alterations. Tenant further agrees to indemnify Landlord, Landlords' agent and the lessor or lessors under all ground or underlying leases against, and hold them harmless from any and all loss, cost, liability, damage and expense including, without limitation, reasonable attorneys fees, incurred in conjunction with or arising from any claims by any persons by reason of injury to persons or damage to property occasioned by any use, occupancy, condition, occurrence, happening, act, omission or negligence referred to in the preceding sentence. 22.2 Landlord shall not be responsible for or liable to Tenant for any loss or damage that may be occasioned by or through the acts or omissions of persons occupying adjoining premises or any part of the premises adjacent to or connected with the Premises or any part of the Park or for any loss or damage resulting to Tenant or its property from burst, stopped or leaking water, gas, sewer or steam pipes or for any damage to or loss of property within the Premises from any cause whatsoever, including theft. 22.3 Except as a specifically provided to the contrary in this Lease, Tenant shall pay to Landlord within five days after delivery by Landlord to Tenant of bills or statement therefore; (i) sums equal to all expenditures made and monetary obligations by Landlord including, without limitation, expenditures made and obligations incurred for reasonable attorneys fees, in connection with the remedying by Landlord for Tenant's account pursuant to the provisions of Article 21, (ii) sums equal to all losses, costs, liabilities, damages and expenses referred to in Section 22.1, (iii) sums equal to all expenditures made and monetary obligations incurred by Landlord including, without limitation, expenditures made and obligations incurred for reasonable attorneys fees, in collecting or attempting to college the Rent, any Additional Charges or any other sum of money accruing under this Lease or in enforcing or attempting to enforce any rights of Landlord under this Lease or pursuant to law and (iv) all other sums of money (other than Rent) accruing from Tenant to Landlord under the provisions of this Lease. Any sum of money (other than Rent) accruing from Tenant to Landlord pursuant to any provision of this Lease including, without limitation, he provisions of Exhibit "D" attached hereto, whether prior to or after the Commencement Date, may, at Landlord's option, be deemed Additional Charges. Tenant's obligations under this Section 22.3 shall survive the expiration or sooner termination of the Term. 23. Insurance. Tenant shall procure, at its cost and expense, and keep in effect during the Term, comprehensive general liability insurance including contractual liability with a minimum limit of liability of $3,000,000 per occurrence of bodily injury and property damage combined. Such insurance shall name Landlord as an additional insured, shall specifically include the liability assumed hereunder by Tenant (provided that the amount of such insurance shall not be construed to limit the liability of Tenant hereunder), and shall provide that it is primary insurance and not excess over or contributory with any other valid, existing and applicable insurance in force for or on behalf of Landlord, and shall provide that Landlord shall receive 30 days' written notice from the insurer prior to any cancellation or change of coverage. Tenant shall deliver policies of such insurance or certificates thereof to Landlord on or before the Commencement Date, and thereafter at least 30 days before the expiration dates of expiring policies; and, in the event Tenant shall fail to procure such insurance or to deliver such policies or certificates, Landlord may, at is option, procure same for the account of Tenant, and the cost thereof shall be paid to Landlord as Additional Charges within five days after delivery to Tenant of bills therefore. Tenant's compliance with the provisions of this Article 23 shall in no way limit Tenant's liability under any of the provisions of Article 22. 24. Access to Premises. Landlord reserves and shall at all times have the right to enter the Premises at all reasonable times to (i) inspect same, (ii) supply any service to be provided by Landlord to Tenant hereunder, (iii) show the Premises to prospective purchasers, mortgagees or tenants, (iv) post notices of non-responsibility and to alter, improve or repair the Premises and any portion of the Park, without abatement of Rent or Additional Charges, and may for that purpose erect, use, and maintain scaffolding, pipes, conduits, and other necessary structures in and through the Premises where reasonably required by the character of the work to be performed, provided that the entrance to the Premises shall not be blocked thereby, and further provided that the business of Tenant shall not be interfered with unreasonably. Tenant hereby waives any claim for damages, for any injury or inconvenience or to interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises or any other loss occasioned thereby. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all doors in, upon, and about the Premises excluding files, vaults and sales or special security areas (designated in advance), and Landlord shall have the right to use any and all means that Landlord may deem necessary or proper to open said doors in an emergency, in order to obtain entry to any portions thereof obtained by Landlord by any of said means or otherwise shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. 25. Notices. Except as otherwise expressly provided in this Lease, any bills, statements, notices, demands, requests or other communications given or required to be given in writing, sent by registered or certified mail, or delivered personally (i) to Tenant (ii) at Tenant's address set forth in the Basic Lease Information, if sent prior to Tenant's taking possession of the Premises, or (iii) at the Park if sent subsequent to Tenant's taking possession of the Premises or (iv) at Landlord's option, at any place where Tenant or any agent or employee of Tenant may be found if sent subsequent to Tenant's vacating, deserting, abandoning, or surrendering the Premises or to Landlord at Landlord's address set forth in the Basic Lease Information, or to such other address as either Landlord or Tenant may designate as its new address for such purpose by notice given to the other in accordance with the provisions of this Article 25. Any such bill, statement, notice, demand, request, or other communication shall be deemed to have been rendered or given two days after the date when it shall have been mailed as provided in this Article 25 if sent by registered or certified mail, or upon the date personal delivery is made. If Tenant is notified of the identity and address of Landlord's mortgagee or ground or underlying lessor, Tenant shall give to such mortgagee or ground or underlying lessor notice of any default by Landlord under the terms of the Lease in writing sent by registered or certified mail, and such mortgagee or ground or underlying lessor shall be given a reasonable opportunity to cure such default prior to Tenant's exercising any remedy available to it. 10 Initials CTC DRB 26. No Waiver by Landlord. 26.1 No failure by Landlord to insist upon the strict performance of any obligation of Tenant under this Lease or to exercise any right, power, or remedy consequent upon a breach thereof, no acceptance of full or partial Rent or Additional Charges during the continuance of any such breach, and no acceptance of the keys to or possession of the Premises prior to the termination of the Term by any employee of Landlord shall constitute a waiver of any such breach or of such term, covenant, or condition or operate as a surrender of this Lease. No payment by Tenant or receipt by Landlord of a lesser amount than the aggregate of all Rent and Additional Charges then accruing or becoming due unless Landlord elects otherwise; and no endorsement or statement on any check, no letter accompanying any check or other payment of Rent or Additional Charges in any such lesser amount, and no acceptance of any such check or then such payment by Landlord shall constitute an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Rent or Additional Charges or to pursue any other legal remedy. 26.2 Neither this Lease nor any term or provision hereof may be changed, waived, discharged, or terminated orally, and no breach thereof shall be waived, altered, or modified except by a written instrument signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. No waiver of any breach shall affect or alter this Lease, but each and every term, covenant, and condition of this Lease shall continue in full force and effect with respect to any other existing or subsequent breach thereof. 27. Tenant's Certificates. Tenant, at any time and from time to time upon not less than ten days' prior written notice from Landlord, will execute, acknowledge, and deliver to Landlord and, at Landlord's request, to any prospective purchaser, ground, or underlying lessor or mortgagee of any part of the Park, a certificate of Tenant stating: (i) that Tenant has accepted the Premises (or, if Tenant has not done so, that Tenant has not accepted the Premises and specifying the reasons therefore), (ii) the Commencement and Expiration Dates of this Lease, (iii) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that same is in full force and effect as modified and stating the modifications), (iv) whether or not there are then existing any defenses against the enforcement of any of the obligations of Tenant under this Lease (and, if so, specifying same), (v) whether or not there are then existing any defaults by Landlord in the performance of its obligations under this Lease (and, if so, specifying same), (vi) the dates, if any, to which the Rent and Additional Charges and other charges under this Lease have been paid and (vii) any other information that may reasonably be required by any of such persons. It is intended that any such certificate of Tenant delivered pursuant to this Article 27 may be relied upon by Landlord and any prospective purchaser, ground or underlying lessor or mortgagee of any part of the Park. 28. Tax on Tenant's Personal Property. At least ten days prior to delinquency, Tenant shall pay all taxes levied or assessed upon Tenant's equipment, furniture, fixtures, and other personal property located in or about the Premises. If the assessed value of Landlord's property is increased by the inclusion therein of a value placed upon Tenant's equipment, furniture, fixtures, or other personal property, Tenant shall pay to Landlord, upon written demand, the taxes so levied against Landlord or the proportion thereof resulting from said increase in assessment. The portion of real estate taxes payable by Tenant pursuant to this Article 28 and by other tenants of the Park pursuant to similar provisions in their leases shall be excluded from Taxes for purposes of computing the Additional Charges to be paid pursuant to Article 4. 29. Security Deposit. By execution of this Lease, Landlord acknowledges receipt of Tenant's Security Deposit for the faithful performance of all terms, covenants and conditions of this Lease. The sum of the security deposit is specified in the Basic Lease Information. Tenant agrees that Landlord may, without waiving any of Landlord's other rights and remedies under this Lease upon the occurrence of any of the events of default described in Article 19, apply the Security Deposit to remedy any failure by Tenant to repair or maintain the Premises or to perform any other terms, covenants, or conditions contained herein. If Tenant has kept and performed all terms, covenants, and conditions of this lease during the Term, Landlord will, within 30 days following the termination hereof, return said sum to Tenant or the last permitted assignee of Tenant's interest hereunder at the expiration of the Term. Should Landlord use any portion of the Security Deposit to cure any default by Tenant hereunder, Tenant shall forthwith replenish the Security Deposit to the original amount. Landlord shall not be required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on any such deposit. Upon the occurrence of any of the event of default described in Article 19, the security deposit shall become due and payable to Landlord to the extent required to compensate Landlord for damages incurred, or to reimburse Landlord as provided herein, in connection with any such event or default. 30. Authority. If Tenant signs as a corporation or a partnership, each of the persons executing this Lease on behalf of Tenant does hereby covenant and warrant that Tenant is a duly authorized and existing entity, that Tenant has and is qualified to do business in California, that Tenant has full right and authority to enter into this Lease and that each and every person signing on behalf of Tenant is authorized to do so. Upon Landlord's request, Tenant shall provide Landlord with evidence reasonably satisfactory to Landlord confirming the foregoing covenants and warranties. 31. Broker. Landlord and Tenant represent and warrant to each other that they have not dealt with any broker or finder in connection with this Lease or the Premises other than the broker specified in the Basic Lease Information and that the other party shall not be required to pay any commission whatsoever with regard to this Lease resulting from the actions of the party making such representation, except for the commission owing to the broker specified in the Basic Lease Information, which shall be paid by Landlord. Landlord and Tenant shall indemnify and defend the other party against and hold the other party harmless from any and all losses, costs, damages, liabilities, and expenses including, without limitation, reasonable attorneys fees, resulting from a breach by the indemnifying party of the foregoing representation. 32. Miscellaneous. 32.1 The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. The words used in the neuter gender include the masculine and feminine. If there is more than one Tenant, the obligations under this Lease imposed on Tenant shall be joint and several. The captions preceding the articles of this Lease have been inserted solely as a matter of convenience, and such captions in no way define or limit the scope or intent of any provision of this Lease. 32.2 The terms, covenants, and conditions contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and, except as otherwise provided herein, their respective personal representatives and successors and assignees; provided, however, upon the sale, assignment or transfer by Landlord as named herein (or by any subsequent landlord) of its interest in the Building as owner or lessee, including any transfer by operation of law. Landlord (or subsequent landlord) shall be relieved of all subsequent obligations or liabilities under 11 Initials CTC DRB this Lease, and all obligations subsequent to such sale, assignment, or transfer (but not any obligations or liabilities that have accrued prior to the date of such sale, assignment, or transfer) shall be binding upon the grantee, assignee, or other transferee of such interests, any such grantee, assignee or transferee, by accepting such interest, shall be deemed to have assumed such subsequent obligations and liabilities. A lease of the entire Building to a person other than for occupancy thereof shall be deemed a transfer within the meaning of this Section 32.2. 32.3 If any provision of this Lease or the application thereof to any person of circumstance shall, to any extent, be invalid or unenforceable, the remainder of this lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall be valid and enforced to the full extent permitted by law. 32.4 This Lease shall be construed and enforced in accordance with the laws of the State of California. 32.5 Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or an option for lease and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. 32.6 This instrument, including the exhibits hereto which are made a part of this Lease, contains the entire agreement between the parties, and all prior negotiations and agreements are merged herein. Neither Landlord nor Landlord's agents have made any representations or warranties with respect to the Premises, the Building, the Park or this Lease except as expressly set forth herein, and no rights, easements or licenses are or shall be acquired by Tenant by implication or otherwise unless expressly set forth herein. 32.7 The review, approval, inspection or examination by Landlord of any item to be reviewed, approved, inspected, or examined by Landlord under the terms of this Lease or the exhibits attached hereto, shall not constitute the assumption of any responsibility by Landlord for either the accuracy or sufficiency of any such item or the quality or suitability of such item for its intended use. Any such review, approval, inspection, or examination by Landlord is for the sole purpose of protecting Landlord's interests in the Park and under this Lease, and no third parties, including without limitation, Tenant or any person or entity claiming through or under Tenant, or the contractors, agents, servants, employees, visitors, or licensees of Tenant or any such person or entity, shall have any rights hereunder. 32.8 Tenant shall not place any sign upon the Premises or the Park without Landlord's prior written consent. Under no circumstances shall Tenant place a sign on any roof of the Park. 32.9 Tenant hereby acknowledges that Landlord shall have no obligation whatsoever to provide guard services or other security measures for the benefit of the Premises or the Park. Tenant assumes all responsibility for the protection of Tenant, its employees, suppliers, shippers, customers, and invitees and the property of Tenant and of Tenant's employees, suppliers, shippers, customers and invitees from acts of third parties. Nothing herein contained shall prevent Landlord, at landlord's sole option, from providing security protection for the Park or any part thereof, in which event the cost thereof shall be included within the definition of Common Expenses, as set forth in Subsection 4.1.4. 32.10 Landlord reserves the right, from time to time, to grant such assessments, rights, and dedications as Landlord deems necessary or desirable and to cause the recordation of parcel maps and restrictions as long as such easements, rights, dedications, maps, and restrictions do not unreasonably interfere with the use of the Premises by Tenant. At Landlord's request, Tenant shall join in the execution of any of the aforementioned documents. 32.11 In the event that either Landlord or Tenant fails to perform any of its obligations under this Lease, or in the event a dispute arises concerning the meaning or interpretation of any provision of this Lease, 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 in enforcing or establishing its rights hereunder, including, without limitation, court costs and reasonable attorneys fees. 32.12 Upon the expiration or sooner termination of the Term, Tenant will quietly and peacefully surrender to Landlord the Premises in the condition in which they are required to be kept as provided in Article 9. Ordinary wear and tear and the provisions of Article 16 excepted. 32.13 Upon Tenant's paying the Rent and Additional Charges and performing all of Tenant's obligations under this Lease, Tenant may peacefully and quietly enjoy the Premises during the Term as against all persons or entities lawfully claiming by or through Landlord; subject, however, to the provisions of this Lease and to any mortgages or ground or underlying leases referred to in Article 14. 32.14 Any holding over after the expiration of the Term with the consent of Landlord shall be construed to be a tenancy from month-to-month at 200% of the Rent herein specified (prorated on a monthly basis), unless Landlord shall specify a different rent in its sole discretion, together with an amount estimated by Landlord for the monthly Additional Charges payable under this Lease, and shall otherwise be on the terms and conditions herein specified as far as applicable. Any holding over without Landlords' consent shall constitute a default by Tenant and shall entitle Landlord to reenter the Premises as provided in Article 19 hereof. 12 Initials CTC DRB IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease the day and year first above written. LANDLORD: MIC FOUR POINTS a California Partnership By /s/ Signature Illegible ------------------------------ a ------------------------------ By ------------------------------ Its --------------------------- TENANT: SUTTER BIOMEDICAL INC. -------------------------------- a ------------------------------ By /s/ Signature Illegible ------------------------------ Its President --------------------------- By ------------------------------ Its --------------------------- 13 Initials CTC DRB EXHIBIT "A" ----------- The land referred to is situated in the State of California, County of San Diego, and is described as follows: Lots 43 and 44 of the Hazard Commercial Park, City of San Diego, San Diego County, California, according to Map No. 8503, filed in the Office of the San Diego County Recorder on February 25, 1977. Mailing addresses of the two buildings are 9425 Chesapeake Drive and 9475 Chesapeake Drive respectively. The rentable square footage of the buildings is a 21,404 and 21,452 square feet respectively. 14 Initials CTC DRB EXHIBIT "B" ----------- Floor Plans to be provided later. 15 Initials CTC DRB EXHIBIT "C" ----------- RENTABLE AREA The term "Rentable Area" as used in the Lease shall mean: (a) As to each floor of the Building on which the entire space rentable to tenants is or will be leased to one tenant (hereinafter referred to as "Single Tenant Floor"). Rentable Area shall be the entire area bounded by the inside surface of the four exterior glass walls (or the inside surface of the permanent exterior wall where there is no glass), on such floor, including all areas used for elevator lobbies, corridors, special stairways, or elevators, restrooms, portions of the Building or vertical permission that are included for the special use of Tenant but excluding the area contained within the exterior walls of the Building, or vertical penetrations that are included for the special use of Tenant but excluding the area contained within the exterior walls of the Building stairs, fire towers, vertical ducts, elevator shafts, flues, vents, stacks and pipe shafts. (b) As to each floor of the Building on which space is or will be leased to more than one tenant (hereinafter referred to as "Multi-Tenant Floor), Rentable Area attributable to each such lease shall be the total of (i) the entire area included within the Premises covered by such lease, being the area bounded by the inside surface of any exterior glass walls (or the inside surface of the permanent exterior wall where there is no glass) of the Building bounding such Premises, the exterior of all walls separating such Premises from any public corridors or other public areas on such floor, and the center-line of all walls separating such Premises from other areas leased or to be leased to other tenants on such floor, and (ii) a prorate portion of the area covered by the elevator lobbies, corridors, restrooms, mechanical rooms, electrical rooms, and telephone closets situated on such floors. (c) For purposes of establishing the initial Basic Rent and Tenant's Share (of Taxes and Common Expenses) as shown in Items 11 and 12 of the Basic Lease Information, Rental Area of the Premises is deemed to be as set forth in the Basic Lease Information, and Rentable Area of the Project is deemed to be 166,595 square feet. Prior to the Commencement Date and annually at January 1, Landlord's architect shall determine and certify in writing to Tenant and Landlord the actual Rentable area of the Premises, the Building, and the Project, respectively. Any percentage adjustment resulting from additions of new tenants, additional construction within the complex shall be applied retroactively to the effectivity of such change. At not time shall the percentage exceed the 55% specified in this lease. Such determinations and certifications shall be conclusive, and thereupon Tenant's Share (of Taxes and Common Expenses) and Basic Rent shall be adjusted accordingly. 16 Initials CTC DRB EXHIBIT "D" ----------- (Initial Improvements of the Premises) 17 Initials CTC DRB EXHIBIT "E" ----------- FOUR POINTS INDUSTRIAL PARK Rules and Regulations --------------------- 1. No sidewalks, entrance, passages, courts, elevators, vestibules, stairways, corridors or halls shall be obstructed or encumbered by Tenant or used for any purpose other than Ingress and egress to and from the Premises or the Building and if the Premises is situated on the ground floor of the Building, Tenant shall further, at Tenant's own expense, keep the sidewalks and curb directly in front of the Premises clean and free from rubbish. 2. No awning or other projection shall be attached to the outside walls or windows of the Building without the prior written consent of Landlord. No curtains, blinds, shades, drapes or screens shall be attached to or hung in, or used in connection with any window or door of the Premises, without the prior written consent of Landlord. Such awnings, projections, curtains, blinds, shades, drapes, screens and other fixtures must be of a quality, type, design, color, material and general appearance approved by Landlord, and shall be attached in the manner approved by Landlord. All electrical fixtures hung in offices or spaces along the perimeter of the Premises must be fluorescent, of a quality, type, design, bulb color, size and general appearance approved by Landlord. 3. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by Tenant on any part of the outside or inside of the Premises or of the Building, without the prior written consent of Landlord. In the event of the violation of the foregoing by Tenant, Landlord may remove same without any liability, and may charge the expense incurred by such removal to Tenant. Interior signs on doors and directory tablet shall be inscribed, painted, or affixed for Tenant by Landlord at the expense of Tenant, and shall be of a quality, quantity, type, design, color, size, style, composition, material, location and general appearance acceptable to Landlord. 4. The sashes, sash doors, skylights, windows, and doors that reflect or admit light or air into the halls, passageways or other public places in the Building shall not be covered or obstructed by Tenant, nor shall any bottles, parcels, or other articles be placed on the window sills, or in the public portions of the Building. 5. No showcases or other articles shall be put in front of or affixed to any part of the exterior of the Building, nor placed in public portions thereof without the prior written consent of Landlord. 6. The water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags or other substances shall be thrown therein. All damages resulting from any misuse of the fixtures shall be borne by Tenant to the extent that Tenant or Tenant's agents, servants, employees, contractors, visitors, or licensees shall have caused the same. 7. Tenant shall not make, paint, drill into or in any way deface any part of the Premises or the Building. No boring, cutting, or stringing of wires shall be permitted, except with the prior written consent of Landlord, and as Landlord may direct. 8. No animal or bird or any kind shall be brought into or kept in or about demised premises of the Building. 9. Prior to leaving the Premises for the day, Tenant shall draw or lower window coverings and extinguish all lights. 10. Tenant shall not make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with occupants of the Building or neighboring buildings or premises or those having business with them. Tenant shall not throw anything out of the doors, windows or skylights or down the passageways. 11. Neither Tenant nor any of Tenant's agents, servants, employees, contractors, visitors or licensees shall at any time bring or keep upon the Premises any inflammable, combustible or explosive fluid, chemical, or substance. 12. No additional locks, bolts, or mail slots of any kind shall be placed upon any of the doors or windows by Tenant, nor shall any change be made in existing locks or the mechanism thereof. Tenant must, upon the termination of the tenancy, restore to Landlord all keys of stores, offices, and toilet rooms, either furnished to, or otherwise procured by Tenant, and in the event of the loss of any keys so furnished, Tenant shall pay to Landlord the cost thereof. 13. All removals, or the carrying in or out of any sales, or heavy equipment of any description must take place during the hours which Landlord or its agent may determine from time to time, Landlord reserves the right to prescribe the weight and position of all safes, which must be placed upon two inch thick plank strips to distribute the weight. The move of sales or heavy equipment of any kind must be made upon previous notice at the Superintendent of the Building and in a manner and at times proscribed by him, and the persons employed by Tenant for such work are subject to Landlord's prior approval. Landlord reserves th right to inspect all sales, to be brought into the Building and to exclude from the Building all sales which violate any of these Rules and Regulations or the lease of which these Rules and Regulations are a part. 14. Tenant shall not occupy or permit any portion of the Premises to be occupied as an office that is not generally consistent with the character and nature of all other tenancies in the Building, or is (a) for an employment agency, a public stenographer or typist, a labor union office, a physician's or dentist's office, a dance or music studio, a school, a beauty salon or barber shop, the business of photographic or multilith or multigraph reproductions or offset printing (not precluding using any part of the Premises for photographic, multilith or multigraph reproductions solely in connection with Tenant's own business and/or activities), a restaurant or bar, an establishment for the sale of confectionery or soda or beverages or sandwiches or ice cream or baked goods, an establishment for the preparation or dispensing or consumption of food or beverages (of any kind) in any manner whatsoever, or as a news or cigar stand, or as a radio or television or recording studio, theatre or exhibition hall, for manufacturing, for the storage of merchandise or for the sale of merchandise, goods, or property of any kind at auction, or for lodging, sleeping or for any immoral purpose, or for any business which would tend to generate a large amount of foot traffic in or about the Building or the land upon which it was located, or any of the areas used in the operation of the Building, including but not limited to any use (i) for a banking, trust company, depository, guarantee, or safe deposit business, (ii) as a savings bank, or as a savings and loan association, or as a loan company, (iii) for the sale of travelers checks, money orders, drafts, foreign exchange or letters of credit or for the receipt of money for transmission, (iv) as a stock broker's dealer's office or for the underwriting of securities, or (v) a government office or foreign embassy or consulate, or (vi) a tourist or travel bureau, or (b) use which conflicts with any so-called 18 Initials CTC DRB "exclusive" then in favor of, or is for any use the same as that stated in any percentage lease to, another tenant of the Building or the Park, or (c) a use which would be prohibited by any other portion of this Lease (including but not limited to any Rules or Regulations than in effect) or in violation of law. Tenant shall not engage or pay any employees on the Premises, except those actually working for Tenant on the Premises nor shall Tenant advertise for laborers giving an address at the Premises. 15. Tenant shall not purchase spring water, towels, janitorial or maintenance or other like service from any company or persons not approved by Landlord. Landlord shall approve a sufficient number of sources of such services to provide Tenant with a reasonable selection, but only in such instances and to such extent as Landlord in its judgment shall consider consistent with security and proper operation of the Building. 16. Landlord shall have the right to prohibit any advertising or business conducted by Tenant referring to the Building or the Park which, in Landlord's opinion tends to impair the reputation of the Building or its desirability as a first class building for offices, or the Park, and upon notice from Landlord, Tenant shall refrain from or discontinue such advertising. 17. Landlord reserves the right to exclude from the Building between the hours of 6:00 P.M. and 8:00 A.M. on all days, and at all hours on Saturdays, Sundays and legal holidays, all persons who do not present a pass to the Building issued by Landlord. Landlord may furnish passes to Tenant so that Tenant may validate and issue same. Tenant shall safeguard said passes and shall be responsible for all acts of persons in or about the Building who possess a pass issued to Tenant. 18. Tenant's contractors shall, while in the Building or elsewhere in the Park, be subject o and under the control and direction of the Superintendent of the Building (but not as agent or servant of said Superintendent or of Landlord). 19. If the Premises is or becomes infested with vermin as a result of the use or misuse or neglect of Demised Premises by Tenant, its agents, servants, employees, contractors, visitors or licensees, Tenant shall forthwith at Tenant's expense cause the same to be exterminated from time to time to the satisfaction of Landlord and shall employ such licensed exterminators as shall be approved in writing in advance by Landlord. 20. The requirements of Tenant will be attended to only upon application at the office of the Building. Building personnel shall not perform any work or do anything outside of their regular duties, unless under special instructions from the office of the Landlord. 21. Canvassing, soliciting and peddling in the Building or in the Park are prohibited and Tenant shall cooperate to prevent the same. 22. No water cooler, air conditioning unit or system or other apparatus shall be installed or used by Tenant without the written consent of Landlord. 23. There shall not be used in any space, or in the public halls, plaza areas or lobbies of the Building, or elsewhere in the Park, either by Tenant or by jobbers or others, in the delivery or receipt of merchandise, any hand trucks or dollies, except those equipped with rubber tires and side guards. 24. Tenant, Tenant's agents, servants, employees, contractors, licensees or visitors shall not park any vehicles in any driveways, service entrances, or areas posted "No Parking." 25. Tenant shall install and maintain, at Tenant's sole cost and expense, an adequate visibly marked (at all times properly operational) fire extinguisher next to any duplicating or photocopying machine or similar heat producing equipment, which may or may not contain combustible material, in the Premises. 26. Tenant shall keep its window coverings closed during any period of the day when the sun is shining directly on the windows of the Premises. 27. Tenant shall not use the name of the Building for any purpose other than as the address of the business to be conducted by Tenant in the Premises, nor shall Tenant use any picture of the Building in its advertising, stationary or any other manner without the prior written permission of the Landlord. Landlord expressly reserves the right at any time to change said name without in any manner being liable to Tenant therefore. 19 Initials CTC DRB EX-10.37 7 FIRST ADDENDUM TO LEASE DATED 2-15-88 FIRST ADDENDUM TO LEASE DATED 2/15/88 By and Between MIC FOUR POINTS, A CALIFORNIA PARTNERSHIP and SUTTER BIOMEDICAL, INC. This Addendum amends the above-described Lease as follows: 1. RENTABLE AREA OF PREMISES: The building equals 26,950 gross square feet. However, the rent schedule in Paragraph 2 below shall apply to a total square feet as detailed in the following: Months Square Feet ------ ----------- (for rental rate to be applied to) 1-24 $23,950.00 25-120 $26,950.00 The schedule above details the square footage to be used in calculating rent regardless of actual square footage occupied by Tenant. These square footages are to be adjusted after final space plan is completed. Square footage to be calculated based on BOMA methods for entire building users. For months 1-24, square footage shall be 3,000 square feet less than the adjusted final square footage. 2. RENT: The basic rent as defined in Section 3.1 of the Basic Lease Information and Paragraph 3 of the lease shall be as follows: Months Rate/Sq. Ft. Monthly Rent ------ ------------ ------------ 1-6 $ .30 $ 7,185.00 7-24 $1.00 $23,950.00 25-60 $1.00 $26,950.00 61-96 $1.17 $31,531.50 92-120 $1.29 $34,765.50 The Rent for months 7-12 shall accrue and not be due and payable until the 60th month of the Lease term except as otherwise provided as follows: on the first day of the 60th month Landlord will waive the accrued rent referred to above provided that there has bee no prior termination of this lease and the Tenant is not then in default hereunder. The parties intend for the Term of this Lease to expire on the last day of a full calendar month. Accordingly, if the Commencement Date is other than on the first day of a full calendar month, thereby causing Paragraph 2.1 to indicate an expiration date other than the last day of a full calendar month, then the Term of this Lease shall be extended until the last day of the full calendar month within which the expiation date otherwise indicated by Paragraph 2.1 falls, and the actual expiration date of the Term of this lease (the "Expiration Date") shall be the last day of such full calendar month. * For the purposes of the above detail, month number 1 shall be defined as the first full calendar month during the Term of the Lease. Any rent payable for a partial month before the first full calendar month will be determined on a pro rate basis at the rate of $.83 per square foot. 3. TERM: The Lease shall commence on August 1, 1988, except where Landlord is responsible for delay of completion. A delay of completion by Landlord shall be deemed to have occurred for every day greater than 98 days that elapses between the date permit for Tenant Improvements is issued and given to landlord and the date Certificate of Occupancy is received. Should such delay of completion occur, the Lease Commencement Date shall be extended from August 1, 1988 by the number of days of said delay of completion. Initials CTC DRB FIRST ADDENDUM TO LEASE PAGE TWO 4. TENANT IMPROVEMENTS: The Landlord shall enter into a guaranteed maximum price contract with Snyder Langston to construct the tenant improvements per the plan specifications and working drawings that will be mutually approved by Landlord and Tenant. Landlord shall contribute up to, but not to exceed, $18.00 a square foot (per BOMA) towards tenant improvement work. All costs associated with the tenant improvements in excel of this sum shall be amortized and paid to Landlord by Tenant at an interest rate of 17% per annum. The first two dollars ($2.00) of tenant improvement work in excess of $18.00 per square foot shall be amortized over the 120 months of the Lease Term. All tenant improvement work in excess of $20 per square foot shall be amortized over the first 60 months of the Lease Term. Such amortization shall be added to the monthly rent and be due an payable under the same schedule and penalties as those which apply to rent. Should the tenant improvement work cost less than $18.00 per square foot, Landlord shall pay to Tenant a share of the savings equal to one-half of all savings. Landlord shall pay 50% of this share before September 1, 1988 and the remainder before November 1, 1988. 6. OPTION TO PURCHASE: So long as Tenant is not in default hereunder, Tenant is granted an Option to Purchase 942 Chesapeake Drive and the associated parcel upon which it is located at the time of such purchase subject to completed and recorded parcelization of the property as presented on page 6 of this First Addendum to Lease. The agreed upon price for the building and property is $145 per gross square foot of building, payable on close of the escrow provided herein. Tenant shall notify Landlord of such exercise on or before, May 1, 1990 (the "Notice"). Within three (3) business days after the giving of said Notice, an escrow shall be opened at Chicago Title Company in San Diego, California, or such other title insurance company as may then be designated by Landlord and reasonably acceptable to Tenant. Escrow shall be deemed open when the title company holds executed escrow instructions, from both Landlord and Tenant. Concurrent with the opening of escrow, Tenant shall deposit $55,000.00 cash or as irrevocable letter of credit in form and from a financial institution reasonably acceptable to Lessor in escrow to be applied to the purchase price, said amount shall be deposited in an interest bearing account, by the title company all interest, earned thereon shall be held in escrow and credited to Tenant. Escrow shall close on a date specified by Landlord within one of the following periods: (a) on or after May 15, 1991, but prior to September 15, 1991; or (b) on or after September 15, 1991 but prior to September 15, 1992. Such notice of the closing date shall be given to Tenant and the title company by December 15, 1990. Initials CTC DRB FIRST ADDENDUM TO LEASE PAGE THREE Landlord shall convey the premises to Tenant free and clear of all monetary encumbrances other than those placed on the premises by Tenant and current taxes and assessments. Landlord shall provide Tenant with a CLTA policy of title insurance upon close of escrow. Escrow expenses shall be allocated amount Landlord and Tenant in accordance with the chosen title company's standard procedures for similar type transactions in San Diego County, California. Total price or property shall be paid to Landlord in cash. Close of escrow shall be deemed to occur on the date the grant deed from Landlord to Tenant is recorded in the office of the San Diego County Recorder. If Tenant fails to complete the purchase of the premises after giving the Notice the Parties agree that Seller (Landlord) shall be entitled to the sum of $50,000.00 as liquidated damages, which sum the parties agree is a reasonable sum considering all of the circumstances existing on the data of the Lease, including the relationship of the sum to the range of harm to Seller that reasonably could be anticipated and the anticipation that proof of actual damaged would be costly or inconvenient. In placing their initials at the places provided, each party specifically confirms the accuracy of the statements made above and the fact that each party was represented by counsel who explained the consequences of this liquidated damages provision at the time this Lease was made. Landlord Tenant Initials here: DRB Initial here: CT Should Landlord wish to arrange for the sale of the premises by means of a tax-deferred exchange with one or more third parties, Tenant agrees to cooperate in completing said exchange provided that it incurs no expense or liability in addition to that it would have incurred had the transaction been completed as an outright sale to Tenant. In addition, Tenant acknowledged Landlord's right o set up CC&R's and appropriate easements which would govern over the entire Project, this building inclusive. If escrow fails to close due to Lessor's fault, Tenant shall have all deposits made by it into escrow, and all interest earned thereon, returned to it in full. 7. SALE OF PROPERTY OR TRANSFER OF TITLE: Notwithstanding any provisions of Article 4 of the Lease to the contrary, the term "Taxes" shall not include any increase in real property taxes attribute solely to a transfer in title to the Building during the term of the Lease to a party other than the Tenant (a "Non-Tenant Transfer"). The foregoing shall not be construed so as to exclude from the definition of "Taxes" any increases in real property taxes allocable to the Building as a result of a reappraisal for any reason other than the Non-Tenant Transfer. 8. FIRST RIGHT TO PURCHASE: Effective May 1, 1990, during the Term of the Lease, Tenant has a one time Right of First Refusal to purchase the building. If there shall be an immediate prospect to purchase the building, Landlord shall give Tenant written notice thereof specifying the terms of such a sale. On receipt of such notice, and provided Tenant shall have the option of purchasing the building at the terms offered by the Prospect. Tenant's Right of First Refusal shall be exercised by written notice from Tenant to Landlord, given within five (5) business days after receipt of notice from the Landlord. The failure of the Tenant to exercise this option in the time period specified shall be conclusively deemed a Waiver of Tenants's first Right to Purchase for the remainder of the Lease Term. Initials CTC DRB FIRST ADDENDUM TO LEASE PAGE FOUR 9. ASSIGNMENTS: Not withstanding the provisions of Section 12.3 of the Lease, Landlord hereby grants to Tenant the right to assign this Lease or to subject the Premises in whole or in part to any entity controlled by; controlling or under common ownership with Tenant so long as: (i) Tenant provides Landlord with prior written notice of the identity and notice address of such assignee or subtenant and, (ii) such assignee or subtenant complies with the use provisions set forth in section 6 of this Lease. 10. DESTRUCTION: In the event that the damage as referred to in Section 16 of the Lease renders the building untenantable, Landlord shall inform Tenant within 60 days of Landlord's intent to repair the damage or not. If that repair or reconstruction is not concluded within a period of one hundred eight (180) days from date of damage, the Lease may be terminated by Tenant without penalty. 11. SECURITY DEPOSIT: Landlord shall refund to Tenant any balance of the security deposit in excel of twenty thousand dollars ($20,000) at the conclusion of the third year of the Lease, provided the Tenant is not currently and never has previously been in default of the Lease. 12. FIRST RIGHT OF REFUSAL: Landlord grants solely to Sutter Biomedical, Inc., while it is the Tenant, the Right of First Refusal on any vacant, second generation space in the adjacent building, 9475 Chesapeake Drive, during the Term of the Lease. Sutter Biomedical, Inc. shall respond in writing to Landlord within five (5) business days after a receipt of a written proposal from the Landlord offering the vacant second generation space. 13. SIGNAGE: Landlord shall provide Tenant with exclusive signage rights on the Building commonly known as 9425 Chesapeake Drive. The specifications of such signage shall include: a) letters shall be no more than two (2) feet in height, b) the signage will incorporate the company name logo including the underline characteristic, c) the signage will conform tot he Sutter Biomedical, Inc. corporate blue color, d) signage shall be permitted on the north and east sides of the building, e) illumination of the sign shall be permitted, and the consideration of back lighting shall not be excluded, and f) signage shall be located on the Building at the location to be specified by Tenant. In addition, Landlord shall provide Tenant with shared rights on the monument sign in front of 9425 Chesapeake Drive. The name Sutter Biomedical, Inc. and the name Smith Laboratories, Inc. Shall receive preferential display at the top of any listing placed upon the monument sign. Said monument signage shall be located at the location to be designated and mutually agreed to by Landlord and Tenant and Tenant signage shall be constructed and installed at Tenant's expense in accordance with plans and specifications to be approved by Landlord. 14. MISCELLANEOUS: Except as expressly provided hereinabove, all other terms and conditions of the Lease shall apply herein and remain in full force and effect. In the event of any conflict between the terms of this Addendum to Lease and those of the Lease the First Addendum to Lease, the terms of this Addendum will be deemed to have superseded those of the Lease and the First Addendum to Lease and exclusively will govern the matter in question. Initials CTC DRB FIRST ADDENDUM TO LEASE PAGE FIVE IN WITNESS WHEREOF, this Addendum to Lease is duly executed as of the day and year first hereinabove written. LANDLORD TENANT MIC FOUR POINTS, SUTTER BIOMEDICAL, INC. a California limited partnership By: /s/ D. Ron Beal By: /s/ Charles T. Cashion ----------------------------- -------------------------- By its Managing General Partner President March 31, 1988 March 25, 1988 - ------------------------------- ---------------------------- Date Date [PARCEL DIAGRAM] EX-10.38 8 SECOND ADDENDUM TO LEASE DATED 2/10/88 SECOND ADDENDUM TO LEASE DATED 2/10/88 between MIC FOUR POINTS, A CALIFORNIA PARTNERSHIP and SUTTER BIOMEDICAL, INC. This Second Addendum to Lease is made and entered into this 7th day of October, 1988 by and between MIC Four Points ("Landlord") and Sutter Biomedical, Inc. ("Tenant"). WHEREAS, Landlord and Tenant entered into a Lease Agreement dated February 10, 1988 ("The Lease") as amended by the First Addendum to Lease dated February 10, 1988 under the terms of which Landlord leased to Tenant and Tenant leased from Landlord, that certain real property located at 9425 Chesapeake Drive, San Diego, California ("Demised Premises"). WHEREAS, Landlord and Tenant wish to increase the total space leased by the Tenant, adjust the Commencement Date of the Lease, lengthen the Term of the Lease by two months and increase the Tenant Improvement Allowance to be provided by the Landlord to the Tenant. NOW THEREFORE, the parties mutually agree to amend the Lease as follows: 1. RENTABLE AREA OF PREMISES: The building equals 28,032 gross square feet and such shall be used in calculating rent throughout the term of the Lease. 2. RENT: The basic rent as defined in Section 3.1 of the Basic Lease Information and Paragraph 3 of the lease shall be as follows: Months Rate/Sq. Ft. Monthly Rent ------ ------------ ------------ 1-60* $1.00 $28,032.00 61-100 $1.17 $32,797.44 101-124 $1.29 $36,161.20 * For the purposes of the above detail, month number 1 shall be defined as the first full calendar month during the Term of the Lease. Any rent payable for a partial month before the first full calendar month will be determined on a pro rate basis at the rate of $.83 per square foot. The rent for months 1 through 12 (12 in total), shall accrue and not be due and payable until the 60th month of the Lease term except as otherwise provided as follows: on the first day of the 60th month Landlord will save the accrued rent referenced to above provided that there has been no prior termination of this Lease the Tenant is not then in default hereunder, all operating expenses shall be due and payable for every month are never abated. The parties intend for the Term of this Lease to expire on the last day of a full calendar month. Accordingly, if the Commencement Date is other than on the first day of a full calendar month, thereby causing Paragraph 2.1 to indicate an expiration date other than the last day of a full calendar month, then the Term of this Lease shall be extended until the last day of the full calendar month within which the expiation date otherwise indicated by Paragraph 2.1 falls, and the actual expiration date of the Term of this lease (the "Expiration Date") shall be the last day of such full calendar month. Initials CTC DRB Addendum #2 to Lease Dated 2/10/88 Page Two 3. TERM: The Term of the Lease shall be ten (10) years. The Lease shall commence on October 1, 1988, except where Landlord is responsible for delay of completion. A delay of completion by Landlord shall be deemed to have occurred for every day greater than 105 days that elapses between the date permit for Tenant Improvements is issued and given to landlord and the date Certificate of Occupancy is received. Should such delay of completion occur, the Lease Commencement Date shall be extended from October 1, 1988 by the number o days of said delay of completion, and Tenant shall be credited for rent paid for periods which are subsequently outside of the Lease term. 4. TENANT IMPROVEMENTS: The Landlord shall pay for Tenant Improvements up to Eight Hundred Five Thousand and 00/100 Dollars ($805,000.00). Any expenses above and beyond this incurred by Landlord for Tenant Improvements shall be reimbursed by Tenant to Landlord within thirty (30) days of receipt of invoice. Tenant shall reimburse Landlord Three Hundred Thirty-Six thousand Three Hundred Eighty- Four and 00/100 Dollars ($336,384.00) in twelve (12) equal monthly payments for above standard Tenant Improvements. Each payment shall be due at the beginning of the month, commencing October 1, 1988. Each payment shall be $28,032.00. Should the actual total Tenant Improvements be less than Eight Hundred Five Thousand and 00/100 Dollars ($805,000.00), the final month's reimbursement payment shall be reduced by an amount equal to the difference between the actual total Tenant Improvements and $805,000.00. 5. MISCELLANEOUS: Except as expressly provided hereinabove, all other terms and conditions of the Lease shall apply herein and remain in full force and effect. In the event of any conflict between the terms of this Addendum to Lease and those of the Lease the First Addendum to Lease, the terms of this Addendum will be deemed to have superseded those of the Lease and the First Addendum to Lease and exclusively will govern the matter in question. IN WITNESS WHEREOF, this Addendum to Lease is duly executed as of the day and year first hereinabove written. LANDLORD TENANT MIC FOUR POINTS, SUTTER BIOMEDICAL, INC. a California limited partnership /s/ D. Ron Beal /s/ Charles T. Cashion - -------------------------------- ----------------------------- By: By: President October 13, 1988 October 7, 1988 - -------------------------------- ----------------------------- Date Date EX-10.39 9 SEVERANCE AGREEMENT SEVERANCE AGREEMENT This Severance Agreement, which shall be effective as of February 18, 1997 is by and between George A. Oram, Jr. ("Oram") and OrthoLogic Corp., a Delaware corporation, ("OrthoLogic"). RECITALS A. Oram is currently employed as the President of OrthoLogic, pursuant to an Employment Agreement dated as of July 1, 1996 (the "Employment Agreement"). B. The parties mutually desire to provide for an orderly termination of Oram's employment by OrthoLogic, all on terms satisfactory to both Oram and OrthoLogic, as further set forth in this Agreement. AGREEMENTS In Consideration of the acts, payments, covenants and mutual agreements contained herein, OrthoLogic and Oram agree as follows: 1. Modification of Current Relationship. Effective as of February 18, 1997 (the "Date of Termination"), Oram shall resign as the President of OrthoLogic. From and after the Date of Termination, Oram shall have no further rights or duties as an employee or officer for or on behalf of OrthoLogic. Oram shall continue as a member of the OrthoLogic Board of Directors (the "Board") until OrthoLogic's Annual Meeting in 1997. It is understood by the parties that Oram's term expires at the 1997 Annual Meeting, and Oram agrees that he will not seek reelection to the Board at such meeting. During the first six months following the Date of Termination, Oram shall also make himself available for consulting to OrthoLogic, as may be requested from time to time by OrthoLogic, at mutually convenient times, at a rate of $2,000 per day, which amount shall be prorated for periods of less than one full day. 2. Severance Payment. So long as Oram continues to comply with all requirements of this Agreement, (i) OrthoLogic agrees to pay to Oram an amount equal to six months base salary, over a six-month period beginning February 19, 1997, at the times and in the amounts that are presently paid to Oram in accordance with the normal payroll procedures of OrthoLogic; and (ii) Oram shall be entitled to receive a bonus payment, in an amount determined by the Board, based upon OrthoLogic's performance for the 1996 fiscal year, which shall be prorated to the extent that Oram's employment during 1996 was for a period of less than the full year. 3. COBRA. OrthoLogic agrees to pay premiums for medical benefits (COBRA) for Oram and Oram's dependents for coverage similar to those benefits currently provided by OrthoLogic for 90 days following the Date of Termination. 4. Additional Benefits and Outstanding Loan. a. The $450.00 per month car allowance shall cease to be paid after February 1997. b. OrthoLogic will pay up to $10,000 for costs of outplacement services for Oram which are incurred by Oram within 90 days of the Date of Termination. c. OrthoLogic will pay the actual cost, but not to exceed $10,000, for moving personal goods from Oram's Phoenix residence to New Jersey. d. During 1996, the Company lent $200,000 to Employee, at prime rate, for use in connection with the purchase by Employee of a new home in the Phoenix Metropolitan Area. Interest and principal on such loan shall be paid immediately and in full upon the earlier to occur of (i) the closing of the sale of Employee's Phoenix home, or (ii) a demand by the Company made at any time after December 31, 1997. 5. Release and Covenant Not to Sue. Except as provided in this Agreement, Oram hereby releases, acquits and forever discharges OrthoLogic, its subsidiaries, affiliates, directors, officers, employees and agents of and from any and all actions, claims, damages, expenses or costs of whatever nature arising out of Oram's employment and the termination of such relationship, including, but not limited to, any rights or claims to any vacation, sick leave, severance, medical, dental or any other benefits under the Company's internal policies, under any federal, state or local statute or regulation, or under common law. By way of example only and without limiting the immediately preceding paragraph, this release is applicable to any cause of action, right, claim or liability under Title VII of the 1964 Civil Rights Act, Section 1981 of the 1866 Civil Rights Act, the Equal Pay Act of 1963, the Americans with Disabilities Act, the Arizona Civil Rights Act, and any other equal employment opportunity law or statute, or of wrongful discharge, breach of implied or express contract, breach of the covenant of good faith and fair dealing, intentional or negligent infliction of emotional distress, defamation and any other claim in contract or tort. Oram further covenants and agrees not to join in or commence any action, suit or proceeding, in law or in equity, or before any administrative agency, or to incite, encourage, or participate in any such action, suit or proceedings, against OrthoLogic, its subsidiaries, affiliates, directors, officers, employees or agents in any way pertaining to or arising out of the termination of his employment by or service as an employee, consultant, officer or director of OrthoLogic, or any subsidiary of OrthoLogic. Oram acknowledges that the consideration afforded him under this Agreement, including the payments described in Paragraph 2 above, are in full and complete satisfaction of any claims Oram may have, or may have had, arising out of or relating to the Employment Agreement, his employment with OrthoLogic (or any subsidiary) or the termination thereof. 2 6. Time Period for Considering or Canceling this Agreement. Oram acknowledges that OrthoLogic has encouraged him to consult with an attorney of his choice with respect to this Agreement. Oram further acknowledges that he has been offered a period of time of at least 21 days to consider whether to sign this Agreement, and OrthoLogic agrees that Oram may cancel this Agreement at any time during the seven days following the date on which this Agreement has been signed by him. In order to cancel or revoke this Agreement, Oram must deliver to OrthoLogic 2850 South 36th Street, Suite 16, Phoenix, Arizona 85034, Attention: Chief Executive Officer, written notice stating that Oram is canceling or revoking this Agreement. If this Agreement is canceled or revoked by Oram within such time period, none of the provisions of this Agreement shall be effective or enforceable and OrthoLogic shall not be obligated to make the payments to Oram described in Section 2 or to provide Oram with the other benefits described in this Agreement. 7. Confidentiality of Agreement. Oram and OrthoLogic agree to maintain in confidence the terms and existence of this Agreement and the discussions that let to its creation and execution, with the exception that OrthoLogic may disclose this Agreement and its terms to the extent required or appropriate under applicable securities laws or other laws and that Oram may disclose such matters to any attorney who is providing advice to Oram, to any accountant or federal or state tax agency for purposes of complying with any tax laws, or as otherwise required by law. Further, Oram acknowledges that any duties of confidentiality imposed upon Oram by agreement or by law, including without limitation those imposed by Paragraphs 7 and 9 of this Agreement, shall survive the termination of Oram's employment. 8. Reliance. Oram warrants and represents that (i) he has relied on his own judgment regarding the consideration for and language of this Agreement; that (ii) OrthoLogic has not in any way coerced or unduly influenced him to execute this Agreement; and (iii) that this Agreement is written in a manner that is understandable to him and he has read an understood all paragraphs of this Agreement. 9. Confidential Information. Oram acknowledges that, during his employment by OrthoLogic, Oram has received and also contributed to the production of, Confidential Information. For purposes of this Agreement, Oram agrees that "Confidential Information" shall mean information or material proprietary to OrthoLogic or designated as Confidential Information by OrthoLogic and not generally known by non-OrthoLogic personnel, which Oram developed or of or to which Oram obtained knowledge or access through or as a result of Oram's relationship with OrthoLogic (including information conceived, originated, discovered or developed in whole or in part by Oram). Oram further agrees: 9.1 To furnish OrthoLogic on demand, a complete list of the names and addresses of all present, former and potential customers and other contacts gained while an employee of OrthoLogic, whether or not in the possession or within the knowledge of OrthoLogic. 3 9.2 That all notes, memoranda, documentation and records in any way incorporating or reflecting any Confidential Information shall belong exclusively to OrthoLogic, and Oram agrees promptly to turn over all copies of such materials in Oram's control to OrthoLogic. 9.3 That Oram will hold in confidence and not directly or indirectly reveal, report, publish, disclose or transfer any of the Confidential Information to any person or entity, or utilize any of the Confidential Information for any purpose, except in the course of Oram's work for OrthoLogic. 9.4 That any ideas in whole or in part conceived of or made by Oram during the term of his employment or relationship with OrthoLogic which were made through the use of any of the Confidential Information of OrthoLogic or any of OrthoLogic's equipment, facilities, trade secrets or time, or which result from any work performed by Oram for OrthoLogic, belong exclusively to OrthoLogic and shall be deemed a part of the Confidential Information for purposes of this Agreement. Oram hereby assigns and agrees to assign to OrthoLogic all rights in and to such Confidential Information whether for purposes of obtaining patent or copyright protection or otherwise. Oram shall acknowledge and deliver to OrthoLogic, without charge to OrthoLogic (but at its expense) such written instruments and do such other acts, including giving testimony in support of Oram's authorship or inventorship, as the case may be, necessary in the opinion of OrthoLogic to obtain patents or copyrights or to otherwise protect or vest in Oram the entire right and title in and to the Confidential Information. 10. Non-Compete After Employment Term. The parties acknowledge that Oram has acquired much knowledge and information concerning the business of OrthoLogic and its affiliates as the result of Oram's employment. The parties further acknowledge that the scope of business in which OrthoLogic is engaged as of the date of execution of this Agreement is world-wide and very competitive and one in which few companies can successfully compete. Competition by Oram in that business would severely injure OrthoLogic. Accordingly, until one year after the Date of Termination, Oram will not: 10.1 Within any jurisdiction or marketing area in which OrthoLogic or any of its affiliates is doing business or is qualified to do business, directly or indirectly own, manage, operate, control, be employed by or participate in the ownership, management, operation or control of, or be connected in any manner with, any business of the type and character engaged in and competitive with that conducted by OrthoLogic or any of its affiliates. For these purposes, ownership of securities of not in excess of 1% of any class of securities of a public company shall not be considered to be competition with OrthoLogic or any of its affiliates; 4 10.2 Persuade or attempt to persuade any potential customer or client to which OrthoLogic or any of its affiliates has made a proposal or sale, or with which OrthoLogic or any of its affiliates has been having discussions, not to transact business with OrthoLogic or such affiliate, or instead to transact business with another person or organization; 10.3 Solicit the business of any company which is a customer or client of OrthoLogic or any of its affiliates at any time during Oram's employment by the OrthoLogic, or was its customer or client within two years prior to the date of this Agreement, provided, however, if Oram becomes employed by or represents a business that exclusively sells products that do not compete with products then marketed or intended to be marketed by OrthoLogic, such contact shall be permissible; or 10.4 Solicit, endeavor to entice away from OrthoLogic or any of its affiliates, or otherwise interfere with the relationship of OrthoLogic or any of its affiliates with, any person who is employed by or otherwise engaged to perform services for OrthoLogic or any of its affiliates, whether for Oram's account or for the account of any other person or organization. 11. Common Law of Torts or Trade Secrets. Nothing in this Agreement shall be construed to limit or negate the common law of torts or trade secrets where such common law provides OrthoLogic with broader protection than the protection provided by this Agreement. 12. Nature of the Agreement. This Agreement and all provisions hereof, including all representations and promises contained herein, are contractual and not a mere recital and shall continue in permanent force and effect. This Agreement and all attachments constitute the sole and entire agreement of the parties with respect to the subject matter hereof, superseding all prior agreements and understandings between the parties, including the Employment Agreement dated as of July 1, 1996, and there are no agreements of any nature whatsoever between the parties hereto except as expressly stated herein. This Agreement may not be modified or changed except by means of a written instrument signed by both parties. If any portion of this Agreement is found to be unenforceable for any reason whatsoever, the unenforceable provision shall be considered to be severable, and the remainder of the Agreement shall continue to be in full force and effect. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Arizona. 13. No Admission of Liability. Nothing contained in this Agreement shall be construed in any manner as an admission by OrthoLogic or Oram that he or it has violated any statute, law or regulation, or breached any contract or agreement. 14. Remedies. Any and all remedies set forth herein are intended to be nonexclusive and either party may, in addition to such remedies, seek any additional remedies available either in law or in equity in the event of default or breach by the other party. 5 15. Injunctive Relief. Oram agrees that it would be difficult to measure the damage to OrthoLogic from any breach by Oram of the covenants set forth herein, that injury to OrthoLogic from any such breach would be impossible to calculate, and that money damages would therefore be an inadequate remedy for any such breach. Accordingly, Oram agrees that if Oram should breach any term of this Agreement, OrthoLogic shall be entitled, in addition to and without limitation of all other remedies it may have, to offset payments to Oram required by this Agreement and/or to injunctions or other appropriate orders to restrain any such breach without showing or proving any actual damage to OrthoLogic. This paragraph shall survive termination of Oram's employment. 16. Indemnification. OrthoLogic will provide indemnification to Oram in accordance with the current Certificate and Bylaws of OrthoLogic. These obligations shall survive the termination of Oram's employment. 17. Testimony. If Oram has knowledge of or is alleged to have knowledge of any matters which are the subject of any pending, threatened or future litigation involving OrthoLogic (or any subsidiary), he will make himself available to testify if and as necessary. Oram will also make himself available to the attorneys representing OrthoLogic in connection with any such litigation or dispute for such purposes as they may deem necessary or appropriate, including but not limited to the review of documents, discussion of the case and preparation for any legal proceedings. This Agreement is not intended to and shall not be construed so as to in any way limit or affect the testimony which Oram gives in an such proceedings. Further, it is understood and agreed that Oram will at all times testify fully, truthfully and accurately, whether in deposition, hearing, trial or otherwise. 18. Publicity. Oram agrees that he will not make any announcements or public statements regarding either this Agreement or the termination of his employment without OrthoLogic's prior consent. The parties understand that a mutually acceptable for of press release will be issued promptly after the execution of this Agreement. 19. No Disparagement. Each party agrees that as part of the consideration for this Agreement, he or it will not make disparaging or derogatory remarks, whether oral or written, about the other party or, in the case of OrthoLogic, about its subsidiaries, affiliates, officers, directors, employees or agents. Dated this 7th day of March, 1997. /s/ GEORGE A. ORAM, JR. ----------------------- GEORGE A. ORAM, JR. ORTHOLOGIC CORP. By: /s/ Allan M. Weinstein, Ph.D. Allan M. Weinstein, Ph.D. Its: Chairman and CEO 6 EX-10.40 10 PROMISSORY NOTE PROMISSORY NOTE $200,000.00 Phoenix, Arizona November 15, 1996 FOR VALUE RECEIVED, the undersigned (collectively, "Maker") jointly and severally promise to pay to the order of ORTHOLOGIC CORP., a Delaware corporation ("Payee"), at 2850 South 36th Street, Suite 16, Phoenix, Arizona 85034, or at such other location as Payee may from time to time designate, the principal amount of TWO HUNDRED THOUSAND AND NO/100 DOLLARS ($200,000.00), or so much thereof as Payee may advance to or for the benefit of Maker, or either of them, plus interest calculated on a daily basis (based on a 365-day year) from the date hereof on the principal balance from time to time outstanding as hereinafter provided, principal, interest and all other sums payable hereunder to be paid in lawful money of the United States of America as follows: (a) Interest shall accrue at the Prime Rate. The "Prime Rate" is defined as the interest rate per annum designated by the Wall Street Journal as its "prime rate", as listed on the date of this note. The interest rate on this indebtedness shall be fixed on the date of this note and will remain unchanged for the term. (b) The entire unpaid principal balance, all accrued and unpaid interest, and all other amounts payable hereunder shall be due and payable in full on the earlier to occur of: (i) the closing of the sale of Maker's New Jersey home, having an address of 324 Kelly Drive, Neshanic Station, New Jersey 08853; or (ii) the third anniversary of the date of this Note. All payments on this Note shall be applied first to the payment of any costs, penalties, late charges, fees or other charges incurred in connection with the indebtedness evidenced hereby, next to the payment of accrued interest and then to the reduction of the principal balance. Maker hereby waives presentment for payment, notice of nonpayment, protest, demand, notice of protest, notice of acceleration, dishonor, intent to accelerate and nonpayment, diligence in enforcement, and indulgences of every kind, and without further notice hereby agrees to renewals, extensions, indulgences and acceptance of partial payments, either before or after maturity. This Note shall be binding upon Maker and their respective heirs, personal representatives, successors and assigns and shall inure to the benefit of Payee and its successors and assigns. Failure of Payee to exercise any option hereunder shall not constitute a waiver of the right to exercise the same in the event of any subsequent default or in the event of the continuance of any existing default after demand for strict performance hereof. Further, any forbearance by Payee in exercising any right or remedy hereunder, or otherwise afforded by applicable law shall not be a waiver of or preclude the exercising of any such right or remedy. Payee's remedies as provided herein shall be cumulative and concurrent and may be pursued singularly, successfully or together at Payee's sole discretion and may be exercised as often as the occasion may arise. This Note may not be modified, amended or changed orally. It may only be amended, modified or changed by an agreement in writing signed by the party against whom enforcement of any waiver, modification, change, amendment or discharge is sought. Time is of the essence in this Note. At the option of Payee, the entire unpaid principal balance, all accrued and unpaid interest and all other amounts payable hereunder shall become immediately due and payable without notice upon the failure to pay any sum due and owing hereunder as provided herein, if the failure continues for five (5) days after the due date. After maturity, including maturity upon acceleration after default, the unpaid principal balance, all accrued and unpaid interest and all other amounts payable hereunder shall bear interest from the date of maturity until paid at the rate that is five percent (5%) per annum above the annual rate that would otherwise be payable under the terms hereof. Maker shall pay all costs and expenses, including reasonable attorneys' fees and court costs, incurred in the collection or enforcement of all or any part of this Note. All such costs and expenses shall be secured by the Loan Documents. In the event of any court proceedings, court costs and attorneys' fees shall be set by the court and not by jury and shall be included in any judgment obtained by Payee. If this Note is placed in the hands of an attorney for collection, or is collected in whole or in part by suit or through probate, bankruptcy or other legal proceedings of any kind, Maker agrees to pay, in addition to all other sums payable hereunder, all reasonable costs and expenses of collection, including but not limited to, reasonable attorneys' fees. Maker agrees to an effective rate of interest that is the rate stated above plus any additional rate of interest resulting from any other charges in the nature of interest paid or to be paid by or on behalf of Maker, or any benefit received or to be received by Payee, in connection with this Note. It is the intent of the Maker and Payee in execution of this Note to contract in strict compliance with all applicable usury laws governing the loan evidenced by this Note. In furtherance thereof, Maker and Payee stipulate and agree that none of the terms and provisions contained in this Note shall ever be construed to create a contract for the use, forbearance or extension of money requiring payment of interest at a rate in excess of the maximum interest rate permitted to be charged by or under any laws 2 governing the loan evidence by this Note. Maker shall never be required to pay interest on this Note at the rate in excess of the maximum interest that may be lawfully charged under applicable laws. In the event any holder of this Note shall collect monies which are deemed to constitute interest which would otherwise increase the effective interest rate on this Note to a rate in excess of that permitted to be charged by applicable laws, all such sums deemed to constitute interest in excess of the maximum permissible rate shall, immediately upon such determination, be applied to the principal of this Note until the principal thereof shall be paid in full and the excess, if any, shall be returned to Maker. This Note and the obligations contained herein shall be binding upon and may be enforced against both the separate and community properties of the undersigned. This Note shall be governed by and construed according to the laws of the State of Arizona. MAKER: Address: 324 Kelly Drive Neshanic Station, NJ 08853 /s/ GEORGE A. ORAM, JR. ----------------------- GEORGE A. ORAM, JR. - 3 - EX-11.1 11 STATEMENT OF COMPUTATION OF NET INCOME (LOSS) Exhibit 11.1 ORTHOLOGIC CORP. STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING* (In thousands, except per share amounts)
Years Ended December 31, -------------------------------------------- 1996 1995 1994 ---- ---- ---- Net income (loss) .................................................... $2,538 ($1,352) ($4,472) ====== ====== ====== Common shares outstanding at end of period............................ 25,022 19,252 13,942 Adjustment to reflect weighted average for shares issued during the period..................................................... (1,747) (3,703) (151) Assuming conversion of stock options and warrants..................... 869 -- -- ------ ------- ------ Weighted average number of common shares outstanding.................. 24,144 15,549 13,791 ====== ======= ====== Net income (loss) per weighted average number of common and common equivalent shares outstanding.............................. $0.11 ($0.09) ($0.33) ====== ======= ======
* Adjusted to reflect the Company's 2-for-1 stock split effected in the form of a 100% stock dividend in June 1996. EX-13.1 12 PORTIONS OF 1996 ANNUAL REPORT SPECIAL NOTES REGARDING FORWARD-LOOKING STATEMENTS This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections of results of operations and financial condition, statements of future economic performance, and general or specific statements of future expectations and beliefs. The matters covered by such forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to differ materially from those contemplated or implied by such forward-looking statements. Important factors which may cause actual results to differ include, but are not limited to, the following matters, which are discussed in more detail in the Company's Form 10-K for the 1996 fiscal year: (i) The Company's lack of experience with respect to newly acquired technologies and product lines, such as CPM products, may reduce the Company's ability to exploit the opportunities potentially offered by the acquisitions discussed in this report; (ii) Potential difficulties in integrating the operations of newly acquired companies may impact negatively on the Company's ability to realize benefits from the acquisitions. As noted herein the Company plans to close certain facilities and consolidate operations within certain projected time frames. These plans include the termination or relocation of certain personnel. No assurance can be given that the present timetable for consolidation or closures will not be delayed or that the termination and relocation of personnel will not result in additional, unanticipated costs. The consolidation and coordination of the Company's personnel and operations may prove to be more costly or difficult than anticipated, resulting in the diversion of management resources and adverse effects on the operating results of the Company. Moreover, in part as a potential result of personnel and policy changes, there can be no assurance that customers of the Company and any acquired entity will continue their historic buying patterns; (iii) The Company recently changed from selling its products primarily through independent dealers to selling primarily through a direct sales force. Although the Company believes that in the long run this will be an effective strategy, presently identifiable risks include: (a) the Company's management is inexperienced in dealing with such a large number of direct salespeople, and procedures that worked with a small direct sales force and motivated them may not be transferable to a larger force; (b) the Company recently hired a substantial number of new salespeople with little or no experience selling the Company's products; new salespeople typically face a learning curve and not all new salespeople will be successful; (c) for those salespeople who were hired from dealerships and thus had experience selling the Company's products, the fact that they are no longer selling products made by other manufacturers as part of their sales calls may reduce their access to doctors; and (d) territory expansion and realignment means a larger number of salespeople will be calling on physicians with whom they have not established a professional relationship. There can be no assurance that the Company's efforts to expand the internal sales force and to increase its productivity will produce positive effects on sales or profits; (iv) As discussed herein, the Company intends to pursue sales in international markets. The Company, however, has had little experience in such markets. Expanded efforts at pursuing new markets necessarily involves expenditures to develop such markets and there can be no assurance that the results of those efforts will be profitable; (v) There can be no assurance that the Company's estimates concerning what it has defined as the "Orthocare market" are accurate, or that changes in that market will not cause the nature and extent of that market to deviate materially from the Company's expectations; 11 SPECIAL NOTES REGARDING FORWARD-LOOKING STATEMENTS, CONTINUED (vi) To the extent that the Company presently enjoys perceived technological advantages over competitors, technological innovation by present or future competitors may erode the Company's position in the market. For example, prior to the acquisitions discussed herein, the Company's historic sales have been derived almost exclusively from the OrthoLogic 1000, and there is a possibility that competitors may develop new treatments or improve existing treatments that could be used in place of the OrthoLogic 1000. The same observation is true with respect to the Company's CPM and fixation products. To sustain long-term growth, the Company must develop and introduce new products and expand applications of existing products; however, there can be no assurance that the Company will be able to do so or that the market will accept any such new products or applications; (vii) The Company operates in a highly regulated environment and cannot predict the actions of regulatory authorities. The action or non-action of regulatory authorities may impede the development and introduction of new products and new applications for existing products, and may have temporary or permanent effects on the Company's marketing of its existing or planned products. As noted herein, the Company has entered into an agreement with Mitsubishi Chemical Corporation and will collaborate in attempting to obtain approval by Japan's national health insurance for reimbursement for the use of the OrthoLogic 1000. However, there can be no assurance that the Company will actually receive such approval; (viii) There can be no assurance that the influence of managed care will continue to grow either in the United States or abroad, or that any such growth will result in greater acceptance or sales of the Company's products. In particular, there can be no assurance that existing or future decision makers and third party payors within the medical community will be receptive to the use of the Company's products or replace or supplement existing or future treatments. Moreover, the transition to managed care and the increasing consolidation underway in the managed care industry may concentrate economic power among buyers of the Company's products, which concentration could foreseeably adversely affect the price third party payors are willing to pay, and thus adversely affect the Company's margins; and (ix) Although the Company believes that existing litigation initiated against the Company is without merit and the Company intends to defend such litigation vigorously, an adverse outcome of such litigation could have a material adverse effect on the Company's business, financial condition and results of operations. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General OrthoLogic was founded in July 1987, and the Company was engaged primarily in the commercialization of the Company's proprietary BioLogic technology in order to develop products that stimulate the healing of bone fractures and spinal fusions. On August 30, 1996 OrthoLogic acquired Sutter Corporation ("Sutter") for $24.5 million in cash. Sutter develops, manufactures, and markets orthopaedic rehabilitation products (primarily continuous passive motion ("CPM") devices) and services. As discussed in Note 15 to the consolidated financial statements the Company's completed two additional CPM related acquisitions in March 1997. Management is in the process of preparing a formal restructuring plan related to consolidating and integrating all of its CPM related facilities, operations and personnel. The Company plans to reduce the number of facilities from six to two during the second and third quarter of 1997. All CPM device manufacturing will be in Canada and the ancillary servicing and administrative functions will be consolidated into a Phoenix, Arizona location. Once the restructuring plan is completed and costs related to these activities can be estimated, they will be reflected as additional acquisition costs in the allocation of purchase price. Fracture Healing In March 1994, the Company received approval of its Premarket Approval Application ("PMA") from the U.S. Food and Drug Administration (the "FDA") and commenced marketing its OrthoLogic 1000 Bone Growth Stimulator for the treatment of nonunion fractures. In 1993, the Company commenced clinical trials for the SpinaLogic 1000, an application of the BioLogic technology as an adjunct to spinal fusion surgery. Also during 1993, the Company commenced sales of its first commercial product, the OrthoFrame External Fixator. Additionally, in cooperation with the Mayo Clinic in Rochester, Minnesota, the Company developed the OrthoFrame/Mayo Wrist Fixator and commenced sales of this product during the first quarter of 1994. The Orthopaedic Department of the Mayo Clinic will also provide ongoing clinical input on future product design enhancements. Prior to the second quarter of 1996 the Company marketed its products primarily through a network of independent orthopaedic specialty dealers. During the second quarter of 1996 the Company commenced conversion of the primary marketing channel to a direct sales force. The Company paid approximately $10.8 million to former independent dealers for the return of territory rights, covenants-not-to-compete, and the right to hire former independent dealer sales representatives as Company employees. At December 31, 1996 the fracture healing direct sales force had 82 sales representatives and 2 remaining independent dealers. The Company's OrthoLogic 1000 is sold to patients upon receipt of a written prescription. The Company submits a bill to the patient's insurance carrier (third party payor) for reimbursement. All bills for the OrthoLogic 1000 are submitted to third party payors at the product's list price. The Company's OrthoFrame products are used in conjunction with surgical procedures and are sold to hospitals. The Company recognizes revenue at the time of product shipment. OrthoFrame products are shipped based upon receipt of purchase orders from hospitals, which are billed at the time of shipment. Each OrthoLogic 1000 is shipped based upon receipt of a physician's prescription. Therefore, the Company operates with no backlog. Orthopaedic Rehabilitation The primary product in orthopaedic rehabilitation is the direct rental of continuous passive motion devices to patients in the home, hospital, and outpatient surgical facilities. In addition to CPM rentals the Company also markets bracing and cryotherapy products. The Company maintains a fleet of CPM's which are rented to patients upon receipt of a written prescription. The Company recognizes CPM revenue daily during the period of prescribed usage. A bill is sent to the patient's insurance carrier (third party payor) for reimbursement. At December 31, 1996 the orthopaedic rehabilitation direct sales force had 87 sales representatives. Other OrthoLogic reported net income of $2.5 million during 1996, however, the Company, as of December 31, 1996, had a deficit of $16.9 million. At December 31, 1996, the Company had incurred approximately $12.0 million in net operating loss carryforwards for federal income tax purposes. The Company's ability to utilize its net operating loss carryforwards may be subject to annual limitations in future periods pursuant to the "change in ownership rules" under Section 382 of the Internal Revenue Code of 1986, as amended. Future operating results will depend on numerous factors including, but not limited to demand for the Company's products, the timing, cost and acceptance of product introductions and enhancements made by the Company or others, levels of third party payment, alternative treatments which currently exist or may be introduced in the future, practice patterns, competitive conditions in the industry, general economic conditions and other factors influencing the orthopaedic market in the United States or other countries in which the Company operates in or expands into. In addition, efforts to reform the health care system in the United States and contain health care expenditures could adversely affect the Company's revenues and results of operations. Furthermore, the Company's medical devices are subject to regulation by the FDA. The FDA has the power to affect the Company's sales and marketing of its devices. The Company cannot determine the effect such trends will have on its operations, if any. Results of Operations Years Ended December 31, 1994, 1995 and 1996. Revenues. OrthoLogic's revenue increased 196% from $5.0 million in 1994 to $14.7 million in 1995. The increase in revenue was due primarily to increases in OrthoLogic 1000 sales which received FDA approval in March 1994. OrthoLogic's revenue increased from $14.7 million in 1995 to $41.9 million in 1996, an increase of 185%. The increase in revenue is primarily attributable to higher sales levels of the OrthoLogic 1000 and revenues from Sutter for four months. However, sales of the OrthoLogic 1000 decreased in the second half of 1996, compared to the first half of 1996, primarily due to low productivity of the Company's sales people associated with transition to a direct sales force. 13 Gross Profit. Gross profit increased from $3.6 million in 1994 to $11.6 million in 1995, an increase of 219%. Gross profit increased 189% from $11.6 million in 1995 to $33.6 million in 1996. Gross profit as a percentage of sales increased from 73.5% in 1994 to 79.1% in 1995 and to 81.6% in 1996. The gross profit percentage has improved over time primarily as a result of the absorption of fixed manufacturing costs over a higher volume of manufactured product. Selling, General and Administrative Expenses ("SG&A"). SG&A expenses increased 101% from $5.6 million in 1994 to $11.3 million in 1995 and 182% to $31.9 million in 1996. The increase from 1994 to 1995 was attributable to higher personnel costs and other costs which relate directly to higher sales levels of the OrthoLogic 1000, such as commissions to sales agents, allowance for bad debts and royalties. Personnel costs also increased due to a higher number of personnel in several areas, including direct sales representatives, regional sales managers, product managers, customer service, third party payor, billing and collections and reimbursement specialists. The increase from 1995 to 1996 is due in part to the variable costs (commissions, bad debts, and royalties) associated with the increased revenue. The fixed component of SG&A also increased due to additional personnel at all levels for senior management, human resources, marketing, accounting and management information systems, and other infrastructure required to support the growing revenue volume, sales representatives added as a result of the transition to a direct sales force and incremental SG&A expenses from Sutter for four months. In addition, legal costs incurred defending the Company against lawsuits and amortization of intangibles arising from the acquisition of Sutter and costs from the conversion to a direct sales force combined to increase SG&A by $1.3 million. SG&A costs are expected to increase in 1997 due to a full year of the current personnel, Sutter SG&A and the asset acquisitions, discussed in Note 15, of Toronto Medical Corp. and Danninger Medical Technology, Inc.; however, the future levels of SG&A are dependent upon many factors, including commissions, royalties, bad debt and personnel levels. Research and Development Expenses. Research and development expenses for 1994 were $2.8 million. The expenses were attributable to research efforts and developmental activities for the OrthoFrame, the OrthoLogic 1000 and the OrthoFrame/Mayo Wrist Fixator. Research and development expenses decreased 23.5% from $2.8 million in 1994 to $2.1 million in 1995 and increased to $2.2 million in 1996. During the year ended December 31, 1994, the Company experienced nonrecurring development costs associated with the OrthoLogic 1000 and the OrthoFrame/Mayo Wrist Fixator, which were not incurred in 1995 and 1996. Other Income. Grant revenue increased 758.8% from $25,000 in 1994 to $215,000 in 1995 and decreased 14.9% to $183,000 in 1996. Grant revenue will fluctuate from year to year depending on the number and dollar level of grant awards. The total number of grants awarded in 1994, 1995 and 1996 were 0, 3, and 2, respectively. The grants are not awarded based on calendar years. Interest income increased 9.9% from $278,000 in 1994 to $305,000 in 1995 and increased 831% to $2,841,000 in 1996. The fluctuations were caused by different amounts of cash and short-term investments and varying interest rates. The Company completed additional public offerings in October 1995 and April 1996 which provided net proceeds of approximately $17.6 million and $74.0 million, respectively. Net Income. Net income during 1996 is comprised of an operating loss of $485,000 which is offset by other income of $3.0 million, consisting primarily of interest income of $2.8 million. Liquidity and Capital Resources The Company has financed its operations through the public and private sales of equity securities and product sales. From inception through December 31, 1996, the Company has raised $118.8 million in net proceeds from equity financings. At December 31, 1996, the Company had cash and cash equivalents of $13.5 million and short-term investments of $35.3 million. Working capital increased 218.8% from $23.5 million at December 31, 1995 to $75.0 million at December 31, 1996. This increase is primarily the result of the Company's public offering which provided net proceeds of approximately $74.0 million. Net cash used by operations decreased 14.8% from $5.6 million in 1994 to $4.8 million in 1995. The decrease is attributable to the decrease in net loss from $4.5 million in 1994 to $1.4 million in 1995 and was partially offset by an increase in accounts receivable and inventory. Net cash used by operations increased 44.6% from $4.8 million in 1995 to $6.9 million in 1996. This increase was due primarily to increases in accounts receivable and inventory of $4.7 million and $2.3 million, respectively, offset by increases in net income and depreciation and amortization of $3.9 million and $1.6 million, respectively. The Company anticipates that the cash generated from product sales and rentals and current cash balances will be sufficient to meet the Company's capital requirements for the foreseeable future. There can be no assurance, however, that the Company will not require additional financing in the future. If the Company were required to obtain additional financing in the future, there can be no assurance that such sources of capital will be available on terms favorable to the Company, if at all. Accounts receivable increased from $6.5 million at December 31, 1995 to $26.9 million at December 31, 1996. This increase is due primarily to the acquisition of Sutter, increased sales of fracture healing products and an increased collection cycle experienced during the Company's growth. As discussed in greater detail in Note 13 the Company has been named as a defendant in certain lawsuits. Management believes that the allegations are without merit and will vigorously defend them. No costs related to the potential outcome of these actions have been accrued. The Company plans to relocate its corporate offices in the fourth quarter of 1997. No lease has been signed related to this move. 14 Selected Financial Data The selected financial data for each of the five years in the period ended December 31, 1996 are derived from audited financial statements of the Company. The selected financial data is qualified in its entirety by and should be read in conjunction with the Financial Statements and related Notes thereto and other financial information appearing elsewhere herein and the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations." As discussed in Note 2 of the footnotes the Company completed an aquisition in August 1996.
Years ended December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (in thousands, except per share data) STATEMENTS OF OPERATIONS DATA: Net revenue $ 41,884 $ 14,678 $ 4,953 $ 326 $ -- Cost of revenue 8,299 3,065 1,314 161 -- Operating expenses: Selling, general and administrative 31,901 11,304 5,611 1,113 944 Research and development 2,169 2,132 2,787 2,769 1,992 --------- --------- --------- --------- --------- Total operating expenses 34,070 13,436 8,398 3,882 2,936 --------- --------- --------- --------- --------- Operating loss (485) (1,823) (4,760) (3,717) (2,936) Other income (expense) 3,023 471 288 393 (50) --------- --------- --------- --------- --------- Net income (loss) $ 2,538 $ (1,352) $ (4,472) $ (3,324) $ (2,986) ========= ========= ========= ========= ========= Net income (loss) per share (1) $ 0.11 $ (0.09) $ (0.33) $ (0.26) $ (0.39) ========= ========= ========= ========= ========= Weighted average shares outstanding (1) 24,144 15,549 13,791 13,090 7,662 ========= ========= ========= ========= ========= December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (in thousands) BALANCE SHEET DATA: Working capital $ 74,985 $ 23,518 $ 4,968 $ 9,553 $ 1,559 Total assets 113,026 27,490 7,576 10,949 2,730 Long-term debt, less current maturities -- -- -- 20 125 Stockholders` equity 101,927 24,437 6,052 10,214 1,884
(1) Based on weighted average common share equivalents outstanding, giving retroactive effect to the conversion of outstanding Preferred Stock into Common Stock and a stock split. See Notes to Financial Statements. Stockholder Information Market information. The Company's Common Stock commenced trading on the Nasdaq National Market on January 28, 1993 under the symbol "OLGC." The bid price information as adjusted for a 2 for 1 stock split effected as a stock dividend in June 1996, included herein is derived from the Nasdaq Monthly Statistical Report, represents quotations by dealers, may not reflect applicable markups, markdowns or commissions, and does not necessarily represent actual transactions. 1996 1995 ---- ---- High Low High Low ---- --- ---- --- First Quarter $13.656 $7-1/8 $2.813 $1-11/16 Second Quarter 26-1/4 9-7/8 3 2 Third Quarter 16-3/8 7-1/8 5.563 2-5/16 Fourth Quarter 11-3/8 5-5/8 7-7/8 4-1/16 As of March 7, 1997, there were 25,031,846 shares outstanding of the Common Stock of the Company held by approximately 279 stockholders of record. Dividends. The Company has never paid a cash dividend on its common stock. The Board of Directors currently anticipates that all of the Company's earnings, if any, will be retained for use in its business and does not intend to pay any cash dividends on its Common Stock in the foreseeable future. 15 Consolidated Balance Sheets
December 31, ------------ 1996 1995 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 13,493,853 $ 8,830,514 Short-term investments (Note 6) 35,306,989 9,149,360 Accounts receivable, less allowance for doubtful accounts of $8,595,000 and $1,480,000 26,856,144 6,488,203 Inventories, net (Note 7) 6,551,382 1,829,865 Prepaids and other current assets 1,194,679 273,237 Deferred taxes (Note 9) 2,401,000 -- ------------- ------------- Total current assets 85,804,047 26,571,179 ------------- ------------- FURNITURE, RENTAL FLEET AND EQUIPMENT, net (Note 8) 9,082,003 695,932 DEPOSITS AND OTHER ASSETS (Note 11) 93,112 97,748 NOTE RECEIVABLE - Officer (Note 11) 200,000 125,000 GOODWILL, net (Note 2) 7,757,981 -- DEALER INTANGIBLES, net (Note 3) 10,088,559 -- ------------- ------------- TOTAL $ 113,025,702 $ 27,489,859 ============= ============= December 31, ------------ 1996 1995 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,041,943 $ 1,053,323 Accrued bonuses and compensation 3,443,988 1,199,909 Deferred credits 2,738,779 -- Accrued royalties 556,495 333,213 Accrued expenses 2,073,633 466,802 ------------- ------------- Total current liabilities 10,818,839 3,053,247 ------------- ------------- DEFERRED RENT & CAPITAL LEASE 279,929 -- COMMITMENTS (Notes 4, 11, 12) STOCKHOLDERS' EQUITY Preferred stock, $.0005 par value; 2,000,000 share authorized, none issued Common stock, $.0005 par value; 40,000,000 shares authorized; 25,022,346 and 19,251,728 shares issued 12,510 9,626 Additional paid-in capital 118,832,040 43,882,991 Deficit (16,917,616) (19,456,005) ------------- ------------- Total stockholders' equity 101,926,934 24,436,612 ------------- ------------- TOTAL $ 113,025,702 $ 27,489,859 ============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16 Consolidated Statements of Operations
Years Ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- REVENUES: Net sales $ 31,031,451 $ 14,678,362 $ 4,952,963 Net rentals 10,852,788 -- -- ------------ ------------ ------------ Total revenues 41,884,239 14,678,362 4,952,963 ------------ ------------ ------------ COST OF REVENUES: Cost of goods sold 5,714,510 3,065,451 1,314,328 Cost of rentals 2,584,530 -- -- ------------ ------------ ------------ Total cost of revenues 8,299,040 3,065,451 1,314,328 ------------ ------------ ------------ GROSS PROFIT 33,585,199 11,612,911 3,638,635 ------------ ------------ ------------ OPERATING EXPENSES: Selling, general and administrative 31,900,966 11,303,624 5,611,281 Research and development 2,169,090 2,132,441 2,786,929 ------------ ------------ ------------ Total operating expenses 34,070,056 13,436,065 8,398,210 ------------ ------------ ------------ OPERATING LOSS (484,857) (1,823,154) (4,759,575) ------------ ------------ ------------ OTHER INCOME (EXPENSE): Grant revenue 182,658 214,704 25,000 Interest income 2,840,588 305,243 277,721 Interest expense -- (48,438) (14,693) ------------ ------------ ------------ Total other income (expense) 3,023,246 471,509 288,028 ------------ ------------ ------------ NET INCOME (LOSS) $ 2,538,389 $ (1,351,645) $ (4,471,547) ============ ============ ============ NET INCOME (LOSS) PER WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (Note 1) $ 0.11 $ (0.09) $ (0.33) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (Note 1) 24,143,763 15,548,856 13,791,158 ========== ========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17 Consolidated Statements of Stockholders' Equity
Preferred Stock Common Stock Additional --------------- ------------ ---------- Shares Amount Shares Amount Paid-in Capital Deficit Total ------ ------ ------ ------ --------------- ------- ----- Balance, January 1, 1994 - - 6,779,191 $ 3,390 $ 23,843,247 $ (13,632,813) $ 10,213,824 Exercise of common options at prices ranging from $.10 to $4.50 per share (Note 10) - - 141,900 71 61,303 -- 61,374 Stock option compensation (Note 10) - - -- -- 73,571 -- 73,571 Exercise of common stock warrant (Note 10) - - 50,000 25 174,975 -- 175,000 Net loss - - -- -- -- (4,471,547) (4,471,547) ---- ----- ---------- -------- ------------- ------------- ------------- Balance, December 31, 1994 - - 6,971,091 3,486 24,153,096 (18,104,360) 6,052,222 Sale of common stock (Note 10) - - 2,512,199 1,256 19,564,379 -- 19,565,635 Exercise of common options at prices ranging from $.325 to $5.75 per share (Note 10) - - 141,300 70 85,875 -- 85,945 Stock option compensation (Note 10) - - -- -- 84,455 -- 84,455 Exercise of common stock warrant (Note 10) - - 1,274 1 (1) -- -- Net loss - - -- -- -- (1,351,645) (1,351,645) ---- ----- ---------- -------- ------------- ------------- ------------- Balance, December 31, 1995 - - 9,625,864 4,813 43,887,804 (19,456,005) 24,436,612 Sale of common stock (Note 10) - - 2,530,000 1,265 73,949,643 -- 73,950,908 Exercise of common options at prices ranging from $.325 to $14.625 per share (Note 10) - - 324,318 162 852,051 -- 852,213 Exercise of common stock warrant (Note 10) - - 10,241 5 (5) -- -- Stock option compensation (Note 10) - - -- -- 64,307 -- 64,307 Two for one stock split (Note 10) - - 12,490,423 6,245 (6,245) -- -- Exercise of common options at prices ranging from $1.844 to $7.313 per share (Note 10) - - 41,500 20 84,485 -- 84,505 Net income - - -- -- -- 2,538,389 2,538,389 ---- ----- ---------- -------- ------------- ------------- ------------- Balance, December 31, 1996 - - 25,022,346 $ 12,510 $ 118,832,040 $ (16,917,616) $ 101,926,934 ==== ===== ========== ======== ============= ============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18 Consolidated Statements of Cash Flows
Years Ended December 31, 1996 1995 1994 ---- ---- ---- OPERATING ACTIVITIES: Net income (loss) $ 2,538,389 $ (1,351,645) $ (4,471,547) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 1,926,056 301,567 289,853 Change in operating assets and liabilities: Accounts receivable (9,062,119) (4,407,128) (1,973,263) Inventories (3,171,448) (860,449) (474,118) Prepaids and other current assets (819,623) (97,969) 43,422 Deposits and other assets 4,636 (1,866) 5,567 Accounts payable (708,136) 582,228 366,657 Accrued bonuses and compensation 39,561 59,828 248,572 Accrued royalties 223,282 220,043 108,681 Accrued expenses 2,114,567 771,859 236,037 ------------ ------------ ------------ Net cash used in operating activities (6,914,835) (4,783,532) (5,617,020) ------------ ------------ ------------ INVESTING ACTIVITIES: Expenditures for furniture and equipment, net (1,389,309) (133,818) (699,190) Intangibles from dealer transactions (10,752,116) -- -- Officer note receivable, net (75,000) -- -- Purchase of Sutter Corporation, net of cash acquired (24,907,442) -- -- (Purchase) sale of short-term investments (26,157,629) (9,149,360) 6,523,432 ------------ ------------ ------------ Net cash (used) provided in investing activities (63,281,496) (9,283,178) 5,824,242 ------------ ------------ ------------ Years Ended December 31, 1996 1995 1994 ---- ---- ---- FINANCING ACTIVITIES: Payments under long-term debt and capital lease obligations (27,956) (19,706) (101,374) Proceeds from issuance of common stock 74,887,626 19,651,580 236,374 ------------ ------------ ------------ Net cash provided by financing activities 74,859,670 19,631,874 135,000 ------------ ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 4,663,339 5,565,164 342,222 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,830,514 3,265,350 2,923,128 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 13,493,853 $ 8,830,514 $ 3,265,350 ============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: The Company purchased all of the capital stock of Sutter Corporation and incurred certain costs related to this acquisition for a total purchase price of $25,047,000. In connection with this acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 31,516,000 Cash paid and cost related to the acquisition of capital stock (25,047,000) ------------ Liabilities assumed $ 6,469,000 ============ Stock option compensation $ 64,307 $ 84,455 $ 73,571 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION- Cash paid during the year for interest $ 0 $ 48,438 $ 14,693 ============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19 Notes To Consolidated Financial Statements For The Years Ended December 31, 1996, 1995 and 1994 1. Summary of Significant Accounting Policies Organization - OrthoLogic, Corp. (formerly IatroMed, Inc.) was incorporated on July 30, 1987 (date of inception) and commenced operations in September 1987. On August 30, 1996 OrthoLogic, Corp. acquired all of the outstanding capital stock of Sutter Corporation ("Sutter") which became a wholly-owned subsidiary of OrthoLogic (collectively the "Company" or "OrthoLogic"). Description of business - OrthoLogic is engaged in two primary areas of orthopaedic healthcare primarily in the United States. The fracture healing area is engaged in developing, manufacturing, and marketing proprietary, technologically advanced orthopaedic devices designed to enhance the healing of diseased, damaged or degenerated musculo-skeletal tissue. The orthopaedic rehabilitation area is engaged in developing, manufacturing, and marketing orthopaedic rehabilitation products and services, primarily through the direct rental of continuous passive motion ("CPM") devices to patients in the home, hospitals, and outpatient surgical facilities. Principles of consolidation - The consolidated financial statements include the accounts of OrthoLogic, Corp. since its inception and Sutter since its acquisition on August 30, 1996. All material inter-company accounts and transactions have been eliminated. The following briefly describes the significant accounting policies used in the preparation of the financial statements of the Company: a. Inventories are stated at the lower of cost (first-in, first-out method) or market. b. Furniture, rental fleet and equipment are stated at cost or, in the case of leased assets under capital leases, at the present value of future lease payments at inception of the lease. Depreciation is calculated on a straight-line basis over the estimated useful lives of the various assets, which range from three to seven years. Leasehold improvements and leased assets under capital leases are amortized over the life of the asset or the period of the respective lease using the straight-line method, whichever is the shortest. c. Grant revenue is recorded as costs are incurred in accordance with the terms of the grant contract. d. Research and development represent both costs incurred internally for research and development activities, as well as costs incurred by the Company to fund the activities of the various research groups (Note 4), with which the Company has contracted. All research and development costs are expensed when incurred. e. Cash and cash equivalents consist of cash on hand and cash deposited with financial institutions, including money market accounts, and commercial paper purchased with an original maturity of three months or less. f. Income (loss) per common and common equivalent share - is computed on the weighted average number of common and common equivalent shares outstanding during each year and includes shares issuable upon exercise of stock options when dilutive. g. Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation. h. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 2. Acquisition On August 30, 1996, OrthoLogic, Corp. acquired all of the outstanding capital stock of Sutter for $24.5 million in cash. The acquisition was accounted for as a purchase and, accordingly the net assets and results of operations of Sutter have been included in these consolidated financial statements commencing August 30, 1996. The purchase resulted in goodwill of $7.9 million which is being amortized over 15 years. The following unaudited pro forma summary combines the consolidated results of operations of OrthoLogic, Corp. and Sutter as if the acquisition had occured on January 1 of that period after giving effect to certain adjustments including amortization of the purchase price in excess of net assets acquired, interest income, and income taxes. This pro forma summary is not necessarily indicative of the results of operations that would have occured if OrthoLogic, Corp. and Sutter had been combined during such periods. Moreover, the pro forma summary is not intended to be indicative of the results of operations to be attained in the future. Year Ended December 31, ----------------------- (in thousands, except per share data) ------------------------------------- 1996 1995 ---- ---- Net revenues $ 65,623 $ 47,062 Income (loss) from continuing operations $ 1,487 $ (2,476) Net income (loss) per common share $ 0.06 $ (0.16) The Company intends to close the Sutter corporate office and manufacturing facility as part of a restructuring (the "Restructuring Plan," see Note 15). Events which remain to be determined include 1) which employees will be terminated or relocated and 2) matters surrounding the closure of facilities and relocation of servicing operations. The amount of costs to be incurred related to these activities have not yet been estimated. Once the Restructuring Plan is approved, the related liabilities will be reflected as additional acquisition costs in the allocation of purchase price. 20 Notes To Consolidated Financial Statements, cont. For The Years Ended December 31, 1996, 1995 and 1994 3. Dealer Intangibles During the second quarter of 1996 the Company initiated a plan to convert its primary marketing channel from an independent dealer network to a direct sales force. In connection with this conversion the Company paid approximately $10.8 million to certain former independent dealers for the return of territory rights, covenants-not-to-compete with varying terms, and the right to hire former independent dealer sales representatives as Company employees. This amount is being amortized on a straight line basis over seven years. 4. Research, Product Development and License Agreements The Company has entered into several research contracts, product development agreements and license agreements. These agreements relate to products being sold, products currently under development, and ongoing scientific research. Future commitments related to these agreements are summarized as follows: Year Ending December 31, Amount ------------------------ ------ 1997 $ 130,000 1998 45,333 1999 1,000 --------- Total $ 176,333 ========= In addition, the Company has committed to pay royalties on the sale of products or components of products developed under certain of these agreements. The royalty percentages vary but generally range from 7% to 0.5% of the sales amount for licensed products. The royalty percentage under the different agreements decreases when either a certain sales dollar amount is reached or royalty amount is paid. Royalty expense under these agreements totaled $621,597, $414,408 and $180,570 in 1996, 1995 and 1994, respectively. 5. Distributor and Sales Agency Agreements Prior to the second quarter of 1996 the Company marketed its products primarily through a network of independent orthopaedic speciality dealers. During the second quarter of 1996 the Company commenced conversion of the primary marketing channel to a direct sales force. This conversion was substantially complete by year end. In August 1996 the Company acquired Sutter whose primary marketing channel was a direct sales force. The Company's primary products, the OrthoLogic 1000 and CPM devices, are prescribed by clinicians for specific patient usage. The Company sells or rents product upon receipt of a prescription, signed by a clinician. The Company bills the patient's insurance carrier or the patient, if they are not insured. During 1995, one distributor obtained prescriptions for which product was shipped and which represents approximately 12% of net sales. This same distributor purchased other products from the Company which account for less than 1% of net sales for this same period. For the years ended December 31, 1996 and 1994, no distributor accounted for over 10% of revenue. 6. Investments The Company has implemented Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities." At December 31, 1996, marketable securities were comprised of corporate debt securities and direct obligations of the United States Government and its agencies and were managed as part of the Company's short-term cash management program and were classified as held-to-maturity securities. All such securities were purchased with original maturities less than one year. Such classification requires these securities to be reported at amortized cost. A summary of the fair market value and unrealized gains and losses on these securities is as follows: December 31, 1996 1995 ---- ---- Amortized Cost $ 35,306,989 $ 9,149,360 Gross unrealized gain 48,912 45,887 Gross unrealized loss (13,117) -- ------------ ------------ Fair Value $ 35,342,784 $ 9,195,247 ============ ============ 7. Inventories Inventories consisted of the following: December 31, 1996 1995 ---- ---- Raw materials $ 4,646,620 $ 1,156,716 Work-in-process 127,514 95,715 Finished goods 2,037,850 577,434 ----------- ----------- 6,811,984 1,829,865 Less allowance for obsolescence (260,602) -- ----------- ----------- Total $ 6,551,382 $ 1,829,865 =========== =========== 8. Furniture, Rental Fleet and Equipment Furniture, rental fleet and equipment consisted of the following: 21 December 31, 1996 1995 ---- ---- Rental fleet $ 7,366,886 $ -- Machinery and equipment 1,738,572 1,140,328 Computer equipment 1,070,534 473,994 Furniture and fixtures 825,894 175,330 Leasehold improvements 362,409 102,335 ------------ ------------ 11,364,295 1,891,987 Less accumulated depreciation and amortization (2,282,292) (1,196,055) ------------ ------------ Total $ 9,082,003 $ 695,932 ============ ============ 9. Income Taxes At December 31, 1996, the Company has incurred approximately $12.0 million in net operating loss carryforwards expiring from 2002 through 2011 for federal income tax purposes. The Company issued Series B Convertible Preferred Stock during 1988, Series C Convertible Preferred Stock during 1990 and Series D Convertible Preferred Stock during 1992, completed its IPO in 1993 and completed a private placement and public offerings of its common stock in 1995 and 1996. Stock issuances, as discussed in Note 10, may cause a change in ownership under the provisions of Internal Revenue Code Section 382; accordingly, the utilization of the Company's net operating loss carryforwards may be subject to annual limitations. Management has evaluated the available evidence about future taxable income and other possible sources of realization of deferred tax assets. The valuation allowance reduces deferred tax assets to an amount that management believes will more likely than not be realized. The components of deferred income taxes at December 31 are as follows (in '000s): 1996 1995 ---- ---- Allowance for bad debts $ 3,456 $ 592 Other accruals and reserves 675 25 Valuation Allowance (1,730) (618) ------- ------- Total current 2,401 0 ------- ------- Net operating loss carryforwards 4,746 7,187 Difference in basis of fixed assets (606) -- Nondeductible accruals and reserves 441 197 Amortization of intangibles and other 630 (2) Valuation Allowance (5,211) (7,382) ------- ------- Total noncurrent 0 0 ------- ------- Total deferred income taxes $ 2,401 $ 0 ======= ======= A reconciliation of the difference between the provision for income taxes and income taxes at the statutory U.S. federal income tax rate is as follows for the year ended December 31, 1996: Income taxes at statutory rate $ 863 Net operating losses used (930) State income taxes 200 Other (133) ----- Net provision $ 0 ===== Prior to 1996, the Company had experienced net operating losses for all years; therefore, there was no provision for 1995 or 1994. 22 Notes To Consolidated Financial Statements, cont. For The Years Ended December 31, 1996, 1995 and 1994 10. Stockholders' Equity In October 1987, the stockholders adopted a Stock Option Plan (the "Option Plan") which was amended in January 1996 to increase the number of common shares reserved for issuance under the Option Plan to 4,000,000 shares. Two types of options may be granted under the Option Plan: options intended to qualify as incentive stock options under Section 442 of the Internal Revenue Code ("Code") and other options not specifically authorized or qualified for favorable income tax treatment by the Code. All eligible employees may receive more than one type of option. Any director or consultant who is not an employee of the Company shall be eligible to receive only nonqualified stock options under the Option Plan. In October 1989, the Board of Directors (the "Board") approved that in the event of a takeover or merger of the Company in which 100% of the equity of the Company is purchased, 75% of all unvested employee options will vest, with the balance vesting equally over the ensuing 12 months, or according to the individual's vesting schedule, whichever is earlier. If an employee or holder of stock options loses their position as a result of or subsequent to the acquisition, 100% of that individual's stock options will vest immediately upon employment termination. Options are granted at prices which are equal to the current fair value of the Company's common stock at the date of grant. During January 1993, an independent valuation of the fair value of the Company's common stock was performed for 1991 and 1992. This valuation indicated that certain options granted during 1991 and all options granted during 1992 were at prices less than the fair value at the date of grant. The Company recorded the difference between the fair value and the exercise price as compensation expense as the options vested. During 1996, 1995 and 1994 approximately $12,000, $13,000 and $191,000 respectively, was recorded as compensation expense. There is no remaining future compensation expense. The vesting period is generally related to length of employment and all vested options lapse upon termination of employment if not exercised within a 90-day period (or one year after such termination because of death or disability or the date of termination if terminated for cause). A summary of the status of the Option Plan as of December 31, 1996, 1995, and 1994, and changes during the years then ended is presented below:
1996 1995 1994 Weighted-Average Weighted-Average Weighted-Average Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price - ------------- ------ -------------- ------ -------------- ------ -------------- Outstanding at beginning of year 2,356,034 $ 3.33 1,654,034 $ 1.61 1,367,300 $ 0.91 Granted 914,400 13.15 1,112,600 5.04 600,300 2.68 Exercised (700,790) 1.60 (282,600) 0.30 (283,800) 0.22 Forfeited (60,000) 6.23 (128,000) 2.42 (29,766) 2.34 ---------- ---------- --------- Outstanding at end of year 2,509,644 $ 7.31 2,356,034 $ 3.33 1,654,034 $ 1.61 ========== ========== ========= Options exercisable at year-end 613,737 774,220 656,486 ========== ========== ========= Weighted-average fair value of options granted during the year $ 7.50 $ 2.87 ========== ==========
23 Notes To Consolidated Financial Statements, cont. For The Years Ended December 31, 1996, 1995 and 1994 The following table summarizes information about fixed stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ---------------------------------------------------------------------------------- -------------------------------------- Range of Number Outstanding Weighted-Average Weighted-Average Number Exercisable Weighted-Average Exercise Prices at 12/31/96 Remaining Contractual Life Exercise Price at 12/31/96 Exercise Price --------------- ----------- -------------------------- -------------- ----------- -------------- $ 0.16 - $ 2.25 509,944 5.46 $ 1.84 274,193 $ 1.71 2.44 - 4.78 511,400 7.45 3.06 97,734 3.05 6.50 - 6.50 16,000 11.89 6.50 0 0 6.78 - 6.78 550,000 3.95 6.78 148,959 6.78 7.31 - 17.88 927,300 8.63 12.95 92,851 12.98 --------- ---- ------- ------- ------ $ 0.16 - $17.88 2,509,644 6.75 $ 7.31 613,737 $ 4.83 --------- ---- ------- ------- ------
The Company applies APB Opinion No. 25 and related interpretations in accounting for its Option Plan. Accordingly, no compensation cost, other than discussed above, has been recognized for its Option Plan. Had compensation cost been computed based on the fair value of awards on the date of grant, utilizing the Black-Scholes option-pricing model, consistent with the method stipulated by Statement of Financial Accounting Standards No. 123, the Company's net earnings and earnings per share for the years ended December 31, 1996 and 1995 would have been reduced to the pro forma amounts indicated below, followed by the model assumptions used:
December 31, 1996 1995 ---- ---- Net income (loss): As reported (in '000s) $ 2,538 $ (1,352) Pro forma (in '000s) $ 679 $ (1,687) Net income (loss) per weighted average number of common and common equivalent shares outstanding: As reported $ 0.11 $ (0.09) Pro forma $ 0.03 $ (0.11) Black-Scholes model assumptions: Risk-free interest rate 6.00% 6.00% Expected volatility .6 .6 Expected term 5 years 5 years Dividend yield 0% 0%
24 Notes To Consolidated Financial Statements, cont. For The Years Ended December 31, 1996, 1995 and 1994 At December 31, 1996, options for 613,737 shares of common stock were exercisable. The options generally expire five or ten years from the date of grant. At the closing of the Company's IPO on January 28, 1993 all convertible preferred stock, totaling 4,173,002 shares, was converted into an equal amount of common stock. At December 31, 1996, there were 2,000,000 shares of preferred stock authorized and none were issued and outstanding. The former preferred stockholders and certain of their transferees now holding their shares of common stock may require the Company, commencing April 28, 1993 and ending on July 6, 2003, on not more than two occasions, to file a registration statement under the Securities Act with respect to at least 30% of their shares of common stock. Stockholders holding 60% of such registerable shares must make the registration demand. The Company must file a registration statement with the Securities and Exchange Commission within 90 days of the receipt of the request. The former holders of all of the shares of Series D Preferred Stock may require the Company, on one or more occasions, to file a registration statement under the Securities Act for all or any part of their shares of common stock. The Company must file a registration statement within 90 days of the receipt of the request. Further, holders of common stock with registration rights may require the Company to register all or a portion of their shares of common stock on Form S-3, subject to certain conditions and limitations. The Company is obligated to pay the offering expenses of each such offering, except for the selling stockholders' pro rata portion of underwriting discounts and commissions. During 1994, the former holders of certain shares of Series D Preferred Stock and certain warrant holders required the Company to register their shares of common stock. Sales of substantial amounts of the common stock in the public market pursuant to the above registration rights could adversely affect prevailing market prices. In June 1992, the Company issued a warrant to purchase 100,000 shares of common stock, at an exercise price of $1.75 per share, to the placement agent in connection with the sale of the Series D Preferred Stock. The warrant was exercised in August 1994. In connection with the Company's IPO in January 1993, the Company issued a warrant to purchase 50,000 shares of common stock, at an exercise price of $4.20 per share, to the underwriter. In 1995 as a result of the private placement, the exercise price was reduced to $4.055. The warrant was exercised using a net exercise provision during 1995 and 1996. In 1993, the Company issued a warrant to purchase 20,000 shares of common stock, at an exercise price of $1.813 per share, to another company for an ownership interest of that company (see Note 11). This warrant expires in August 1998. On February 28, 1995 the Company issued 1,000,000 shares of common stock upon the closing of a private placement of its common stock. Gross proceeds to the Company were $2 million. Net proceeds to the Company after deducting costs of the offering were approximately $1.9 million. The common stock was sold to 11 accredited investors, including Arizona Growth Partners, L.P. which at the time held more than 5% of the Company's stock. The general partner of an entity which is the general partner of Arizona Growth Partners, L.P. is a member of the Company's Board of Directors. The holders of such shares of common stock exercised their right to require the Company to register the shares under the Securities Act, the Company so registered the shares prior to March 1996. In 1996, the Company issued a warrant to purchase 5,000 shares of common stock, at an exercise price of $2.41 per share, to a consultant as partial payment for services. This warrant expires in March 2001. On October 31, 1995 and November 6, 1995 the Company issued a total of 4,024,398 shares of common stock upon the closings of a public offering of its common stock. Gross proceeds to the Company were $19.1 million. Net proceeds to the Company after deducting costs of the offering were approximately $17.6 million. On April 30, 1996 the Company issued 5,060,000 shares of common stock upon the closing of a public offering of its common stock. Gross proceeds to the Company were $78.4 million. The net proceeds to the Company after deducting costs of the offering were approximately $74.0 million. The common stock was sold at $15.50 per share. During the first quarter of 1996 the Company amended its Articles of Incorporation to authorize 40,000,000 shares of common stock, $.0005 par value. In addition, the Board of Directors approved a 2 for 1 stock split in the form of a 100 percent common share dividend which was paid on June 25, 1996, to stockholders of record as of June 4, 1996. The accompanying financial statements and footnotes have been restated to give effect to the split. 11. Related Parties The Company has entered into two-year employment agreements with the Chief Executive Officer ("CEO"), President and the Executive Vice President of Research and Development of the Company. The employment agreements provide that salaries and bonuses shall be determined annually by the Board of Directors. If the Company terminates the employee's employment without cause, the employee is entitled to a severance payment equal to twelve months' salary. In addition, three other officers of the Company have entered into severance agreements wherein payments equal to twelve months' salary are required upon termination of the employee without cause. During June 1992, the Company loaned $125,000 to its CEO. The note plus accrued interest was paid during 1996. 25 Notes To Consolidated Financial Statements, cont. For The Years Ended December 31, 1996, 1995 and 1994 During November 1996, the Company loaned $200,000 to its former President. The loan is unsecured and bears interest at 8%. The note is due upon sale of the former President's Phoenix home. The Company may demand payment after December 31, 1997. The Company has a 5% ownership interest in a company which is providing research services to the Company per an agreement referred to in Note 4. The Company paid approximately $32,000 and granted a warrant for 10,000 shares of the Company's stock (as described in Note 10) for the ownership interest. This investment is included in deposits and other assets at December 31, 1996. The Company has a consulting agreement with a member of the Board of Directors. The agreement has a renewable one year term and the fee is negotiated each year. During each of 1996, 1995 and 1994, the Company paid the member $25,000 for services rendered under the agreement. The Company's CEO has a minority interest in royalties paid by the Company under a product license (see Note 4). The CEO has transferred to the Company his rights to any royalties under this agreement as long as he is a director or officer of the Company. The Company has received no royalties to date under this agreement. 12. Commitments The Company is obligated under non-cancelable operating lease agreements for its office, manufacturing and research facilities. Rent expense for the years ended December 31, 1996, 1995 and 1994 was $482,000, $131,000 and $124,000, respectively. The following is a schedule of future minimum lease payments for the years ending December 31 under non-cancelable lease agreements with original terms in excess of one year: Leases ------------------------------------ Capital Operating Total ------- --------- ----- 1997 $ 68,672 $1,083,243 $1,151,915 1998 68,672 580,765 649,437 1999 68,672 14,122 82,794 2000 47,264 5,301 52,565 Thereafter -- -- -- ---------- ---------- ---------- Total future minimum lease payments 253,280 $1,683,431 $1,936,711 ========== ========== Less amount representing interest 39,568 ---------- Present value of minimum lease payments 213,712 Less current portion 51,207 ---------- Long-term portion $ 162,505 ========== 13. Litigation During 1996 certain lawsuits were filed in the United States District Court for the District of Arizona against the Company and certain officers and directors alleging violations of Section 10(b) of the Securities Exchange Act of 1934, and SEC Rule 10b-5 promulgated thereunder. Plaintiffs in these actions allege that correspondence received by the Company from the U.S. Food and Drug Administration (the "FDA") pertaining principally to the promotion of the Company's OrthoLogic 1000 Bone Growth Stimulator was material and undisclosed, leading to an artificially inflated stock price. Plaintiffs further allege that the Company's non-disclosure of the FDA correspondence and of the alleged practices referenced in that correspondence operated as a fraud against plaintiffs. Plaintiffs further allege that once the FDA letter became known, a material decline in the stock price of the Company occurred, causing damage to the plaintiffs. In addition, the Company has been served with a substantially similiar action filed in Arizona state court alleging state law causes of action grounded in the same set of facts. All plaintiffs seek class action status, unspecified compensatory damages, fees and costs. Plaintiffs also seek extraordinary, equitable and/or injunctive relief as permitted by law. Management believes that the allegations are without merit and will vigorously defend them. 26 Notes To Consolidated Financial Statements, cont. For The Years Ended December 31, 1996, 1995 and 1994 In addition to the foregoing, a shareholder derivative complaint alleging among other things, breach of fiduciary duty in connection with the conduct alleged in the aforesaid federal and state court class actions have also been filed in Arizona state court. By agreement between the parties, that action has been stayed pending a decision on defendant's forthcoming motion to dismiss those actions. The costs associated with defending these allegations and the potential outcome cannot be determined at this time and accordingly, no estimate for such costs has been included in these financial statements. 14. 401(k) Plan The Company adopted a 401(k) plan (the "Plan") for its employees on July 1, 1993. The Company may make matching contributions to the Plan on behalf of all Plan participants, the amount of which is determined by the Board of Directors. The Company did not make any matching contributions to the Plan in 1996, 1995 or 1994. 15. Subsequent Events On February 25, 1997 the Company declared a dividend distribution of one Preferred Stock Purchase Right (the "Rights") for each outstanding share of the Company's common stock, payable March 12, 1997 to holders of record on that date. The Rights will expire on March 11, 2007. Each Right will entitle shareholders to buy 1/100 of a share of Series A Preferred Stock at an exercise price of $25.00. Initially, no separate Rights certificates will be distributed; the Rights will trade with the Company's common stock and will not be exercisable until the earlier of 10 business days following the acquisition of 15% or more of the Company's common stock by a person or group or 15 business days following the commencement of a tender offer for 20% or more of the Company's common stock. At the discretion of the Board of Directors of the Company, the Rights can be redeemed at any time prior to the 10th day following the date the Rights become exercisable. If the Rights are not redeemed by the Board, and the Company is acquired, holders of the Rights (other than an "acquiring person") will be entitled to purchase additional shares of common stock of either the Company or the acquiring corporation (whichever survives) at one-half the market price. On March 3, 1997 and March 12, 1997 the Company acquired certain assets and assumed certain liabilities of Toronto Medical Corp. ("Toronto") and Danninger Medical Technology, Inc. ("DMTI") for approximately $4.0 million and $9.1 million in cash, respectively. Both acquisitions were accounted for as a purchase, however at the date of this report the purchase price allocation had not yet been determined and accordingly the amount of goodwill has not been computed. Toronto and DMTI develop, manufacture and market CPM devices on a national and international level. Management plans to restructure the operations related to these acquisitions during the second and third quarter of 1997 including, but not limited to, closing and/or relocating facilities and terminating or relocating certain employees. The Restructuring Plan will include the integration of these acquisitions. Once the estimated costs related to these activities are determined, they will be accrued and reflected as additional acquisition costs in the allocation of purchase price. Independent Auditors' Report To the Board of Directors and Stockholders of OrthoLogic Corp.: We have audited the accompanying consolidated balance sheets of OrthoLogic, Corp. and its subsidiary (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of OrthoLogic Corp. and its subsidiary at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP March 12, 1997 Phoenix, Arizona 27 EX-21.1 13 SUBSIDIARIES OF ORTHOLOGIC CORP. Exhibit 21.1 SUBSIDIARIES OF ORTHOLOGIC CORP.
Name Under Which Name Jurisdiction of Incorporation Subsidiary Does Business - ---- ----------------------------- ------------------------ Sutter Corporation California Sutter Corporation Toronto Medical Orthopaedics Ltd. Canada Toronto Medical Orthopaedics Ltd.
EX-23.1 14 CONSENT OF INDEPENDENT AUDITORS INDEPENDENT AUDITORS CONSENT We consent to the incorporation by reference in the Registration Statements No. 33-79010, No. 333- 1268 and No. 333-09785 of OrthoLogic Corp. on Form S-8 and Registration Statements No. 33- 82050 and No. 333-1558 of OrthoLogic Corp. on Form S-3 of our report dated March 12, 1997, appearing in the Annual Report on Form 10-K of OrthoLogic Corp. for the year ended December 31, 1996. DELOITTE & TOUCHE LLP Phoenix, Arizona March 26, 1997 EX-27 15 ART. 5 FDS FOR DECEMBER 31, 1996
5 This schedule contains summary financial information extracted from the financial statements in Orthologic Corp's report on Form 10-K for the year ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 1 U.S. DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 13,493,853 35,306,989 35,451,144 8,595,000 6,551,382 85,804,047 9,082,003 2,282,292 113,025,702 10,818,839 0 0 0 12,510 101,914,424 113,025,702 31,031,451 41,884,239 8,299,040 34,070,056 0 0 0 2,538,839 0 2,538,839 0 0 0 2,538,839 0.11 0.11
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