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<SEC-DOCUMENT>0000351721-99-000003.txt : 19990331
<SEC-HEADER>0000351721-99-000003.hdr.sgml : 19990331
ACCESSION NUMBER: 0000351721-99-000003
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990330
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ADVANCED NEUROMODULATION SYSTEMS INC
CENTRAL INDEX KEY: 0000351721
STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841]
IRS NUMBER: 751646002
STATE OF INCORPORATION: TX
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 000-10521
FILM NUMBER: 99578853
BUSINESS ADDRESS:
STREET 1: ONE ALLENTOWN PARKWAY
CITY: ALLEN
STATE: TX
ZIP: 75002
BUSINESS PHONE: 9723909800
MAIL ADDRESS:
STREET 1: ONE ALLENTOWN PARKWAY
CITY: ALLEN
STATE: TX
ZIP: 75002
FORMER COMPANY:
FORMER CONFORMED NAME: QUEST MEDICAL INC
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
<TEXT>
<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANCE ACT OF 1934
For the transition period from to
Commission File Number: 0-10521
------------------------
ADVANCED NEUROMODULATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 75-1646002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 ALLENTOWN PARKWAY,
ALLEN, TEXAS 75002
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (972) 390-9800
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
<TABLE>
<S> <C>
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
NONE NONE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Title of Class
--------------
Common Stock, $.05 Par Value
------------------------
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of the 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. | |
Aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of March 18, 1999: $61,662,572
Number of shares outstanding of the registrant's Common Stock as of
March 18, 1999: 7,776,129
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the
registrant's Annual Meeting of Stockholders to be held on June 23, 1999, are
incorporated by reference into Part III.
================================================================================
<PAGE>
Advanced Neuromodulation Systems, Inc.
Annual Report
Form 10-K
Year Ended December 31, 1998
PART I
ITEM 1. BUSINESS
General
-------
Advanced Neuromodulation Systems, Inc., a Texas corporation ("ANS" or the
"Company"), designs, develops, manufactures and markets implantable electronic
stimulation systems for spinal cord stimulation used to manage chronic
intractable pain. Until June 1998, ANS was known as Quest Medical, Inc.
Because stimulation devices have gained acceptance as a viable, efficacious and
cost-effective treatment alternative for relieving chronic intractable pain, the
Company is continuing its efforts to expand its product offerings in the high
growth market of neuromodulation. Neuromodulation is the electrical or chemical
modulation of the central nervous system to enhance function or reduce
dysfunction. Today, ANS is a market share and technology leader in the $35
million radio-frequency stimulation segment of the neuromodulation market. In
1998, the Company accelerated its investment in development projects to position
the Company for participation in the other larger and more rapidly growing
segments of the neuromodulation market. Industry analysts expect the
neuromodulation market to grow from $260 million in 1998 to nearly $1 billion by
2003.
Recent Developments
-------------------
On January 30, 1998, the Company completed the sale of substantially all of the
assets of its cardiovascular and intravenous fluid product lines (the "CVS
Operations") to Atrion Corporation ("Atrion"). The CVS Operations designed,
developed, manufactured and marketed cardiovascular products (including pressure
control valves, filters and surgical retracting tapes), specialized intravenous
fluid delivery tubing sets and accessories and pressure monitoring kits used
primarily in labor and delivery. The cardiovascular products of the CVS
Operations also included the MPS(R) myocardial protection system, a
sophisticated system designed to manage the delivery of solutions to the heart
during open-heart surgery. See Item 7: "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Overview" and Note 11- "Sale of
CVS Operations/Discontinued Operations" of the Notes to Consolidated Financial
Statements.
The Company also granted Atrion a nine-month option to acquire the Company's
principal office and manufacturing facility in Allen, Texas for $6.5 million.
During October 1998, Atrion exercised its option to acquire the facility and the
closing of the transaction occurred on February 1, 1999. The Company repaid its
outstanding mortgage debt at closing and received net proceeds of $2.7 million
-1-
<PAGE>
after repayment of the mortgage debt and related expenses to the transaction.
The Company will move its operations to a 40,000 square foot leased facility in
the North Dallas area during May 1999. See Item 2: "Properties".
In January 1999, the Company and Sofamor Danek Group, Inc. ("Sofamor Danek")
terminated a June 1998 agreement under which ANS would develop and manufacture
for Sofamor Danek, products and systems for use in Deep Brain Stimulation. The
termination was effective upon the closing of the Sofamor Danek merger with
Medtronic, Inc. Under terms of the termination agreement, Sofamor Danek agreed
to accelerate payments due to ANS in the amount of $8 million. The Company
received the $8 million payment the day after the completion of the Sofamor
Danek/Medtronic merger. See Item 7: "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Overview" and Note 12- "Product
Development Agreement" of the Notes to Consolidated Financial Statements.
The Neuromodulation Market
--------------------------
Neuromodulation is the electrical or chemical modulation of the central nervous
system to enhance function or reduce dysfunction. The neuromodulation market is
comprised of implantable electrical stimulation systems and fully implantable
intrathecal drug pumps that modulate the central nervous system by delivering
either electricity or pharmaceuticals directly to nerve fibers.
Four product segments address the chronic intractable pain segment of the
neuromodulation market. These segments are: (1) radio-frequency stimulation
systems for spinal cord stimulation, (2) implantable pulse generator stimulation
systems for spinal cord and deep brain stimulation, (3) fully implantable
constant rate intrathecal drug pumps and (4) fully implantable programmable rate
intrathecal drug pumps. Industry analysts estimate the market at $260 million in
1998 and growing to nearly $1 billion by 2003.The growth in the market for
stimulation systems and intrathecal drug pumps is being driven by a number of
factors including:
* New technology is increasing the capability of these devices
* New clinical applications for stimulation systems and intrathecal drug
pumps are being discovered and tested
* Improved outcomes driven by technology, patient selection and improved
techniques
* Stimulation and intrathecal drug pump devices are low risk, cost effective
and the therapies are reversible
* Patient awareness and advocacy
* A growing base of pain specialists and centers of excellence
Listed below are the estimated units and revenue by market segment in 1998 and
2003 for all manufacturers of such products. These estimates do not consider
applications for neuromodulation technology platforms such as urge incontinence,
epilepsy, peripheral nerve stimulation, sacral nerve root stimulation for
various pelvic pain disorders, functional stimulation, tens stimulation,
peripheral vascular disease and deep brain applications for disorders other than
Parkinson's Disease and Essential Tremor.
-2-
<PAGE>
Estimated, for all product manufacturers, by market segment:
<TABLE>
<CAPTION>
1998 2003
-------------------- --------------------
$ $
Units (000's) Units (000's)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Radio-frequency stimulation
systems for spinal cord
stimulation ....................... 2,750 $ 35,000 4,460 $ 60,000
Implantable pulse generator
stimulation systems for spinal
cord stimulation .................. 11,250 80,000 30,850 282,000
Implantable pulse generator
stimulation systems for deep brain
stimulation for Parkinson's Disease
and Essential Tremor .............. 2,745 20,000 19,050 175,000
Fully implantable constant rate
intrathecal drug pumps ............ 1,935 8,000 5,450 23,000
Fully implantable programmable
rate intrathecal drug pumps ....... 15,400 117,000 51,900 380,000
--------- --------- --------- ---------
Total .................... 34,080 $260,000 111,710 $920,000
--------- --------- --------- ---------
</TABLE>
The number of patients who can benefit from stimulation and intrathecal drug
pump devices is substantial. Thus, the Company believes the market is
under-served and under-penetrated. In 1998, only 34,000 patients benefited from
a stimulation system or intrathecal drug pump.
The Company's growth strategy is to develop and license proprietary products to
expand from its current participation in the radio-frequency stimulation segment
into all segments of the neuromodulation market. Since most pain practitioners
implant products in all four categories, the Company believes it is in a unique
position to leverage its distribution capabilities.
Products
--------
STIMULATION SYSTEMS
Stimulation devices electrically stimulate nerve fibers along the spinal cord to
reduce chronic severe neuropathic pain by "masking" the pain signals sent to the
brain. Neuropathic pain usually arises from nerve damage. Stimulation device
implantation manages the pain associated with failed back surgery syndrome
(FBSS), peripheral neuropathy, phantom limb or stump pain, ischemic pain and
reflex sympathetic dystrophy (RSD), also known as complex regional pain syndrome
(CRPS). Stimulation device implantation in the brain is being used to relieve
the effects of various neurological disorders, such as Parkinson's Disease and
Essential Tremor by delivering small electrical impulses to targeted structures
in the brain.
The market for stimulation systems is currently divided between radio-frequency
stimulation systems, which use an external power source, and stimulation systems
-3-
<PAGE>
that utilize implantable battery driven systems known as implantable pulse
generators (IPGs). According to industry analysts, lPG devices account for 80
percent of the number of spinal cord stimulation procedures performed, with
radio-frequency devices accounting for the remainder. The Company currently
designs, develops, manufactures and markets radio-frequency stimulation devices
and is in the process of developing an IPG device. The primary advantage of the
radio-frequency device revolves around the benefits of the system's external
battery. An external battery system allows the patient to recharge the device by
simply changing out a special nine-volt battery. The IPG requires surgical
intervention, revision and replacement after two to four years. Due to its
inexpensive power system, the radio-frequency device can be programmed with a
wide range of amplitude, frequency and pulse width settings for a variety of
programs controlled by the patient. These features make the radio-frequency
devices the most cost efficient for long-term stimulation treatment. On the
other hand, IPG devices provide the convenience of a completely internalized
system, although they involve added long-term cost when repeat surgeries are
required to replace the IPG power source. Both radio-frequency systems and IPG
systems are useful to the pain physician. Radio-frequency systems are most often
prescribed for patients who have complex bilateral pain syndromes or large pain
topographies that require high power levels. IPGs are most often prescribed for
patients with simple unilateral and single extremity pain complaints or
indications with low power requirements.
The Company's radio-frequency stimulation systems consist of four primary
components: leads, a receiver, a transmitter and programmer. The leads are most
commonly placed percutaneously through the skin into the epidural space of the
spinal column. This procedure for lead placement is similar to that employed by
anesthesiologists in routine epidural procedures. Typically, one or two leads
are inserted, each of which has multiple electrodes that can be used to
stimulate the targeted nerve roots of the spinal cord. Laminotomy style (paddle)
leads are also available for neurosurgeons or orthopedic surgeons who prefer to
insert leads in an open surgical procedure approach. The leads are then
connected to a passive receiver, which is implanted under the skin on the side
of the abdomen. The receiver contains electronics that receive radio-frequency
energy and data from a source (the transmitter) outside the body, and delivers
the prescribed electrical pulses to the leads. The transmitter is approximately
the size of a pager, and is typically worn on a belt. Since it is external to
the body, the transmitter can be easily programmed and serviced as needed, and
its battery can be simply recharged or replaced.
The Company's CompuStim(R) systems include four, seven, eight and sixteen
electrodes on one, two or more leads; simple and complex receivers; and an
external battery powered transmitter. The Company believes that the CompuStim
product line's multi-electrode leads and advanced multiprogrammable technology
have changed the manner in which neuromodulation is performed worldwide. For
example, the Company's "Dual Octrode" device, a system of dual leads with eight
electrodes on each lead introduced in 1995, creates a targeted current density
that appears to be especially effective in relieving complex and multi-extremity
pain patterns. Previously, quadrapolar stimulation systems only relieved the leg
pain associated with FBSS. Many thought leaders support the view that the Dual
Octrode device provides improved pain relief to both the legs and the back. Dual
Octrode systems are enjoying increasing acceptance from the physician community
and, in the Company's judgment, is the technological leader in the stimulation
field. The Company believes that the long-term results of stimulation in the
treatment of pain have improved as a result of the technological superiority of
-4-
<PAGE>
ANS products. Moreover, the ease of use of the system has expanded the potential
market for these products.
The Company recently completed development of its enhanced radio-frequency
stimulation system and expects to introduce the products in the United States in
1999. These products include enhancements that will simplify the procedure for
implanters while providing improved function.
In 1998, the Company licensed the rights to filed method patents for sacral
nerve root stimulation aimed at relieving the effects of chronic pelvic pain,
including interstitial cystitis. Interstitial cystitis is an extremely painful
bladder disease that affects an estimated 450,000 people worldwide. The Company
believes its advanced radio-frequency stimulation devices can be effective in
treating pelvic pain indications including interstitial cystitis. In February
1999, the Company received conditional approval from the FDA to initiate a pilot
study to evaluate the use of its advanced radio-frequency stimulation systems to
treat interstitial cystitis. If the pilot study is successful, the Company would
seek approval from the FDA to initiate further clinical studies in the process
to receive a PMA approval to begin marketing in the United States.
The Company believes its radio-frequency stimulation devices represent a strong
base for penetration of the broader neuromodulation market. The Company
continued development of an IPG stimulation system during 1998 to better serve
the broad needs of the pain management market. The Company expects to complete
development of its IPG stimulation system during the second quarter of 1999 and
will seek approval from the FDA during the third quarter of 1999 to initiate
clinical trials. The IPG stimulation system will allow the Company to
participate in the largest segment of the stimulation market for spinal cord
stimulation and leverage its sales and marketing capabilities. In addition, the
IPG provides the Company the opportunity to address a larger number of new
indications such as chronic intractable angina, urinary urge incontinence,
peripheral nerve stimulation and DBS for essential tremor and tremor associated
with Parkinson's disease.
PAINDOC(R)
In early 1997 the Company began marketing PainDoc, a pen-based computer system
that is designed to assist physicians and their patients in optimizing the
performance of the Company's stimulation devices both pre- and post-operatively.
PainDoc interfaces with the Company's CompuStim transmitters to optimize
stimulation therapy and document treatment outcomes. PainDoc allows the
physician to interact with the patient to map the location and intensity of the
patient's pain. The resulting "pain map" is then used to assess and select the
most effective stimulation sets, or combination of multi-electrode stimulation
arrays, to treat the pain. The idea is to generate pain coverage that overlaps
the patient's pain map. The selected arrays (programs) are uploaded into the
patient's CompuStim transmitter. The physician can visually compare the
patient's pain map against a stimulation map and optimize the patient's
stimulator setting to address the patient's needs and assess whether desired
levels of pain relief have been obtained and whether excess stimulation has been
delivered.
PainDoc enables the physician to program up to 24 different stimulation sets
delivering electrical stimulation every 50 milliseconds to expand pain area
coverage and relief. The Company believes that PainDoc should also allow
physicians to create a broad based database tool that, by using a standardized
-5-
<PAGE>
methodology, will enable physicians to share and compare outcomes data, which
can then be used to deliver more efficacious pain relief to individual patients.
The Company believes that PainDoc and CompuStim devices used in tandem
significantly enhance the effectiveness, flexibility and precision of managing
chronic neuropathic pain. The Company expects PainDoc to promote the selection
of the Company's CompuStim devices for stimulation procedures, especially as
stimulation devices become more sophisticated and the pain management process
becomes more refined. In October 1995, the Company received 510(k) approval from
the FDA to market PainDoc as an interactive medical treatment device. See Item
1: "Business-Other Business Matters-Government Regulation."
The Company continues to make improvements to PainDoc and will continue to
develop systems that are easier to use and offer more capability.
INTRATHECAL DRUG PUMPS
Fully implantable intrathecal drug pumps are designed to deliver pharmaceuticals
directly into the intrathecal space (the fluid-filled area around the spinal
cord). With intrathecal drug delivery, the medication is delivered directly to
its site of action. This contrasts to oral or intravenous drug delivery, where
the medication is distributed systemically throughout the entire body. Since the
drug is being delivered directly to the site of action, a greater therapeutic
effect can be achieved with much lower quantities of medication, which reduces
the common side effects that can occur with oral medications. Today, intrathecal
drug pumps are used to deliver morphine for the treatment of pain and baclofen
for the treatment of spasticity.
Intrathecal drug pump systems consist of the pump itself and a catheter. The
pump is a low profile cylinder shaped device (similar to the size of a hockey
puck) that contains a reservoir into which the drug to be delivered is injected
and mechanisms that regulate the rate of delivery of the drug. The pump is
implanted under the skin generally in the abdominal area and is connected to the
catheter. The catheter is a piece of silastic tubing that is tunneled under the
skin and into the spinal fluid space in the back where it delivers the drug from
the pump. The drug supply in the pump usually lasts one to three months. The
drug pump is refilled using a needle inserted through the skin into the pump's
access port. The drug is then injected through the needle into the reservoir.
The refill procedure is generally performed on an outpatient basis by a
physician or under the direct supervision of a physician.
Industry analysts estimate that the intrathecal drug pump market will grow
annually between 25 to 30 percent over the next five years. In 1998 the market
was estimated at $125 million and is expected to grow to $403 million by the
year 2003. The market for fully implantable intrathecal drug pumps is currently
divided between constant rate drug pumps and programmable rate drug pumps.
According to industry analysts, the programmable drug pumps account for 89
percent of the number of intrathecal drug pump procedures performed, with
constant rate drug pumps accounting for the remainder. Currently, Medtronic,
Inc. is the sole worldwide provider of a programmable intrathecal drug pump.
The programmable rate drug pump is the most versatile type of implantable pump
since it allows the rate of drug delivery to be changed non-invasively to meet
varying patients' needs. Medtronic's programmable pump contains a battery and
-6-
<PAGE>
motor. The battery delivers pulses of energy to the motor which pushes the drug
from the pump into the catheter and into the spinal canal. The programmability
feature allows for time-modified delivery of the drug. For example, it can be
non-invasively programmed to deliver more medication at night and less in the
morning. Since the pump is powered with a battery, the entire pump typically
needs to be replaced every four to five years.
Constant rate drug pumps are designed to provide drug infusion at a constant
rate. Once implanted, the medication flow rates remain the same. In order to
change medication rates, different drug concentrations can be mixed and changed
at refill. Constant rate pumps are typically powered by pressurized gas
contained in a compartment of the device. As the gas expands, the medication is
forced out of the drug reservoir through a flow restrictor and catheter and into
the spinal canal. When the drug reservoir is refilled, its power is
automatically recharged. Therefore constant rate pumps are less expensive and
have a longer implant life (eight to ten years) since there is no battery that
can be depleted.
Management believes that the fully implantable intrathecal drug pump market
offers significant opportunity. In August 1998, the Company completed an
agreement with Tricumed Medizintechnik GmbH, a German corporation, granting ANS
exclusive rights to distribute Tricumed's fully implantable intrathecal drug
pump products in international markets including the United States, Canada, the
United Kingdom, France, Spain, Switzerland, South America, Australia and other
world markets. Tricumed manufactures a proprietary constant rate intrathecal
drug pump (Archimedes) that has received the CE mark (European) approval.
Tricumed is also developing a fully implantable programmable intrathecal drug
pump (Micromedes). Tricumed expects to complete development of the Micromedes
pump and seek regulatory approval in Europe (CE mark) in the latter part of
1999. Both the Archimedes and Micromedes pumps have proprietary engineered
features that improve patient convenience and reduce costs. If Tricumed
successfully completes development of the Micromedes and obtains the CE mark,
the Company would commence marketing the Micromedes pump in international
countries. The Company would also seek approval from the FDA to initiate
clinical trials in the United States, a step in the process to receive approval
to market the Micromedes domestically. The Company commenced marketing the
Archimedes pump in international countries in the first quarter of 1999.
In 1998, the Company also continued development on its own low-cost fully
implantable constant rate intrathecal drug pump utilizing proprietary technology
licensed from the University of Minnesota. The Company expects to complete
development of the pump in the third quarter of 1999 and will seek approval from
the FDA to initiate clinical trials in the United States. The Company will seek
CE mark approval to distribute the low-cost pump internationally during the
second half of 1999, with international sales expected to commence in late
fourth quarter of 1999. Management believes that its value priced pump will
expand the market for fully implantable intrathecal drug pumps to price
sensitive markets including cancer pain therapy and third world countries.
-7-
<PAGE>
Other Business Matters
----------------------
MARKETING AND MAJOR CUSTOMER
ANS utilizes specialty distributors and commissioned sales agents to market its
stimulation systems. Currently, the Company has seven specialty distributors who
employ thirty-five personnel to market its stimulation systems. In addition, the
Company has twenty commissioned sales agents and two direct sales
representatives who sell the Company's stimulation systems. The Company employs
four regional sales managers who oversee the distributors, sales agents and
direct representatives. Internationally, the Company sells product to fourteen
specialty distributors who represent ANS in twenty-one countries. The primary
medical specialists the Company targets in its marketing efforts are
anesthesiologists, neurosurgeons and orthopedic surgeons. Although neurosurgeons
were the first practitioners to use stimulation systems, anesthesiologists now
account for a greater percentage of sales as the relative number of these
practitioners has grown and as the understanding and acceptance of stimulation
treatment has increased. The Company derives 90 percent of net revenues from
product sales of its stimulation systems from domestic sales and approximately
10 percent from export sales.
During 1998, 1997 and 1996, the Company had one major customer that accounted
for 10 percent or more of its net revenue from product sales. Sun Medical, Inc.,
a specialty distributor of ANS products, accounted for $3.4 million, $3.7
million and $2.6 million, or 20 percent, 25 percent and 22 percent of ANS' net
revenue from product sales for the years ended December 31, 1998, 1997 and 1996,
respectively. While the Company believes its relations with Sun Medical are
good, the loss of this customer could have a material adverse effect on the
Company's business, financial condition and results of operations.
RESEARCH AND DEVELOPMENT
In 1998, the Company focused its research and development efforts on the
continued development of its enhanced radio-frequency stimulation systems and
ongoing research and development of new products for the neuromodulation market,
such as an implantable pulse generator stimulation system for spinal cord
stimulation, an implantable pulse generator stimulation system for Deep Brain
Stimulation ("DBS") and a low-cost constant rate intrathecal drug pump. The
Company expended $2.8 million (13.9 percent of total net revenue) on its
research and development activities in 1998, compared to $977,000 (6.6 percent
of total net revenue) in 1997. The Company expects to increase its investment in
research and development and clinical trials during 1999 and expects
expenditures of approximately $4.6 million. These expenditures will be directed
toward completion of the low-cost constant rate intrathecal drug pump, the
implantable pulse generator stimulation system for spinal cord stimulation, the
implantable pulse generator stimulation system for DBS and for the development
of next generation radio-frequency stimulation systems and implantable pulse
generator stimulation systems. These expenditures also include expenses for
clinical trials that the Company expects to initiate on several of its new
products upon approval from the FDA. The clinical trials are a necessary process
to receive approval from the FDA to begin marketing the products in the United
States. During February 1999, the Company received approval from the FDA to
initiate a pilot clinical study to evaluate the use of its advanced
radio-frequency stimulation systems to treat pelvic pain, specifically
-8-
<PAGE>
interstitial cystitis. The Company also expects to seek approval from the FDA
during the third quarter of 1999 to initiate clinical studies for its
implantable pulse generator stimulation system for spinal cord stimulation and
its low-cost constant rate intrathecal drug pump. As of March 1999, ANS had an
in-house research and development staff of 25 personnel as compared to 13 in
March 1998.
The Company is evaluating strategic partners for DBS to replace its terminated
agreement with Sofamor Danek that could partially fund research and development
expenditures during 1999. In addition to DBS, the Company believes its
implantable pulse generator stimulation platform has market opportunities
outside its focus of chronic pain including applications such as epilepsy,
urinary incontinence, angina, peripheral nerve stimulation and peripheral
vascular disease. The Company may also seek strategic partners with established
distribution systems to develop these market opportunities outside the chronic
pain market area.
MANUFACTURING
The Company manufactures and packages its stimulation systems at its
manufacturing facility in Allen, Texas. This facility received ISO 9001
certification (for design and manufacturing processes) in July 1995. See Item 1.
"Business-Other Business Matters-Government Regulations."
The Company's manufacturing processes consist of the assembly of standard and
custom component parts and the testing of completed products. The Company
subcontracts with various suppliers to provide it with the quantity of component
parts necessary to assemble its products. Almost all of these components are
available from a number of different suppliers, although certain components are
purchased from single sources. For example, the Company currently relies on a
single supplier for a computer chip used in the receiver and transmitter of its
stimulation systems. The supplier of this computer chip has indicated its desire
to cease manufacturing and supplying the computer chip in the future, but to
date, has not determined when this will occur. The supplier has agreed to notify
the Company once a date has been determined and allow the Company to place a
final one-time purchase order for the computer chip. In the interim, the Company
is maintaining a higher than normal inventory of the computer chip. In addition,
the Company is developing a custom computer chip to replace the existing
computer chip and expects such chip to be available during the first half of
2000. A sudden disruption in supply from the computer chip supplier or another
single-source supplier could adversely affect the Company's ability to deliver
finished products on time.
The Company devotes significant attention to quality control. Its quality
control measures begin at the manufacturing level where components are assembled
in a "clean room" environment designed and maintained to reduce product exposure
to particulate matter. Products are tested throughout the manufacturing process
for adherence to specifications. Finished components are shipped to outside
processors for ethylene oxide gas sterilization.
Skills of assembly workers required for the manufacture of medical products are
similar to those required in typical assembly operations. The Company believes
that workers with these skills are readily available in the Dallas area.
-9-
<PAGE>
COMPETITION
In marketing its stimulation systems, the Company competes with one other
significant supplier, Medtronic, Inc. Medtronic has substantially greater
financial resources and engages in substantially greater research and
development and marketing efforts. Medtronic holds a substantial majority share
of the stimulation market and sells both radio-frequency stimulation systems and
implantable pulse generator stimulation systems. Medtronic also holds the
substantial majority share of the market for implantable intrathecal drug pumps
and is the sole marketer worldwide of fully implantable programmable intrathecal
drug pumps and implantable pulse generators.
The Company believes that the principal competitive factors in the
neuromodulation market are cost-effectiveness, impact on patient outcomes,
product performance, quality, ease of use, technical innovation and customer
service. The Company intends to continue to compete on the basis of its high
performance products, innovative technologies, manufacturing capability, close
customer relations and support, and its strategy to increase its offerings of
products within the neuromodulation market.
PATENTS, TRADEMARKS AND PROPRIETARY INFORMATION
The Company currently owns four United States patents and also owns two foreign
patents. In management's view, these patents offer reasonable coverage of its
stimulation devices' electrode, receiver, transmitter and programmer technology.
These patents cover both radio-frequency stimulation systems and implantable
pulse generator stimulation systems for a wide range of current and future
applications. Pending patent applications concern the PainDoc computer system
and the Company's innovative Multistim(R) technology.
The Company also licenses four United States patents and one foreign patent from
the University of Minnesota relating to the constant rate intrathecal drug pump
the Company is currently developing.
In 1998, the Company licensed exclusive worldwide rights to filed method patents
for sacral nerve-root stimulation aimed at relieving the effects of chronic
pelvic pain, including interstitial cystitis. Currently, there are two pending
patent applications. See Item 7: "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Overview".
The validity of any patents issued to the Company may be challenged by others
and the Company could encounter legal and financial difficulties in enforcing
its patent rights against infringers. In addition, there can be no assurance
that other technologies cannot or will not be developed or that patents will not
be obtained by others which would render the Company's patents obsolete. The
loss of any one patent would not have a material adverse effect on the Company's
current revenue base. Although the Company does not believe that patents are the
sole determinant in the commercial success of its products, the loss of a
significant percentage of its patents or its patents relating to the stimulation
product line could have a material adverse effect on the Company's business,
financial condition and results of operations.
-10-
<PAGE>
The Company has developed technical knowledge which, although non-patentable, is
considered by the Company to be significant in enabling it to compete. However,
the proprietary nature of such knowledge may be difficult to protect. The
Company has entered into an agreement with each key employee prohibiting such
employee from disclosing any confidential information or trade secrets of the
Company and prohibiting that employee from engaging in any competitive business
while the employee is working for the Company and for a period of one year
thereafter. In addition, these agreements also provide that any inventions or
discoveries relating to the business of the Company by these individuals will be
assigned to the Company and become the Company's sole property.
Claims by competitors and other third parties that the Company's products
allegedly infringe the patent rights of others could have a material adverse
effect on the Company. The interventional pain management market is
characterized by extensive patent and other intellectual property claims, which
can create greater potential than in less developed markets for possible
allegations of infringement, particularly with respect to newly developed
technology. Intellectual property litigation is complex and expensive and the
outcome of this litigation is difficult to predict. Any future litigation,
regardless of outcome, could result in substantial expense to the Company and
significant diversion of the efforts of the Company's technical and management
personnel. An adverse determination in any such proceeding could subject the
Company to significant liabilities to third parties, or require the Company to
seek licenses from third parties or pay royalties that may be substantial.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms or at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing or
selling certain of its products, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
COMPUSTIM, MULTISTIM, PAINDOC, UNISTIM and OCTRODE are among the Company's
registered trademarks. Registration applications are pending for various
trademarks the Company believes have value in the marketplace, including
Advanced Neuromodulation Systems and ANS.
GOVERNMENT REGULATION
The manufacture and sale of the Company's products are subject to regulation by
numerous governmental authorities, principally the FDA and corresponding foreign
agencies. The research and development, manufacturing, promotion, marketing and
distribution of the Company's products in the United States are governed by the
Federal Food, Drug and Cosmetic Act and the regulations promulgated thereunder
(the "FDC Act and Regulations"). The Company is subject to inspection by the FDA
for compliance with such regulations and procedures.
The FDA has traditionally pursued a rigorous enforcement program to ensure that
regulated entities such as the Company comply with the FDC Act and Regulations.
A company not in compliance may face a variety of regulatory actions, including
warning letters, product detentions, device alerts, mandatory recalls or field
corrections, product seizures, injunctive actions or civil penalties and
criminal prosecutions of the Company or responsible employees, officers and
directors. The Company was last inspected in the summer of 1996, with no major
violations found.
-11-
<PAGE>
Under the FDA's requirements, a new medical device cannot be released for
commercial use until a pre-market approval application (a "PMA") has been filed
with the FDA and the FDA has approved the device's release. If a manufacturer
can establish that a newly developed device is "substantially equivalent" to a
legally marketed device, the manufacturer may seek marketing clearance from the
FDA to market the device by filing a 510(k) premarket notification with the FDA,
which usually takes less time than a PMA. The process of obtaining FDA clearance
can be lengthy, expensive and uncertain. Both a 510(k) and a PMA, if granted,
may include significant limitations on the indicated uses for which a product
may be marketed. FDA enforcement policy strictly prohibits the promotion of
approved medical devices for unapproved uses. In addition, product approvals can
be withdrawn for failure to comply with regulatory requirements or the
occurrence of unforeseen problems following initial marketing. Although all of
the Company's currently marketed products have been the subject of successful
510(k) submissions, the Company believes that because the products the Company
currently has in development are more innovative, some of these products will
require the PMA submission process, which is lengthier and more costly than the
510(k) process.
The Company is also subject to regulation in each of the foreign countries in
which it sells its products with regard to product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. Many of the regulations applicable to the Company's
products in such countries are similar to those of the FDA. The national health
or social security organizations of certain countries require the Company's
products to be qualified before they can be marketed in those countries. To
date, the Company has not experienced significant difficulty in complying with
these regulations.
To position itself for access to European and other international markets, ANS
has maintained certification under the ISO 9000 Series of Standards. ISO 9000 is
a set of integrated requirements, which when implemented, form the foundation
and framework for an effective quality management system. These standards were
developed and published by the ISO, a worldwide federation of national standard
bodies, founded in Geneva, Switzerland in 1946. ISO has over 92 member
countries. ISO certification is essential to enter European Community markets.
In December 1998, ANS' quality system was recommended for re-certification and
an upgrade to ISO 9001/EN 46001 certification. The ISO 9001 registration is the
most stringent standard in the ISO series and lasts for three years. The German
notified body TUV Product Services will issue the upgraded certificates. The ISO
9001 standard covers design, production, installation and servicing of products.
The EN 46001 covers the same elements as the ISO standard however the focus is
on quality systems for medical device manufacturing. In addition, ANS is
certified to the Active Implantable Medical Device Directive allowing ANS to
market devices throughout the European Community. The Company is subject to an
annual audit by the notified body to maintain the registrations.
The financial arrangements through which the Company markets, sells and
distributes its products may be subject to certain federal and state laws and
regulations in the United States with respect to the provision of services or
products to patients who are Medicare or Medicaid beneficiaries. The "fraud and
abuse" laws and regulations prohibit the knowing and willful offer, payment or
receipt of anything of value to induce the referral of Medicare or Medicaid
patients for services or goods. In addition, the physician anti-referral laws
-12-
<PAGE>
prohibit the referral of Medicare or Medicaid patients for certain "Designated
Health Services" to entities in which the referring physician has an ownership
or compensation interest. Violations of these laws and regulations may result in
civil and criminal penalties, including substantial fines and imprisonment. In a
number of states, the scope of fraud and abuse or physician anti-referral laws
and regulations, or both, have been extended to include the provision of
services or products to all patients, regardless of the source of payment,
although there is variation from state to state as to the exact provisions of
such laws or regulations. In other states, and on a national level, several
health care reform initiatives have been proposed which would have a similar
impact. The Company believes that its operations and its marketing, sales and
distribution practices currently comply in all respects with all current fraud
and abuse and physician anti-referral laws and regulations, to the extent they
are applicable. Although the Company does not believe that it will need to
undertake any significant expense or modification to its operations or its
marketing, sales and distribution practices to comply with federal and state
fraud and abuse and physician anti-referral regulations currently in effect or
proposed, financial arrangements between manufacturers of medical devices and
other health care providers may be subject to increasing regulation in the
future. Compliance with such regulation could adversely affect the Company's
marketing, sales and distribution practices, and may affect the Company in other
respects not presently foreseeable, but which could have an adverse impact on
the Company's business, financial condition and results of operations.
THIRD PARTY REIMBURSEMENT AND COST CONTAINMENT
The Company's products are purchased primarily by hospitals and ambulatory
surgery centers, which then bill various third party payers for the services
provided to the patients. These payers, which include Medicare, Medicaid,
private insurance companies, managed care and worker's compensation
organizations, reimburse part or all of the costs and fees associated with the
procedures performed with these devices.
Medicare and Medicaid reimbursement for hospitals is based on a fixed amount for
admitting a patient with a specific diagnosis. Because of this fixed
reimbursement method, hospitals have incentives to use less costly methods in
treating Medicare and Medicaid patients, and will frequently make capital
expenditures to take advantage of less costly treatment technologies.
Frequently, reimbursement is reduced to reflect the availability of a new
procedure or technique, and as a result hospitals are generally willing to
implement new cost saving technologies before these downward adjustments take
effect. Likewise, because the rate of reimbursement for certain physicians who
perform certain procedures has been and may in the future be reduced in the
event of further changes in the resource-based relative value scale method of
payment calculation, physicians may seek greater cost efficiency in treatment to
minimize any negative impact of reduced reimbursement. Any amendments to
existing reimbursement rules and regulations which restrict or terminate the
reimbursement eligibility (or the extent or amount of coverage) of medical
procedures using the Company's products or the eligibility (or the extent or
amount of coverage) of the Company's products could have an adverse impact on
the Company's business, financial condition and results of operations. Third
party payers are increasingly challenging the prices charged for medical
products and services and may deny reimbursement if they determine that a device
was not used in accordance with cost-effective treatment methods as determined
by the payer, was experimental or was used for an unapproved application.
-13-
<PAGE>
The Company's stimulation systems, while cost-effective compared to repeat back
surgeries, have encountered some resistance to third party reimbursement.
Although Medicare, Medicaid and many private insurers reimburse for the
stimulation systems and procedure, especially after repeat back surgeries have
failed to relieve chronic pain, some managed care and private payers
occasionally refuse to reimburse for stimulation systems or restrict
reimbursement. There can be no assurance that in the future, third party payers
will continue to reimburse for the Company's products, or that their
reimbursement levels will not adversely affect the profitability of the
Company's products. In addition, health care costs have risen significantly over
the past decade, and there have been and will continue to be proposals by
legislators and regulators to curb these costs. Legislative action limiting
reimbursement for certain procedures could have a material adverse effect on the
Company's business, financial condition and results of operations.
In response to the focus of national attention on rising health care costs, a
number of changes to reduce costs have been proposed or have begun to emerge.
There have been, and may continue to be, proposals by legislators and regulators
and third party payers to curb these costs. There has also been a significant
increase in the number of Americans enrolling in some form of managed care plan.
It has become a typical practice for hospitals to affiliate themselves with as
many managed care plans as possible. Higher managed care penetration typically
drives down the prices of health care procedures, which in turn places pressure
on medical supply prices. This causes hospitals to implement tighter vendor
selection and certification processes, by reducing the number of vendors used,
purchasing more products from fewer vendors and trading discounts on price for
guaranteed higher volumes to vendors. Hospitals have also sought to control and
reduce costs over the last decade by joining group purchasing organizations or
purchasing alliances. The Company cannot predict what continuing or future
impact existing or proposed legislation, regulation or such third party payer
measures may have on its future business, financial condition or results of
operations.
Changes in reimbursement policies and practices of third party payers could have
a substantial and material impact on sales of the Company's products. The
development or increased use of more cost-effective treatments could cause such
payers to decrease or deny reimbursement to favor these other treatments.
EMPLOYEES
As of March 18, 1999, the Company employed 103 full-time employees, 25 in
research and development, 21 in sales and marketing, 45 in manufacturing and
related operations, and the remainder in executive and administrative positions.
None of the Company's employees is represented by a labor union and the Company
considers its employee relations to be good.
ADVISORY BOARD
The Company has established the Advanced Neuromodulation Systems Advisory Board,
which is comprised of individuals with substantial expertise in neuromodulation
and pain management. Members of the Company's management and scientific and
technical staff consult closely with members of the Advisory Board to identify
specific areas where techniques are changing and where existing products do not
adequately fulfill the needs of the pain physician. The Advisory Board helps
-14-
<PAGE>
management evaluate new product ideas and concepts and once a product is
approved for development, its subsequent design and development. The Advisory
Board may also participate in the clinical testing of products developed.
Certain members of the Advisory Board are employed by academic institutions and
may have commitments to or consulting or advisory agreements with other entities
that may limit their availability to the Company. The members of the Advisory
Board may also serve as consultants to other medical device companies. No
members of the Advisory Board are expected to devote more than a small portion
of their time to the Company.
ITEM 2. PROPERTIES
At December 31, 1998, the Company owned and occupied a manufacturing facility
and executive office in Allen, Texas (located north of Dallas). The facility
covers approximately 107,000 square feet and was constructed during 1993 on 19.2
acres of land that the Company acquired in 1985. The Company borrowed $4.4
million from MetLife Capital Corporation to construct and outfit the facility.
The land, facility and certain equipment of the Company secure the note. See
Note 5 - "Notes Payable" of the Notes to Consolidated Financial Statements.
In connection with the January 1998 sale of the CVS Operations, the Company
granted Atrion a nine-month option to acquire the Company's principal office and
manufacturing facility in Allen, Texas for $6.5 million. Atrion exercised the
option to acquire the facility during October 1998 and the transaction closed on
February 1, 1999. The Company repaid the outstanding mortgage debt on the
facility at closing and received net proceeds of $2.7 million after paying
expenses related to the transaction. No material gain or loss was realized on
the sale of the facility. The Company is leasing space, furniture and equipment
from Atrion until May 1999 at the monthly rate of $48,125 and is paying Atrion
fifty percent of certain operating expenses including utilities, janitorial
services, landscaping services, insurance and property taxes. At that time the
Company will move its operations to a 40,000 square foot leased facility in
Plano, Texas, a northeast suburb of Dallas. The Company entered a sixty-three
month lease agreement in February 1999 for the aforementioned space. Under terms
of the lease agreement, the Company receives three months of free rent and the
monthly rental rate for the remaining term of the lease is $48,308. The monthly
rental rate includes certain operating expenses such as property taxes on the
facility, insurance, landscape and maintenance and janitorial services. The
Company also has a first right of refusal to acquire the facility. The Company
expects to spend approximately $2.3 million for furniture and equipment,
leasehold improvements, computer systems, telephone systems and manufacturing
clean room for the leased facility. The expense for moving and transitioning
into the new facility is expected to be immaterial.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to product liability claims related to ANS' stimulation
systems. Product liability insurers have assumed responsibility for defending
the Company against these claims, subject to reservation of rights in certain
cases. While historically product liability claims for ANS stimulation systems
have not resulted in significant monetary liability for the Company beyond its
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<PAGE>
insurance coverage, there can be no assurances that the Company will not incur
significant monetary liability to the claimants if such insurance is unavailable
or inadequate for any reason, or that the Company's current stimulation business
and future ANS neuromodulation products will not be adversely affected by these
product liability claims. While the Company seeks to maintain appropriate levels
of product liability insurance with coverage that the Company believes is
comparable to that maintained by companies similar in size and serving similar
markets, there can be no assurance that the Company will avoid significant
future product liability claims relating to its stimulation systems.
Except for such product liability claims and other ordinary routine litigation
incidental or immaterial to its business, the Company is not currently a party
to any other pending legal proceeding. The Company maintains general liability
insurance against risks arising out of the normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is currently quoted on the NASDAQ Stock Market under
the symbol "ANSI." Until June 30, 1998, the common stock was quoted on the
NASDAQ Stock Market under the symbol "QMED". The Company's symbol was changed on
July 1, 1998 in connection with the name change of the Company from Quest
Medical, Inc. to Advanced Neuromodulation Systems, Inc. On March 18, 1999, there
were approximately 704 holders of record of the Company's common stock. The
following table sets forth the quarterly high and low closing sales prices for
the Company's common stock. These prices do not include adjustments for retail
mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
1997: High Low
----- ----------- -----------
<S> <C> <C>
First Quarter $ 8.13 $ 5.94
Second Quarter $ 9.22 $ 5.75
Third Quarter $ 10.50 $ 8.25
Fourth Quarter $ 10.00 $ 6.38
</TABLE>
<TABLE>
<CAPTION>
1998: High Low
----- ----------- -----------
<S> <C> <C>
First Quarter $ 8.75 $ 6.50
Second Quarter $ 10.00 $ 8.06
Third Quarter $ 10.00 $ 5.75
Fourth Quarter $ 6.75 $ 5.00
</TABLE>
<TABLE>
<CAPTION>
1999: High Low
----- ----------- -----------
<S> <C> <C>
First Quarter $ 8.19 $ 6.19
(through March 18, 1999)
</TABLE>
-16-
<PAGE>
To date, the Company has not declared or paid any cash dividends on its common
stock and the Board of Directors does not anticipate paying cash dividends on
the Company's common stock in the foreseeable future.
During January 1998, the Board of Directors approved a stock repurchase program
of up to 500,000 shares of the Company's common stock and during August 1998
approved the repurchase of up to an additional 1,000,000 shares. The Company's
purchases may be effected through open market purchases, block transactions,
privately negotiated purchases or otherwise. Purchases of the Company's common
stock will be effected at prices and terms to be determined in light of then
current circumstances, are completely discretionary and may be temporarily or
permanently suspended at any time without notice. Through December 31, 1998, the
Company had repurchased 1,258,625 shares of its common stock at an aggregate
cost of $9,411,055 (including commissions), or an average of $7.48 per share.
During the year ended December 31, 1998, the Company issued 184,874 shares from
its treasury upon the exercise of stock options. At December 31, 1998, 1,073,751
shares remained in the treasury.
-17-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
-----------------------------------------------------
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996 1995(1) 1994
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Statement of Operations Data (2):
<S> <C> <C> <C> <C> <C>
Net revenue-product sales ..... $ 17,006 $ 14,718 $ 11,403 $ 10,434 $ --
Total net revenue ............. 20,106 14,718 11,403 10,434 --
Gross profit-product sales .... 12,021 9,878 8,088 7,682 --
Research and development
expense ..................... 2,801 977 1,316 808 --
Purchased research and
development ................. -- -- -- 10,500 --
Marketing, general and
administrative and
amortization expenses ....... 8,486 6,815 6,257 3,796 --
Earnings (loss) from
operations .................. 3,833 2,086 515 (7,421) --
Net earnings (loss) from
continuing operations ....... 2,586 818 115 (8,906) --
Loss from discontinued
operations .................. (212) (93) (527) (1,199) (1,719)
Gain on the sale of assets of
discontinued operations ..... 4,585 -- -- -- --
Net earnings (loss) from
discontinued operations ..... 4,373 (93) (527) (1,199) (1,719)
Net earnings (loss) ........... $ 6,959 $ 724 $ (412) $(10,374) $(1,719)
Diluted earnings (loss) per share:
Continuing operations ........ $ .30 $ .09 $ .01 $ (1.42) $ --
Discontinued operations ...... $ .51 $ (.01) $ (.06) $ (.19) $ (.33)
Extraordinary item ........... $ -- $ -- $ -- $ (.05) $ --
Net earnings (loss) .......... $ .81 $ .08 $ (.05) $ (1.66) $ (.33)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(in thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
marketable securities ....... $ 12,263 $ 2,204 $ 2,206 $ 3,914 $ 5,262
Working capital .............. 16,426 14,128 11,088 12,183 7,411
Total assets ................. 45,485 48,982 47,188 44,496 24,235
Short-term notes payable and
current maturities of
long-term notes payable ..... 3,633 8,257 2,084 1,616 2,759
Notes payable, excluding
current maturities .......... -- 3,635 11,912 8,558 4,124
Stockholders' equity ......... $ 33,304 $ 33,906 $ 30,993 $ 30,870 $ 15,931
</TABLE>
- -----------------------
(1) Includes results of ANS from March 31, 1995. The net loss for 1995 reflects
a charge of $10,500, or $(1.68), for purchased in-process research and
development incurred in connection with the ANS acquisition and an
extraordinary charge of $269, or $(.05) per share, for the write-off of
capitalized debt issuance costs due to early repayment of bank debt with the
proceeds from a public offering completed in November 1995.
(2) On January 30, 1998, the Company sold its cardiovascular and intravenous
fluid delivery product lines (CVS Operations). The CVS Operations have been
accounted for as discontinued operations. See Note 11 of the Notes to
Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Consolidated Financial
Statements of the Company and the related Notes.
OVERVIEW
On January 30, 1998, we sold the assets of our CVS Operations, including our
MPS(R) myocardial protection system product line, to Atrion Corporation
("Atrion"). See Note 11 - "Sale of CVS Operations/ Discontinued Operations" of
the Notes to Consolidated Financial Statements. We received approximately $23
million in cash from the sale. We also granted Atrion a nine-month option to
acquire our principal office and manufacturing facility in Allen, Texas for $6.5
million. Atrion exercised the option to acquire the facility during October 1998
and the transaction closed on February 1, 1999. We repaid the outstanding
mortgage debt on the facility at closing and received net proceeds of $2.7
million after paying expenses related to the transaction. No material gain or
loss was realized on the sale of the facility. We are leasing space, furniture
and equipment from Atrion until May 1999 at the monthly rate of $48,125 and are
paying Atrion fifty percent of certain operating expenses. At that time we
will move our operations to a 40,000 square foot leased facility in Plano,
Texas, a northeast suburb of Dallas. The expense of moving and transitioning
into the new facility is expected to be immaterial.
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<PAGE>
Assets of the CVS Operations sold to Atrion primarily consisted of accounts
receivable, inventories, furniture and fixtures, manufacturing tooling and
equipment, and intangible assets including patents, trademarks and purchased
technology. The intangible assets also included the rights to the name Quest
Medical, Inc., our former name. We reported a pretax gain on the transaction of
$7.1 million during the year ended December 31, 1998. This pretax gain is net of
$1,005,000 compensation expense recorded as a result of changes made to the
stock options held by employees of the CVS Operations. See Note 7 -
"Stockholders' Equity" of the Notes to Consolidated Financial Statements. The
pretax gain is also net of an expense of $969,000 recorded in connection with
sale of the facility to Atrion which relates to abated property taxes. See Note
11- "Sale of CVS Operations/Discontinued Operations" of the Notes to
Consolidated Financial Statements. We utilized $9 million of the proceeds from
the sale to retire debt and pay expenses related to the transaction. We are
utilizing the remaining proceeds for working capital for our expanding ANS
business and for the repurchase of issued and outstanding shares. During 1998,
the Board of Directors approved stock repurchase programs of up to 1,500,000
shares of the Company's common stock at prices and terms to be determined in
light of then current circumstances. During the year ended December 31, 1998, we
repurchased 1,258,625 shares of our common stock at an aggregate cost of
$9,411,055 (including commissions).
The CVS Operations have been accounted for as discontinued operations in the
Consolidated Financial Statements for the years ended December 31, 1998, 1997,
and 1996.
At our Annual Meeting of Shareholders in May 1998, the shareholders approved a
proposal to change the name of the Company from Quest Medical, Inc. to Advanced
Neuromodulation Systems, Inc. The name change became effective during June 1998.
The Company's trading symbol on the NASDAQ Stock Market was changed from "QMED"
to "ANSI" on July 1, 1998.
In June 1998, we completed an agreement with Sofamor Danek Group, Inc. ("Sofamor
Danek") under which we would develop and manufacture for Sofamor Danek, products
and systems for use in Deep Brain Stimulation ("DBS"). See Note 12- "Product
Development Agreement" of the Notes to Consolidated Financial Statements. We
received a payment of $4 million upon execution of the agreement that is being
recognized into income as revenue based upon the estimated completion of the
development project. During the year ended December 31, 1998, we recognized $3.1
million into income as revenue. In January 1999, the agreement with Sofamor
Danek was terminated in conjunction with the merger of Sofamor Danek and
Medtronic, Inc. In connection with the termination, we received an additional
payment of $8 million from Sofamor Danek, which will be recognized into income
as revenue during 1999.
The former agreement with Sofamor Danek fits with our strategy to strengthen and
broaden our neuromodulation technology platforms and to find strategic partners
to leverage ANS' core technology into other significant market segments beyond
our focus on the pain management market. We are evaluating potential strategic
partners for DBS to replace the terminated relationship with Sofamor Danek,
although there is no assurance that we will be successful in negotiating and
consummating a new DBS agreement.
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<PAGE>
In August 1998, we completed an agreement with Tricumed Medizintechnik GmbH, a
German corporation, granting us exclusive rights to distribute Tricumed's CE
mark approved constant rate intrathecal drug pump and a future programmable rate
intrathecal drug pump which Tricumed is currently developing. Our distribution
rights in international markets include the United States, Canada, the United
Kingdom, France, Spain, Switzerland, South America, Australia and other world
markets. We began distribution of the constant rate intrathecal pump
internationally during January 1999. If Tricumed is successful in developing the
programmable rate intrathecal drug pump and obtaining the CE mark, we would also
begin marketing such pump internationally. We would also seek approval from the
FDA to initiate clinical studies in the United States, a necessary process to
receive a PMA approval to begin marketing in the United States.
In August 1998, we completed an agreement to license exclusive worldwide rights
to filed method patents for sacral nerve root stimulation aimed at relieving the
effects of chronic pelvic pain including interstitial cystitis ("I.C."), an
extremely painful bladder disease that affects an estimated 450,000 people
worldwide. We made a licensing payment of $250,000 upon executing the agreement
and will pay up to an additional $750,000 in licensing payments upon certain
regulatory approvals in 1999 and 2000. We have also agreed to pay a royalty on
product sales used in sacral nerve root stimulation. We believe our advanced
radio-frequency stimulation systems can be effective in treating pelvic pain
indications including I.C. In February 1999, we received conditional approval
from the FDA to initiate a pilot clinical study to evaluate the use of our
advanced radio-frequency stimulation systems to treat I.C. If the pilot study is
successful, we would seek approval from the FDA to initiate further clinical
studies in the process to receive a PMA approval to begin marketing in the
United States.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------
We reported net earnings of $6.96 million or $.81 per diluted share in 1998
compared to $724,000 or $.08 per diluted share in 1997. The 1998 results
included net earnings of $4.4 million from the discontinued CVS Operations or
$.51 per diluted share primarily due to an after-tax gain of $4.6 million on the
sale of the discontinued operations while the 1997 results included a loss of
$93,000 or $(.01) per diluted share from the discontinued operations. Net
earnings from continuing operations increased to $2.6 million or $.30 per
diluted share in 1998 compared to $818,000 or $.09 per diluted share in 1997.
Total net revenue from continuing ANS operations of $20.1 million for the year
ended December 31, 1998, was $5.4 million, or 37 percent, above the comparable
1997 level of $14.7 million. The 1998 period includes $3.1 million of net
revenue associated with our former development agreement for DBS products with
Sofamor Danek. Net revenue from ANS product sales increased 16 percent to $17.0
million during 1998 compared to $14.7 million in 1997. This increase in net
revenue from product sales was the result of higher unit sales volume of ANS'
radio-frequency stimulation systems used to treat complex pain patterns. Of the
$2.3 million increase in 1998, $1.7 million was the result of higher sales in
the United States and the remainder from higher sales internationally. We expect
to launch our enhanced radio-frequency stimulation systems in the United States
market during the second quarter of 1999. Our strategy is to expand our product
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offerings to all segments of the neuromodulation market and therefore we have
increased our investment in research and development. These development projects
include an implantable pulse generator for spinal cord stimulation, an
implantable pulse generator for Deep Brain Stimulation and a low-cost constant
rate intrathecal drug pump. Our partner Tricumed is also developing a
programmable rate intrathecal drug pump.
Gross profit from product sales increased to $12.0 million in 1998 from $9.9
million in 1997 due to the increase in net revenue from product sales discussed
above and an increase in gross profit margin. Gross profit margin from product
sales increased to 70.7 percent in 1998 compared to 67.1 percent in 1997 due,
for the most part, to a $479,000 expense during 1997 for the write-off of ANS
inventory of previous designs. Excluding such write-off in 1997, gross profit
margin remained approximately the same, 70.4 percent in 1997 compared to 70.7
percent in the 1998 period.
Total operating expenses (the aggregate of research and development, marketing,
amortization of intangibles and administrative expenses) increased to $11.3
million in 1998 compared to $7.8 million in 1997 and as a percentage of total
net revenue increased to 56 percent in 1998 from 53 percent in 1997.
Research and development expense increased to $2.8 million in 1998, or 13.9
percent of 1998 total net revenue, from $977,000 during 1997, or 6.6 percent of
1997 total net revenue, reflecting our stepped up commitment to develop products
that will expand our presence into all market segments of the neuromodulation
market. This increase during 1998 compared to 1997 was the result of higher
salary and benefit expense from staffing additions, increased consulting
expense, and higher test material expense. These expenditures during 1998 were
directed toward development of our enhanced radio-frequency stimulation systems
which we expect to introduce to the U.S. market in the second quarter of 1999, a
low-cost constant rate intrathecal drug pump, an implantable pulse generator
stimulation system for spinal cord stimulation and an implantable pulse
generator system for Deep Brain Stimulation. We expect to complete the
development of our implantable pulse generator stimulation system for spinal
cord stimulation during the second quarter of 1999 and expect to seek FDA
approval in the third quarter of 1999 to initiate clinical trials in the United
States. We will also seek the CE mark (European) approval for the implantable
pulse generator stimulation system for spinal cord stimulation during the second
half of 1999 with market introduction expected internationally in the fourth
quarter of 1999. We also expect to complete development of our low-cost constant
rate intrathecal drug pump during the third quarter of 1999 and expect to seek
approval from the FDA to initiate clinical trials at that time. We are currently
evaluating strategic partners to replace our former relationship with Sofamor
Danek for Deep Brain Stimulation.
Marketing expense, as a percentage of total net revenue, decreased to 23.3
percent in 1998 from 27.0 percent in 1997, while the dollar amount increased
from $4.0 million during 1997 to $4.7 million in 1998. This dollar increase
during 1998 was attributable to higher commissions from increased product sales,
higher training expense for new users of ANS products and higher convention and
promotional expense.
General and administrative expense increased from $1.8 million during 1997 to
$2.6 million in 1998 and as a percentage of total net revenue, increased to 13.1
percent in 1998 from 12.0 percent during 1997. This increase in expense during
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<PAGE>
1998 was principally the result of increased legal expense related to the
various development agreements discussed above, increased recruiting and
relocation expense and increased costs for existing employee benefit plans.
Amortization of ANS intangibles increased from $1.1 million in 1997 to $1.2
million during 1998, mostly due to an expense associated with a non-compete
agreement with the former president and chief executive officer.
Other income increased to $499,000 in 1998 compared to an expense of $536,000 in
1997 primarily as a result of two factors. First, interest expense decreased by
$294,000 during 1998 compared to 1997 as a result of the repayment of short-term
notes payable in January 1998 from the proceeds of the sale of the CVS
Operations. Second, interest income increased by $720,000 in 1998 compared to
1997 due to higher funds available for investment due to the proceeds from the
January 1998 sale of the CVS Operations.
Income tax expense from continuing operations increased to $1.75 million in 1998
from $733,000 in 1997 due to higher earnings from ANS operations. This
represents effective tax rates of 40.3 percent in 1998 and 47.3 percent in 1997.
Our expense for amortization of costs in excess of net assets acquired
(goodwill) is not deductible for tax purposes, thus explaining the higher
effective tax rate during both 1998 and 1997 compared to the U.S. statutory rate
for corporations of 34 percent.
Comparison of the Years Ended December 31, 1997 and 1996
- --------------------------------------------------------
We reported net earnings of $724,000 or $.08 per diluted share in 1997 compared
to a net loss of $412,000 or $(.05) per diluted share in 1996. The 1997 results
included a net loss of $93,000 from the discontinued CVS Operations or $(.01)
per diluted share while the 1996 results included a net loss of $527,000 or
$(.06) per diluted share from the discontinued operations. Net earnings from
continuing operations increased to $818,000 or $.09 per diluted share in 1997
compared to $115,000 or $.01 per diluted share in 1996.
Total net revenue from continuing ANS operations of $14.7 million for the year
ended December 31, 1997, was $3.3 million, or 29 percent, above the level for
the comparable 1996 period of $11.4 million. This increase during 1997 was the
result of higher unit sales volume, principally in the United States. During
1996 and into the first quarter of 1997, we dedicated significant engineering
and marketing resources to build the infrastructure at ANS and improve our
current products to transform ANS into an industry leader and compete
effectively in the stimulation market. We believe these measures account for the
increase in net revenue during the 1997 period compared to the same period
during 1996.
Gross profit from product sales increased during 1997 to $9.9 million compared
to $8.1 million in 1996. As a percentage of net revenue, however, gross profit
decreased to 67.1 percent in 1997 compared to 70.9 percent during 1996. This
decrease in gross profit margin during 1997 was due, for the most part, to a
$479,000 expense for the write-off of ANS inventory of previous designs. As
mentioned above, during 1996 we dedicated a significant amount of time and
effort to improve the design and performance of our products. Due to the
acceptance and superior performance of the current design of ANS products, we
decided that inventories of previous designs should be written off and recorded
such expense during the second quarter of 1997.
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<PAGE>
Total operating expenses of $7.8 million during 1997 increased slightly from the
1996 level of $7.6 million, although as a percentage of total net revenue, such
expenses decreased to 52.9 percent during 1997 from 66.4 percent in 1996.
Research and development expense decreased to $977,000 in 1997, or 6.6 percent
of 1997 total net revenue, from $1.3 million during 1996, or 11.5 percent of
1996 total net revenue. This decrease during 1997 compared to 1996 was the
result of lower salary and benefit expense from personnel reductions, lower
consulting expense, and lower regulatory expense.
Marketing expense, as a percentage of total net revenue, decreased to 27.0
percent in 1997 from 29.3 percent in 1996, while the dollar amount increased
from $3.3 million during 1996 to $4.0 million in 1997. This dollar increase
during 1997 was attributable to additional expense related to higher
commissions, clinical study and training expense for new users of ANS products.
General and administrative expense decreased from $2.1 million during 1996 to
$1.8 million in 1997 and as a percentage of total net revenue, decreased to 12.0
percent in 1997 from 18.3 percent during 1996. This decrease in expense during
1997 was principally the result of a charge during 1996 of $198,000 to write off
an account receivable from a former ANS distributor who filed bankruptcy.
Amortization of ANS intangibles increased from $826,000 in 1996 to $1.1 million
during 1997, mostly due to patents acquired during February 1997 from the former
owner of the stimulation business.
Other expense increased to $536,000 in 1997 compared to $81,000 during 1996 as a
result of three factors. First, interest expense increased by $207,000 during
1997 compared to 1996 as a result of higher levels of borrowing and higher
overall interest rates on borrowed money. Second, interest income declined by
$85,000 during 1997 compared to 1996 as a result of lower funds available for
investment combined with overall lower rates of return. Finally, during 1996 we
realized gains of $137,000 on the sale of marketable securities compared to a
loss of $26,000 during 1997, a reduction of $163,000.
Income tax expense increased to $733,000 during 1997 from $320,000 in 1996 due
to higher earnings from operations. This represents effective tax rates of 47.3
percent in 1997 and 73.6 percent in 1996. Our expense for amortization of costs
in excess of net assets acquired (goodwill) is not deductible for tax purposes,
thus explaining the higher effective tax rate during both 1997 and 1996 compared
to the U.S. statutory rate for corporations of 34 percent.
LIQUIDITY AND CAPITAL RESOURCES
In the sale of assets of the CVS Operations to Atrion during January 1998, we
received cash proceeds of approximately $23 million, after post-closing
adjustments as defined in the purchase agreement, which significantly enhanced
our financial position. We utilized approximately $9 million of the proceeds to
retire all our short-term notes payable and related expenses of the transaction.
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<PAGE>
At December 31, 1998 our working capital increased from $14.1 million at
year-end 1997 to $16.4 million at year-end 1998. The ratio of current assets to
current liabilities was 2.7:1 at December 31, 1998, compared to 2.5:1 at
December 31, 1997. Cash, cash equivalents and marketable securities totaled
$12.3 million at December 31, 1998 compared to $2.2 million at December 31,
1997.
During January 1998, the Board of Directors approved a stock repurchase program
of up to 500,000 shares of the Company's common stock and during August 1998
approved the repurchase of up to an additional 1,000,000 shares. During the year
ended December 31, 1998, we repurchased 1,258,625 shares of our common stock at
an aggregate cost of $9,411,055.
In January 1999, we received the $8 million payment in connection with the
termination of the DBS agreement with Sofamor Danek.
During February 1999, we completed the sale of our corporate facility to Atrion
for $6.5 million. After repayment of the mortgage debt and expenses related to
the transaction, we realized net proceeds of $2.7 million.
We expect capital expenditures during 1999 of approximately $3.5 million. Of
such expenditures, approximately $2.3 million is budgeted for new furniture and
equipment, computer systems, telephone system, manufacturing clean-room and
leasehold improvements for our relocation to our new leased facility in May
1999. The remaining expenditures primarily relate to manufacturing tooling and
equipment for the new products we are developing and sacral nerve root patent
licensing fees.
We believe our current cash, cash equivalents and marketable securities, the
termination payment from Sofamor Danek in January 1999, net proceeds from the
February 1999 sale of our corporate facility and cash generated from operations
will be sufficient to fund all of our operating needs, including capital
expenditures and share repurchases for the foreseeable future.
CASH FLOWS
Net cash provided by continuing operations increased to $6.9 million in 1998
compared to $2.1 million in 1997 and a net use of cash during 1995 of $636,000.
This improvement during 1998 compared to 1997 and 1996 reflects the improved
operating results of ANS, deferred revenue associated with the former agreement
with Sofamor Danek and income taxes payable not due until March 1999. Net cash
provided by discontinued operations decreased to $59,000 in 1998 compared to
$391,000 in 1997 and a net use of cash during 1996 of $145,000. The 1998 period
included only one month of results until the sale in January 1998.
Net cash provided by investing activities was $20.8 million in 1998 compared to
net uses of cash in 1997 and 1996 of $5.7 million and $957,000 respectively. The
1998 period reflects net proceeds from the sale of discontinued operations of
$21.8 million. We utilized $1.4 million in 1998 for capital expenditures
primarily for manufacturing tooling and equipment for the new products we are
developing and $250,000 to license method patents for sacral nerve root
stimulation. Primary uses of cash during 1997 were capital expenditures of $1.3
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million and payments to the former owner of the neurostimulation business
relating to patents and settlements of $4.5 million. The primary use of cash
during 1996 was for capital expenditures of $1.9 million.
Net cash used in financing activities was $16.9 million in 1998 compared to net
cash provided by financing activities of $3.3 million in 1997 and $305,000 in
1996. During 1998, we received cash of $818,000 from the exercise of stock
options while $9.4 million was used for share repurchases and $8.3 million to
reduce debt. During 1997, we received cash of $922,000 from the exercise of
stock options and $3.5 million from additional borrowings under short-term
notes. We used $1.2 million during 1997 to repay debt. During 1996, the primary
source of cash from financing activities was $559,000 from the exercise of stock
options while we used cash to repay $151,000 of mortgage debt and $103,000
utilized in the redemption of the Company's shareholder rights plan.
YEAR 2000
The Year 2000 issue results from computer programs being written using two
digits rather than four to define the applicable year. Computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, manufacture products or engage in similar normal business
activities.
We began our assessment of our computer software, hardware, manufacturing
equipment and other non-critical systems in early 1998 and are substantially
complete. The assessment determined that a significant portion of our computer
hardware and software and manufacturing equipment were Year 2000 compliant.
Certain personal computers, non-critical internal software programs and
manufacturing equipment will need modifications or replacement and we expect the
costs associated with the replacement and modifications to approximate
$125,000. We estimate the costs incurred in the assessment of our systems to be
under $100,000, which have been expensed in our current operations.
When we sold our facility to Atrion on February 1, 1999, Atrion also acquired
our mainframe computer and software applications. In moving to a new leased
facility in May 1999, we will purchase new computer hardware and software that
is similar to our current systems. We will also purchase a new telephone system.
We have received assurances from the providers of the new systems that they are
Year 2000 compliant. We expect to spend approximately $500,000 for these new
systems (in addition to the $125,000 for modifications and replacements
discussed above), which is included in the $2.3 million we have budgeted for the
relocation. We will fund these costs from our current cash reserves and expect
most of the costs will be capitalized.
When we relocate to our new facility and install our new computer hardware and
software systems, we will test the systems to ensure compliance
with Year 2000. We expect to complete the testing by the end of the third
quarter of 1999. We also plan to complete the modifications necessary to
non-critical software applications and manufacturing equipment by the end of the
third quarter of 1999.
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<PAGE>
We have contacted the third-party vendors and suppliers of products and
services that we consider critical to our operations to ascertain their level of
Year 2000 readiness. We have no means of ensuring that all vendors and suppliers
will be Year 2000 compliant. The inability of these parties to complete their
Year 2000 resolution process could materially impact us. As a result, we will
consider new business relationships with alternate providers of products and
services as necessary and to the extent alternatives are available.
Our plan to complete the Year 2000 modifications is based upon management's best
estimates and assumptions. We cannot guarantee, however, that we will achieve
these estimates; actual results could differ materially from those plans.
Our goal is to ensure all critical systems and processes under our control
remain operational. However, because certain systems and processes may be linked
with systems outside our control, we cannot assure you that all implementations
will be successful. As a result, we are developing a contingency plan to respond
to any failures that may occur. We do not expect the costs of our Year 2000
project to have a material adverse effect on our financial position or results
of operations. However, any unanticipated failures by critical third party
suppliers and vendors as well as our own failure to execute our Year 2000 plan,
could have a material adverse impact on the Company.
OUTLOOK AND UNCERTAINTIES
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: The matters discussed in this Annual Report on
Form 10-K contain statements that constitute forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
The words "expect," "estimate," "anticipate," "predict," "believe," "plan,"
"will," "should," "intend" and similar expressions and variations thereof are
intended to identify forward-looking statements. Such statements appear in a
number of places in this Annual Report on Form 10-K and include statements
regarding our intent, belief or current expectations with respect to, among
other things: (i) trends affecting our financial condition or results of
operations; (ii) our financing plans; and (iii) our business growth strategies.
We caution our readers that any forward-looking statements are not guarantees of
future performance and involve risks and uncertainties. Actual results may
differ materially from those projected in the forward-looking statements as a
result of various factors. These risks and uncertainties include the following:
PRODUCT DEVELOPMENT AND MARKET ACCEPTANCE. Our growth depends in part on our
ability to develop and gain market acceptance of new products, including next
generation ANS products. We cannot assure you that we will continue to develop
successful products, that delays in product introduction will not be
experienced, or that once such products are introduced, the market will accept
them.
YEAR 2000 COMPLIANCE. We cannot assure you that our Year 2000 readiness efforts
will prevent a material adverse impact on our results of operations, financial
condition and cash flows since our compliance is dependent upon third parties
also being Year 2000 ready in a timely manner.
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<PAGE>
GOVERNMENT REGULATION. Our business is subject to extensive government
regulation, principally by the FDA. The regulatory process, especially as it
relates to product approvals, can be lengthy, expensive and uncertain. See Item
1-"Business-Government Regulation".
SINGLE-SOURCED COMPONENTS. We rely on a single supplier for the computer chip
used in two components of our stimulation systems. The supplier of this computer
chip has indicated its desire to cease manufacturing and supplying the computer
chip in the future, but to date, has not determined when this will occur. The
supplier has agreed to notify us when a date has been determined and allow us to
place a final one-time purchase order for the computer chip. In the interim, we
are maintaining a higher than normal inventory of the computer chip. In
addition, we are developing a custom computer chip to replace the existing
computer chip and expect such chip to be available during the first half of
2000. A sudden disruption in supply from the computer chip supplier or another
single-source supplier could adversely affect our ability to deliver finished
products on time.
COMPETITION AND TECHNOLOGICAL CHANGE. The medical device market is highly
competitive. We compete with many larger companies that have access to greater
capital, research and development, marketing, distribution and other resources
than we do. In addition, our market is characterized by extensive research
efforts and rapid product development and technological change, which could
render our products obsolete or noncompetitive.
INTELLECTUAL PROPERTY RIGHTS. We rely in part on patents, trade secrets and
proprietary technology to remain competitive. It may be necessary to defend
these rights or to defend against claims that we are infringing the rights of
others. Intellectual property litigation and controversies are disruptive and
expensive.
COST PRESSURES ON MEDICAL TECHNOLOGY. The overall escalating cost of medical
products and healthcare results in significant cost pressure. Third party payers
are under intense pressure to challenge the prices charged for medical products
and services. We rely heavily on Medicare and Medicaid reimbursement. Any
amendments to existing reimbursement rules and regulations which restrict or
terminate the reimbursement eligibility (or the extent or amount of coverage) of
medical procedures using our products or the eligibility (or the extent or
amount of coverage) of our products could adversely impact on our business,
financial condition and results of operations.
POTENTIAL PRODUCT LIABILITY. The testing, manufacturing, marketing and sale of
medical devices entail substantial risks of liability claims or product recalls.
RELIANCE ON CUSTOMER/DISTRIBUTOR. During 1998, we had one major customer that
accounted for 10 percent or more of our net revenue. Sun Medical, Inc., a
specialty distributor of our products, accounted for $3.4 million, or 20
percent, of our net revenue from product sales for the year ended December 31,
1998. While we believe our relations with Sun Medical are good, the loss of this
or any other major customer could have a material adverse effect on the
Company's business, financial condition and results of operations.
OTHER UNCERTAINTIES. We discuss other operating, financial or legal risks or
uncertainties in this Form 10-K in specific contexts and in the Company's other
periodic SEC filings. The Company is, of course, also subject to general
economic risks, the risk of interruption in the source of supply, dependence on
key personnel and other risks and uncertainties.
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CURRENCY FLUCTUATIONS
Substantially all of our international sales are denominated in U.S. dollars.
Fluctuations in currency exchange rates in other countries could reduce the
demand for our products by increasing the price of our products in the currency
of the countries in which the products are sold, although we do not believe
currency fluctuations have had a material effect on the Company's results of
operations to date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use derivative financial instruments to manage the impact of interest
rate changes on our investments or debt instruments.
We invest our cash reserves in high quality short-term liquid money market
instruments with major financial institutions. At December 31, 1998, we had
$11,612,347 invested in money market funds. The rate of interest earned on these
investments will vary with overall market rates. A hypothetical 100-basis point
change in the interest rate earned on these investments would not have a
material effect on our income or cash flows.
We also have certain investments in available-for-sale securities. These
investments primarily consist of real estate investment trusts and investment
grade corporate preferred securities that are traded on the New York Stock
Exchange. The cost of these investments is $764,195 and had a fair value at
December 31, 1998 of $566,072. The investments are subject to overall stock
market and interest rate risk. A hypothetical 20 percent decrease in the share
prices of these investments from the prices at December 31, 1998 would decrease
the fair value by $113,214.
The only debt instrument we had at December 31, 1998 was a mortgage note payable
on our facility of $3,633,475. The note payable has a fixed rate with a
weighted-average interest rate of 8.45 percent. We repaid the note payable on
February 1, 1999 when we sold the facility.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in Appendices A, B and C.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained under the captions "Election
of Directors" and "Executive Officers" in the definitive proxy material of the
Company to be filed in connection with its 1999 annual meeting of stockholders,
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained under the captions
"Compensation and Committees of the Board of Directors" and "Compensation of
Executive Officers" in the definitive proxy material of the Company to be filed
in connection with its 1999 annual meeting of stockholders, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained under the caption "Security
Ownership of Management and Principal Shareholders" in the definitive proxy
material of the Company to be filed in connection with its 1999 annual meeting
of stockholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the caption "Certain
Relationships and Related Transactions" in the definitive proxy material of the
Company to be filed in connection with its 1999 annual meeting of stockholders,
which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
1. Financial Statements:
See Index to Financial Statements on the second page of
Appendix A.
2. Financial Statement Schedules:* Schedule II - Valuation and
Qualifying Accounts.
See Appendix B.
* Those schedules not listed above are omitted as not applicable or not
required.
3. Exhibits: See (c) below.
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(b) Reports on Form 8-K.
None.
<TABLE>
<CAPTION>
(c) Exhibits:
<S> <C>
2.1 Asset Purchase Agreement, dated December 29, 1997, by and among
Quest Medical, Inc., QMI Medical, Inc. (formerly known as QMI
Acquisition Corp.) and Atrion Corporation (including exhibits and
schedules 2.1.1, 2.1.2, 2.3(a) and 2.3(b))(8)
3.1 Articles of Incorporation, as amended(5)
3.2 Articles of Amendment to the Articles of Incorporation dated June
12, 1998 changing the name of the Corporation from Quest Medical,
Inc. to Advanced Neuromodulation Systems, Inc.(11)
3.3 Bylaws(1)
4.1 Rights Agreement dated as of August 30, 1996, between Quest
Medical, Inc. and KeyCorp Shareholder Services, Inc. as Rights
Agent(6)
10.1 Quest Medical, Inc. 1979 Amended and Restated Employees Stock
Option Plan(2)
10.2 Form of 1979 Employees Stock Option Agreement(3)
10.3 Quest Medical, Inc. Directors Stock Option Plan (as amended)(2)
10.4 Form of Directors Stock Option Agreement(1)
10.5 Quest Medical, Inc. 1987 Stock Option Plan(5)
10.6 Form of 1987 Employee Stock Option Agreement(5)
10.7 Quest Medical, Inc. 1995 Stock Option Plan(5)
10.8 Form of 1995 Employee Stock Option Agreement(5)
10.9 Quest Medical, Inc. 1998 Stock Option Plan(12)
10.10 Employment Agreement dated April 9, 1998 between Christopher G.
Chavez and Quest Medical, Inc.(10)
10.11 Employment Agreement dated April 9, 1998 between Scott F. Drees
and Quest Medical, Inc. (10)
10.12 Employment Agreement dated April 9, 1998 between F. Robert Merrill
III and Quest Medical, Inc.(10)
10.13 Form of Employment Agreement and Covenant Not to Compete, between
the Company and key employees(1)
10.14 Promissory Note dated December 28,1993, between Quest Medical,
Inc. and MetLife Capital Financial Corporation(4)
10.15 Commercial Deed of Trust, Security Agreement and Assignment of
Leases and Rents and Fixture Filing dated December
28,1993, between Quest Medical, Inc. and MetLife Capital Financial
Corporation(4)
10.16 Term Promissory Note dated December 28,1993, between Quest
Medical, Inc. and MetLife Capital Corporation(4) 10.17 Loan and
Security Agreement dated December 28,1993, between Quest Medical,
Inc. and MetLife Capital Corporation(4)
10.18 Supplemental Security Agreement Number One dated December 28,1993,
between Quest Medical, Inc. and MetLife Capital Corporation(4)
10.19 Third Amended and Restated Credit Agreement dated as of March 3,
1997, between Quest Medical, Inc. and NationsBank of Texas,
N.A.(7)
10.20 Promissory Note (Facility A. Note) in the original principal
amount of $5,650,000 dated March 3, 1997(7)
10.21 Promissory Note (Facility B. Note) in the original principal
amount of $350,000 dated March 3, 1997(7)
10.22 First Amended and Restated Security Agreement dated March 3, 1997,
between Quest Medical, Inc. and NationsBank of Texas, N.A.(7)
10.23 First Amended and Restated Security Agreement dated March 3, 1997,
between Advanced Neuromodulation Systems, Inc. and NationsBank of
Texas, N.A.(7)
</TABLE>
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<TABLE>
<S> <C>
10.24 First Amended and Restated Intellectual Property Security
Agreement and Assignment dated as of March 3, 1997, between Quest
Medical, Inc. and NationsBank of Texas N.A.(7)
10.25 First Amended and Restated Intellectual Property Security
Agreement and Assignment dated as of March 3, 1997, between
Advanced Neuromodulation Systems, Inc. and NationsBank of Texas,
N.A.(7)
10.26 First Amended and Restated License Agreement dated as of March 3,
1997, between Quest Medical, Inc. and NationsBank of Texas,
N.A.(7)
10.27 First Amended and Restated License Agreement dated as of March 3,
1997, between Advanced Neuromodulation Systems, Inc. and
NationsBank of Texas, N.A.(7)
10.28 Guaranty of Advanced Neuromodulation Systems, Inc. in favor of
NationsBank of Texas, N.A. under the Third Amended and Restated
Credit Agreement dated as of March 3, 1997(7)
10.29 Form of License Agreement, dated January 30, 1998, by and between
Quest Medical, Inc. and QMI Medical, Inc. (formerly known as QMI
Acquisition Corp.)(8)
10.30 Form of Lease Agreement, dated January 30, 1998, by and between
Quest Medical, Inc. and QMI Medical, Inc. (formerly known as QMI
Acquisition Corp.)(8)
10.31 Form of Option Agreement, dated January 30, 1998, by and between
Quest Medical, Inc. and QMI Medical, Inc. (formerly known as QMI
Acquisition Corp.)(8)
10.32 Agreement, dated December 31, 1997, by and among Quest Medical,
Inc., its subsidiaries and affiliates and Thomas C. Thompson.(9)
10.33 Lease Agreement dated as of February 4, 1999, between Advanced
Neuromodulation Systems, Inc. and Legacy Lincoln I, LTD. (13)
11.1 Computation of Earnings Per Share(13)
21.1 Subsidiaries(13)
23.1 Consent of Independent Auditors(13)
27.1 Financial Data Schedule - December 31, 1998(13)
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------
<S> <C>
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-18,
Registration No. 2-71198-FW, and incorporated herein by reference.
(2) Filed as an Exhibit to the report of the Company on Form 10-K for the year
ended December 31, 1987, and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
Registration No. 2-78186, and incorporated herein by reference.
(4) Filed as an Exhibit to the report of the Company on Form 10-KSB for the
year ended December 31, 1993, and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Registration Statement on Form SB-2,
Registration No. 33-62991, and incorporated herein by reference.
(6) Filed as an Exhibit to the report of the Company on Form 8-K dated
September 3, 1996, and incorporated herein by reference.
(7) Filed as an Exhibit to the report of the Company on Form 10-K dated for the
year ended December 31, 1996, and incorporated herein by reference.
(8) Filed as an Exhibit to the report of the Company on Form 8-K dated
February 13, 1998, and incorporated herein by reference. Upon request, the
Company will furnish a copy of any omitted schedule to the Commission.
(9) Filed as an Exhibit to the report of the Company on Form 10-K dated for the
year ended December 31, 1997, and incorporated herein by reference.
(10) Filed as an Exhibit to the report of the Company on Form 10-Q dated for the
quarterly period ended March 31, 1998, and incorporated herein by
reference.
(11) Filed as an Exhibit to the report of the Company on Form 10-Q dated for the
quarterly period ended June 30, 1998, and incorporated herein by reference.
(12) Filed as an Exhibit to the Definitive Proxy Statement on Schedule 14A dated
April 27, 1998, and incorporated herein by reference.
(13) Filed herewith.
</TABLE>
-32-
<PAGE>
Signatures
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: March 30, 1999
ADVANCED NEUROMODULATION SYSTEMS, INC.
By: /s/Christopher G. Chavez
------------------------
Christopher G. Chavez
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Company and in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Christopher G. Chavez Chief Executive Officer, President March 30, 1999
- ---------------------------- and, Director of Advanced
Christopher G. Chavez Neuromodulation Systems, Inc.
(Principal Executive Officer)
/s/F. Robert Merrill III Executive Vice President-Finance, March 30, 1999
- ---------------------------- Treasurer and Secretary of
F. Robert Merrill III Advanced Neuromodulation Systems,
Inc. (Principal Financial and
Accounting Officer)
/s/Hugh M. Morrison Chairman of the Board and March 30, 1999
- ---------------------------- Director of Advanced
Hugh M. Morrison Neuromodulation Systems, Inc.
/s/Robert C. Eberhart Director of Advanced March 30, 1999
- ---------------------------- Neuromodulation Systems, Inc.
Robert C. Eberhart
/s/Joseph E. Laptewicz, Jr. Director of Advanced March 30, 1999
- ---------------------------- Neuromodulation Systems, Inc.
Joseph E. Laptewicz, Jr.
/s/Richard D. Nikolaev Director of Advanced March 30, 1999
- ---------------------------- Neuromodulation Systems, Inc.
Richard D. Nikolaev
/s/Michael J. Torma Director of Advanced March 30, 1999
- ---------------------------- Neuromodulation Systems, Inc.
Michael J. Torma
</TABLE>
-33-
<PAGE>
Appendix A
----------
Consolidated Financial Statements
Independent Auditors' Report
Three Years Ended December 31, 1998
Forming a Part of the Annual Report
Form 10-K
Item 8
of
ADVANCED NEUROMODULATION SYSTEMS, INC. and SUBSIDIARIES
(Name of issuer)
Filed with the
Securities and Exchange Commission
Washington, D.C. 20549
under
The Securities and Exchange Act of 1934
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Table of Contents
to
Consolidated Financial Statements
Form 10-K - Item 8
Independent Auditors' Report
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Operations - Years ended December 31, 1998, 1997,
and 1996
Consolidated Statements of Stockholders' Equity - Years ended December 31, 1998,
1997, and 1996
Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997,
and 1996
Notes to Consolidated Financial Statements
<PAGE>
Report of Independent Auditors
The Board of Directors
Advanced Neuromodulation Systems, Inc.
We have audited the accompanying consolidated balance sheets of Advanced
Neuromodulation Systems, Inc. and subsidiaries (the Company) as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. Our audit also included the financial statement
schedule listed in the Index at Item 14A. These consolidated financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Advanced
Neuromodulation Systems, Inc. and subsidiaries at December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ERNST & YOUNG LLP
--------------------
ERNST & YOUNG LLP
Dallas, Texas
February 26, 1999
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
- ------ ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................. $11,697,209 $ 747,828
Marketable securities ..................................... 566,072 1,455,864
Receivables:
Trade accounts, less allowance for doubtful
accounts of $249,607 in 1998 and $212,375 in 1997 .... 3,135,615 2,398,327
Interest and other .................................... 124,511 209,595
----------- -----------
Total receivables .................................... 3,260,126 2,607,922
----------- -----------
Inventories:
Raw materials ......................................... 1,010,865 1,056,718
Work-in-process ....................................... 415,442 323,929
Finished goods ........................................ 1,216,955 1,597,840
----------- -----------
Total inventories .................................... 2,643,262 2,978,487
----------- -----------
Deferred income taxes ..................................... 887,609 2,288,192
Net assets of building and land sold in 1999 and net assets
of discontinued operations sold in 1998 ............... 6,310,985 12,831,318
Prepaid expenses and other current assets ................. 852,025 476,716
----------- -----------
Total current assets ................................. 26,217,288 23,386,327
----------- -----------
Property, plant and equipment:
Land ...................................................... -- 1,927,900
Building and improvements ................................. -- 5,254,945
Furniture and fixtures .................................... 882,968 624,753
Machinery and equipment ................................... 2,066,514 920,879
----------- -----------
2,949,482 8,728,477
Less accumulated depreciation and amortization ............ 1,060,890 1,317,362
----------- -----------
Net property, plant and equipment .................... 1,888,592 7,411,115
----------- -----------
Cost in excess of net assets acquired, net of accumulated
amortization of $1,734,617 in 1998 and $1,178,014
in 1997 ................................................... 9,077,047 9,633,650
Patents, net of accumulated amortization
of $302,281 in 1998 and $148,958 in 1997 .................. 3,054,283 2,851,042
Purchased technology from acquisitions, net of accumulated
amortization of $1,000,000 in 1998 and
$733,334 in 1997 .......................................... 3,000,000 3,266,666
Tradenames, net of accumulated amortization of
$468,750 in 1998 and $343,750 in 1997 ..................... 2,031,250 2,156,250
Other assets, net of accumulated amortization of
$68,993 in 1998 and $0 in 1997 ............................ 216,908 277,270
----------- -----------
$45,485,368 $48,982,320
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1998 1997
- ------------------------------------ ----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable .......................................... $ 904,899 $ 240,249
Short-term notes payable and current maturities of
long-term notes payable ............................... 3,633,475 8,257,348
Deferred revenue .......................................... 900,000 --
Income taxes payable ...................................... 2,276,655 --
Accrued salary and employee benefit costs ................. 562,618 381,735
Other accrued expenses .................................... 1,513,499 379,444
----------- -----------
Total current liabilities ............................ 9,791,146 9,258,776
----------- -----------
Notes payable ................................................. -- 3,635,027
Deferred income taxes ......................................... 2,390,475 2,182,580
Commitments and contingencies
Stockholders' equity:
Common stock, $.05 par value
Authorized 25,000,000 shares in 1998 and 1997;
issued 8,708,367 shares in 1998 and
8,635,509 shares in 1997 ........................... 435,418 431,775
Additional capital ........................................ 41,156,582 40,780,717
Retained earnings (deficit) ............................... (308,859) (7,268,061)
Accumulated other comprehensive income (loss), net of
tax benefit of $67,363 in 1998 and $19,831 in 1997 .... (130,760) (38,494)
Cost of common shares in treasury; 1,073,751 shares in 1998 (7,848,634) --
----------- -----------
Total stockholders' equity ........................... 33,303,747 33,905,937
----------- -----------
$45,485,368 $48,982,320
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net revenue-product sales ............................... $ 17,006,407 $ 14,717,721 $ 11,403,144
Net revenue-contract research and development ........... 3,100,000 -- --
------------ ------------ ------------
Total net revenue .............................. 20,106,407 14,717,721 11,403,144
------------ ------------ ------------
Operating expenses:
Cost of product sales ............................... 4,985,887 4,839,261 3,315,255
General and administrative .......................... 2,633,250 1,760,061 2,083,763
Research and development ............................ 2,801,175 976,900 1,315,953
Amortization of intangibles ......................... 1,170,585 1,085,871 826,418
Marketing ........................................... 4,682,423 3,969,320 3,346,450
------------ ------------ ------------
16,273,320 12,631,413 10,887,839
------------ ------------ ------------
Earnings from operations ....................... 3,833,087 2,086,308 515,305
Other income (expense):
Gain (loss) on sale of marketable securities ........ (4,381) (25,659) 136,975
Interest expense .................................... (331,468) (625,321) (418,246)
Investment and other income, net .................... 834,772 115,197 200,322
------------ ------------ ------------
498,923 (535,783) (80,949)
------------ ------------ ------------
Earnings from continuing operations
before income taxes ........................ 4,332,010 1,550,525 434,356
Income taxes ............................................ 1,746,304 733,014 319,842
------------ ------------ ------------
Net earnings from continuing operations ........ 2,585,706 817,511 114,514
------------ ------------ ------------
Loss from discontinued operations, net of income
tax benefits of $129,711 in 1998, $15,909 in
1997 and $236,967 in 1996 ........................... (211,634) (93,490) (526,671)
Gain on sale of assets of discontinued operations, net of
income tax expense of $2,473,293 .................... 4,585,130 -- --
------------ ------------ ------------
Net earnings (loss) from discontinued operations 4,373,496 (93,490) (526,671)
------------ ------------ ------------
Net earnings (loss) ............................ $ 6,959,202 $ 724,021 $ (412,157)
============ ============ ============
Basic earnings (loss) per share:
Continuing operations ............................... $ .31 $ .10 $ .01
============ ============ ============
Discontinued operations ............................. $ .53 $ (.01) $ (.06)
============ ============ ============
Net earnings (loss) ................................. $ .84 $ .09 $ (.05)
============ ============ ============
Diluted earnings (loss) per share:
Continuing operations ............................... $ .30 $ .09 $ .01
============ ============ ============
Discontinued operations ............................. $ .51 $ (.01) $ (.06)
============ ============ ============
Net earnings (loss) ................................. $ .81 $ .08 $ (.05)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings from continuing operations ............................ $ 2,585,706 $ 817,511 $ 114,514
Adjustments to reconcile earnings from continuing operations
to net cash provided by operating activities:
Depreciation .................................................. 615,388 438,056 312,245
Amortization .................................................. 1,170,585 1,085,871 826,417
Deferred income taxes ......................................... 103,267 717,104 97,478
Non-operating loss (gains) included in net earnings ........... 4,381 25,655 (139,030)
Increase in inventory reserve ................................. 52,818 534,619 --
Changes in assets and liabilities
Receivables ................................................ (748,442) (130,283) 658,980
Inventories ................................................ 200,834 (500,835) (1,385,149)
Prepaid expenses and other assets .......................... (383,940) (302,558) 239,755
Income taxes payable ....................................... 1,605,319 -- --
Accounts payable ........................................... 649,802 (513,704) 57,849
Accrued expenses ........................................... 177,904 (62,529) (615,315)
Deferred revenue ........................................... 900,000 -- --
------------ ------------ ------------
Net cash provided by continuing operations ............... 6,933,622 2,108,907 167,744
Net cash provided by (used in) discontinued operations ... 59,049 391,096 (145,431)
------------ ------------ ------------
Net cash provided by operating activities ................ 6,992,671 2,500,003 22,313
------------ ------------ ------------
Cash flows from investing activities:
Net proceeds from marketable securities transactions ............... 745,620 24,542 1,480,924
Additions to property, plant , equipment and patents - continuing
operations ...................................................... (1,678,842) (545,193) (391,832)
Additions to property, plant and equipment - discontinued operations (12,060) (745,729) (1,580,468)
Net proceeds from sale of assets of discontinued operations ........ 21,754,181 -- --
Payments related to 1995 acquisition ............................... -- (4,472,197) (468,767)
Other .............................................................. -- (594) 3,637
------------ ------------ ------------
Net cash provided by (used in) investing activities ...... 20,808,899 (5,739,171) (956,506)
------------ ------------ ------------
Cash flows from financing activities:
Net increase (decrease) in short-term obligations .................. (8,081,763) 3,531,763 --
Payment of long-term notes ......................................... (177,137) (1,163,349) (150,647)
Exercise of stock options .......................................... 817,766 922,386 558,552
Redemption of rights plan .......................................... -- -- (103,146)
Purchase of treasury stock ......................................... (9,411,055) -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities ...... (16,852,189) 3,290,800 304,759
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ................. 10,949,381 51,632 (629,434)
Cash and cash equivalents at beginning of year ....................... 747,828 696,196 1,325,630
------------ ------------ ------------
Cash and cash equivalents at end of year ............................. $ 11,697,209 $ 747,828 $ 696,196
============ ============ ============
Supplemental cash flow information is presented below:
Income taxes paid .................................................. $ 37,715 $ -- $ --
============ ============ ============
Interest paid ...................................................... $ 370,304 $ 994,294 $ 668,049
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
Retained Other Total
Common Stock Additional Earnings Comprehensive Treasury Stockholders'
Shares Amount Capital (Deficit) Income (Loss) Stock Equity
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 8,147,349 $ 407,367 $ 38,253,670 $ (7,579,925) $ (211,062) $ -- $ 30,870,050
Net loss -- -- -- (412,157) -- -- (412,157)
Adjustment to unrealized
losses on marketable
securities -- -- -- -- 80,184 -- 80,184
-------------
Comprehensive Income (331,973)
-------------
Shares issued upon
exercise of stock
options 159,178 7,959 479,207 -- -- -- 487,166
Issuance of 31,983 new
common shares for
employee bonuses and
cancellation of a
stock option 31,983 1,600 69,786 -- -- -- 71,386
Redemption of rights
plan dividend -- -- (103,146) -- -- -- (103,146)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance at
December 31, 1996 8,338,510 416,926 38,699,517 (7,992,082) (130,878) -- 30,993,483
Net earnings -- -- -- 724,021 -- -- 724,021
Adjustment to
unrealized losses on
marketable securities -- -- -- -- 92,384 -- 92,384
-------------
Comprehensive Income 816,405
-------------
Shares issued upon
exercise of stock
options 296,999 14,849 907,537 -- -- -- 922,386
Tax benefit from
employee stock option
exercises -- -- 1,173,663 -- -- -- 1,173,663
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance at
December 31, 1997 8,635,509 431,775 40,780,717 (7,268,061) (38,494) -- 33,905,937
Net earnings -- -- -- 6,959,202 -- -- 6,959,202
Adjustment to
unrealized losses on
marketable securities -- -- -- -- (92,266) -- (92,266)
-------------
Comprehensive Income 6,866,936
-------------
Shares issued upon
exercise of stock
options 72,858 3,643 160,554 -- -- -- 164,197
Tax benefit from
employee stock option
exercises -- -- 119,509 -- -- -- 119,509
Compensation expense
resulting from
changes to stock
options -- -- 1,004,654 -- -- -- 1,004,654
Issuance of 184,874
shares from treasury
for stock option
exercises -- -- (908,852) -- -- 1,562,421 653,569
Purchase of 1,258,625
treasury shares,
at cost -- -- -- -- -- (9,411,055) (9,411,055)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance at
December 31, 1998 8,708,367 $ 435,418 $ 41,156,582 $ (308,859) $ (130,760) $ (7,848,634) $ 33,303,747
============= ============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) BUSINESS
CONTINUING OPERATIONS
Advanced Neuromodulation Systems, Inc. (the "Company" or "ANS"), formerly Quest
Medical, Inc., designs, develops, manufactures and markets implantable
neurostimulation systems. ANS devices are used primarily to manage chronic
severe pain. ANS revenues are derived primarily from sales throughout the United
States, Europe and Australia.
The neurostimulation systems business, described above, was acquired in March
1995. All other businesses of the Company were sold in January 1998 as described
below under Discontinued Operations.
The research and development, manufacture, sale and distribution of medical
devices is subject to extensive regulation by various public agencies,
principally the Food and Drug Administration and corresponding state, local and
foreign agencies. Product approvals and clearances can be delayed or withdrawn
for failure to comply with regulatory requirements or the occurrence of
unforeseen problems following initial marketing.
In addition, ANS products are purchased primarily by hospitals and other users
who then bill various third-party payers including Medicare, Medicaid, private
insurance companies and managed care organizations. These third-party payers
reimburse fixed amounts for services based on a specific diagnosis. The impact
of changes in third-party payer reimbursement policies and any amendments to
existing reimbursement rules and regulations that restrict or terminate the
eligibility of ANS products could have an adverse impact on the Company's
financial condition and results of operations.
The Company changed its name from Quest Medical, Inc. to Advanced
Neuromodulation Systems, Inc. during June 1998. The Company's NASDAQ stock
symbol was changed from "QMED" to "ANSI" on July 1, 1998.
DISCONTINUED OPERATIONS
On January 30, 1998, the Company sold its cardiovascular and intravenous fluid
product lines ("CVS Operations"), including its MPS(R) myocardial protection
system product line, to Atrion Corporation (see Note 11 - "Sale of CVS
Operations/Discontinued Operations"). The CVS Operations have been accounted for
as discontinued operations in the Consolidated Statements of Operations for the
years ended December 31, 1998, 1997 and 1996. Net assets at December 31, 1997 of
the CVS Operations have been presented on the Consolidated Balance Sheet as net
assets of discontinued operations sold in 1998. During October 1998, Atrion also
exercised an option to acquire the Company's land, office and manufacturing
facility for $6.5 million. The transaction was closed on February 1, 1999. Net
assets of the land and facility have been presented on the Consolidated Balance
Sheet at December 31, 1998 as net assets of building and land sold in 1999.
-1-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Advanced
Neuromodulation Systems, Inc. and all of its subsidiaries. All significant
intercompany transactions and accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers temporary cash investments with maturities of three months
or less from the date of purchase to be cash equivalents.
REVENUE RECOGNITION
The Company recognizes revenue from product sales when the goods are shipped to
its customers. The Company recognizes revenue from research and development
contracts based upon the estimated percentage of completion of the development
project.
MARKETABLE SECURITIES
The Company's marketable securities and debt securities are classified as
available-for-sale and are carried at fair value with the unrealized gains and
losses reported in a separate component of stockholders' equity entitled "Other
comprehensive income". The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income. Realized gains and losses
and declines in value judged to be other than temporary are included in other
income. The cost of securities sold is based on the specific identification
method. Interest and dividends are included in investment income.
INVENTORIES
Inventories are recorded at the lower of standard cost or market. Standard cost
approximates actual cost determined on the first-in, first-out ("FIFO") basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions and improvements
extending asset lives are capitalized while maintenance and repairs are expensed
as incurred. Depreciation is provided using the straight-line method over the
estimated useful lives of the various assets ranging from 3 to 30 years.
-2-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
INTANGIBLE ASSETS
The excess of cost over the net assets of acquired businesses ("goodwill") is
amortized on a straight-line basis over the estimated useful life of 20 years.
The cost of purchased technology related to acquisitions is based on appraised
values at the date of acquisition and is amortized on a straight-line basis over
the estimated useful life (15 years) of such technology.
The cost of purchased tradenames is based on appraised values at the date of
acquisition and is amortized on a straight-line basis over the estimated useful
life (20 years) of such tradenames.
The cost of purchased patents is amortized on a straight-line basis over the
estimated useful life (17 years) of such patents. The cost of licensed patents
is amortized on a straight-line basis over the estimated useful life (20 years)
of such patents. Costs of patents that are the result of internal development
are charged to current operations.
The Company assesses the recoverability of all its intangible assets primarily
based on its current and anticipated future undiscounted cash flows. At December
31, 1998, the Company does not believe there has been any impairment of its
intangible assets.
RESEARCH AND DEVELOPMENT
Product development costs including start-up and research and development are
charged to operations in the year in which such costs are incurred.
ADVERTISING
Advertising expense is charged to operations in the year in which such costs are
incurred. Total advertising expense included in marketing expense from
continuing operations was $21,843, $14,746 and $5,615 at December 31, 1998, 1997
and 1996, respectively.
DEFERRED TAXES
Deferred income taxes are recorded based on the liability method and represent
the tax effect of the differences between the financial and tax basis of assets
and liabilities other than costs in excess of the net assets of businesses
acquired.
STOCK-BASED COMPENSATION
The Company has elected to follow APB No. 25, "Accounting for Stock Issued to
Employees" in the primary financial statements and to provide supplementary
disclosures required by FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (see Note 7 - "Stockholders' Equity").
-3-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
EARNINGS PER SHARE
Basic earnings per share is computed based only on the weighted average number
of common shares outstanding during the period, and the dilutive effect of stock
options and warrants is excluded. Diluted earnings per share is computed using
the additional dilutive effect, if any, of stock options and warrants using the
treasury stock method based on the average market price of the stock during the
period. Basic earnings (loss) per share for 1998, 1997 and 1996 are based upon
8,314,290, 8,428,393 and 8,259,129 shares, respectively. Diluted earnings (loss)
per share for 1998, 1997 and 1996 are based upon 8,544,040, 8,858,086 and
8,809,583 shares, respectively. The following table presents the reconciliation
of basic and diluted shares:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted-average shares outstanding
(basic shares) .......................... 8,314,290 8,428,393 8,259,129
Effect of dilutive instruments(1)
Stock options .................. 214,806 412,996 550,454
Warrants ....................... 14,944 16,697 --
--------- --------- ---------
Dilutive potential common shares 229,750 429,693 550,454
--------- --------- ---------
Diluted shares .......................... 8,544,040 8,858,086 8,809,583
========= ========= =========
</TABLE>
(1) See Notes 5 and 7 for a description of these instruments.
For 1998, 1997 and 1996, the incremental shares used for dilutive earnings
(loss) per share relate to stock options and warrants whose exercise price was
less than the average market price in the underlying quarterly computations.
Options to purchase 215,981 shares at an average price of $9.02 per share were
outstanding in 1998, 148,313 shares at an average price of $10.80 per share were
outstanding in 1997, and options to purchase 128,812 shares at an average price
of $9.82 per share were outstanding in 1996 but were not included in the
computation of diluted earnings (loss) per share because the options' exercise
prices were greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to current-year
presentation.
(3) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 - "Reporting Comprehensive
Income" - was adopted by the Company as of January 1, 1998. The new rules
require the reporting and display of comprehensive income and its components;
however, the adoption of this statement had no impact on the Company's net
earnings or stockholders' equity. SFAS No. 130 requires unrealized gains or
losses on the Company's available for sale securities, which prior to adoption
were reported separately in shareholders' equity, to be included in "Other
comprehensive income". Prior period financial statements have been reclassified
to conform to the requirements of SFAS No. 130. Total comprehensive income is
reported in the Consolidated Statements of Stockholders' Equity.
-4-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(4) MARKETABLE SECURITIES
The following is a summary of available-for-sale securities at December 31,
1998:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment grade preferred securities $ 557,596 $ -- $ 127,763 $ 429,833
Publicly traded limited partnerships 51,875 -- 28,440 23,435
Real estate investment trusts 141,590 -- 29,232 112,358
Other 13,134 -- 12,688 446
---------- ---------- ---------- ----------
$ 764,195 $ -- $ 198,123 $ 566,072
========== ========== ========== ==========
</TABLE>
At December 31, 1998, no individual security represented more than 40 percent of
the total portfolio or 1 percent of total assets. The Company did not have any
investments in derivative financial instruments at December 31, 1998.
The following is a summary of available-for-sale securities at December 31,
1997:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment grade preferred securities $ 557,596 $ 1,870 $ 4,802 $ 554,664
Publicly traded limited partnerships 51,875 -- 10,315 41,560
Real estate investment trusts 241,590 312 12,465 229,437
Other 663,128 -- 32,925 630 203
---------- ---------- ---------- ----------
$1,514,189 $ 2,182 $ 60,507 $1,455,864
========== ========== ========== ==========
</TABLE>
At December 31, 1997, no individual security represented more than 25 percent of
the total portfolio or 1 percent of total assets. The Company did not have any
investments in derivative financial instruments at December 31, 1997.
-5-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(5) NOTES PAYABLE
Notes payable for the years ended December 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Notes payable to banks ........... $ -- $ 5,000,000
Note payable to shareholder ...... -- 2,000,000
Acquisition notes ................ -- 1,000,000
Mortgage notes ................... 3,633,475 3,810,612
Other ............................ -- 81,763
----------- -----------
3,633,475 11,892,375
Less current maturities .......... 3,633,475 8,257,348
----------- -----------
Long-term portion of notes payable $ -- $ 3,635,027
=========== ===========
</TABLE>
In 1993, the Company entered into two mortgage notes relating to its principal
office and manufacturing facility. The first note, in the amount of $2,825,332
at December 31, 1998, bears interest at 8.59 percent and has a twenty-five year
amortization. The loan is collateralized by the Allen facility and land. On
February 1, 1999, the Company repaid the note in connection with the sale of the
land and facility to Atrion Corporation (see Note 11 - "Sale of CVS
Operations/Discontinued Operations"). The second note, in the amount of $808,143
at December 31, 1998, is related to equipment and furnishings and bears interest
at 7.94 percent. The note is collateralized by the equipment and furnishings. On
February 1, 1999, the Company repaid the note in connection with the sale of the
facility to Atrion Corporation. Both notes have been reclassified to short-term
notes payable at December 31, 1998.
At December 31, 1997, the Company's notes payable to banks were under a
$5,650,000 working capital line of credit and a $350,000 term loan facility (the
"Facilities"). Borrowings under the Facilities bore interest at prime plus 100
basis points, or at the Company's option, LIBOR plus 225 or 275 basis points.
The Facilities were collateralized by all of the Company's assets with the
exception of the real property, building and equipment that collateralize the
mortgage notes described above. At December 31, 1997, the Company had advances
in the amount of $4,650,000 outstanding under the working capital line with a
weighted average interest rate of 7.50 percent and advances in the amount of
$350,000 under the term loan facility with a weighted average interest rate of
8.25 percent. On January 30, 1998, the Company repaid all notes payable under
the Facilities with proceeds from the sale of the assets of its CVS Operations
(see Note 11 - "Sale of CVS Operations/Discontinued Operations") and the
Facilities expired.
In February 1997, the Company borrowed $2,000,000 from a nonaffiliate
shareholder pursuant to a promissory note that bore interest at the rate of 6
percent per annum. The Company issued the shareholder a five-year warrant to
purchase 100,000 shares of common stock at an exercise price of $6.50 per share,
the closing sales price on the date the indebtedness was incurred. Under the
warrant agreement, the shareholder has the right to one demand registration in
addition to piggyback registration rights. During November 1997, upon demand of
the shareholder, the Company filed a registration statement on Form S-3. At
February 26, 1999, the warrant remained unexercised. The Company repaid the note
on January 30, 1998 with proceeds from the sale of the assets of its CVS
Operations (see Note 11 - "Sale of CVS Operations/Discontinued Operations").
-6-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In February 1997, the Company issued the former owner of the neurostimulation
business a promissory note in the amount of $1.0 million that bore interest at
the rate of 10 percent per annum. The Company repaid the note on January 30,
1998, with proceeds from the sale of the assets of its CVS Operations (see Note
11 - "Sale of CVS Operations/Discontinued Operations").
(6) FEDERAL INCOME TAXES
The significant components of the net deferred tax liability at December 31,
were as follows:
<TABLE>
<CAPTION>
Deferred tax assets: 1998 1997
----------- -----------
<S> <C> <C>
Tax credit and net operating loss carry forwards $ -- $ 2,488,573
Deferred revenue ............................... 306,000 --
Accrued expenses and reserves .................. 572,030 278,387
Unrealized loss on marketable securities ....... 67,362 19,831
Valuation allowance ............................ -- --
----------- -----------
Total deferred tax asset ....................... 945,392 2,786,791
Deferred tax liabilities:
Purchased intangible assets .................... (1,710,625) (1,843,792)
Excess of tax over book depreciation ........... (602,383) (566,296)
Other .......................................... (135,250) (271,091)
----------- -----------
Total deferred tax liability ................... (2,448,258) (2,681,179)
----------- -----------
Net deferred tax asset (liability) ............. $(1,502,866) $ 105,612
=========== ===========
</TABLE>
The provision for income taxes on earnings from continuing operations for the
years ended December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current $ 2,005,713 $ -- $ --
Deferred (259,409) 733,014 319,842
----------- ----------- -----------
$ 1,746,304 $ 733,014 $ 319,842
=========== =========== ===========
</TABLE>
A reconciliation of the provision for income taxes on earnings from continuing
operations to the expense calculated at the U.S. statutory rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income tax expense at statutory rate .... $ 1,472,883 $ 527,179 $ 147,681
Tax effect of:
State taxes .......................... 117,900 -- --
Nondeductible amortization of goodwill 189,245 185,200 147,999
Other ................................ (33,724) 20,635 24,162
----------- ----------- -----------
Income tax expense ............. $ 1,746,304 $ 733,014 $ 319,842
=========== =========== ===========
</TABLE>
-7-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In 1998, the Company utilized net operating loss carry forwards of $4,277,540
and general business credits and alternative minimum tax credits of $1,038,669
to reduce its tax liabilities. At December 31, 1998, no net operating loss carry
forwards or general business credits existed.
(7) STOCKHOLDERS' EQUITY
The Company has a Shareholder's Rights Plan, adopted in August 1996, which
permits shareholders to purchase shares of the Company's common stock at
significant discounts in the event a person or group acquires more than 15
percent of the Company's common stock or announces a tender or exchange offer
for more than 20 percent of the Company's common stock. Previously outstanding
rights were redeemed in August 1996 at $.01 per share.
During January 1998, the Company's Board of Directors approved a stock
repurchase program of up to 500,000 shares of the Company's common stock and
during August 1998 approved the repurchase of up to an additional 1,000,000
shares. During the year ended December 31, 1998, the Company repurchased
1,258,625 shares of its common stock at an aggregate cost of $9,411,055. During
the year ended December 31, 1998, the Company issued 184,874 shares from its
treasury upon the exercise of stock options. At December 31, 1998, 1,073,751
shares remained in the treasury.
As described in Note 5-"Notes Payable", in 1998 the Company issued a five-year
warrant to purchase 100,000 shares of common stock at an exercise price of $6.50
per share. The warrant is outstanding at December 31, 1998.
The Company has various stock option plans pursuant to which stock options may
be granted to key employees, officers, directors and advisory directors of the
Company. The most recent of the plans, adopted during 1998 (the "1998 Plan")
and approved by the shareholders during May 1998, reserved 800,000 shares of
common stock for options under the plan; provided, however, that on January 1 of
each year (commencing in 1999), the aggregate number of shares of common stock
reserved for options under the 1998 Plan shall be increased by the same
percentage that the total number of issued and outstanding shares of common
stock increased from the preceding January 1 to the following December 31 (if
such percentage is positive). No additional options were added to the 1998 Plan
on January 1, 1999. Several of the plans allow for the grant of incentive stock
options to key employees and officers intended to qualify for preferential tax
treatment under Section 422 of the Internal Revenue Code of 1986. Under all of
the Company's plans, the exercise price of options granted must equal or exceed
the fair market value of the common stock at the time of the grant. Options
granted to employees and officers expire ten years from the date of grant and
for the most part are exercisable one-fourth each year over a four-year period
of continuous service. Options granted to directors and advisory directors
expire six years from the date of grant and for the most part are exercisable
one-fourth each year over a four-year period of continuous service. Certain
options, however, have a special two-year vesting schedule.
At December 31, 1998, under all of the Company's stock option plans, 1,068,215
shares have been granted and are outstanding, 1,646,446 shares of common stock
have been issued upon exercise, and 409,101 shares were reserved for future
grants.
-8-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Data with respect to stock option plans of the Company are as follows:
<TABLE>
<CAPTION>
----------------------------- -----------------------------
Options Outstanding Exercisable Options
----------------------------- -----------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
January 1, 1996 ..... 1,126,561 $ 4.33 622,226 $ 2.84
Granted ............. 323,000 $ 8.12
Exercised ........... (159,178) $ 3.06
Rescinded ........... (115,195) $ 8.36
------------ -------------- ------------ --------------
January 1, 1997 ..... 1,175,188 $ 5.16 663,459 $ 3.51
Granted ............. 66,500 $ 6.16
Exercised ........... (296,999) $ 3.35
Rescinded ........... (111,417) $ 6.36
------------ -------------- ------------ --------------
January 1, 1998 ..... 833,272 $ 5.68 568,285 $ 4.66
Granted ............. 1,352,800 $ 6.12
Exercised ........... (257,732) $ 3.49
Rescinded ........... (860,125) $ 8.10
------------ -------------- ------------ --------------
December 31, 1998 ... 1,068,215 $ 4.82 465,340 $ 4.58
------------ -------------- ------------ --------------
</TABLE>
<TABLE>
<CAPTION>
Exercisable Options at
Options Outstanding at December 31, 1998 December 31, 1998
- -------------------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Price Shares Life (Years) Exercise Price Shares Exercise Price
- -------------- --------- ------------ -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.45 - 2.25 24,814 1.05 $ 2.10 24,814 $ 2.10
$ 2.25 - 3.50 47,793 0.85 $ 3.18 47,793 $ 3.18
$ 3.50 - 5.25 963,983 8.80 $ 4.89 361,108 $ 4.70
$ 5.25 - 8.00 21,625 1.75 $ 6.00 21,625 $ 6.00
$ 8.00 - 12.25 10,000 0.08 $ 9.75 10,000 $ 9.75
--------- ----------- -------------- -------- --------------
1,068,215 8.04 $ 4.82 465,340 $ 4.58
--------- ----------- -------------- -------- --------------
</TABLE>
Exercisable options at December 31, 1998 and 1997 included options for 134,904
and 306,297 shares, respectively, with a weighted average exercise price of
$4.53 per share at December 31, 1998 and $4.22 per share at December 31, 1997,
which are held by employees who terminated employment with the Company on
January 30, 1998 in connection with the sale of the CVS Operations (see Note 11
- - "Sale of CVS Operations/Discontinued Operations"). The Company accelerated the
vesting of the unvested portion of these terminated employee options as a result
of the sale. The Company also extended the normal 90-day exercise period
subsequent to termination to January 30, 1999 for these options.
In November 1998, the Board of Directors authorized the repricing of options for
certain employees, advisory directors and directors under various of the Plans.
Stock options were rescinded for these participants and a new option was granted
at the then fair market value of the common stock of $5.00 per share.
-9-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In accordance with APB No. 25, the Company has not recorded compensation expense
for its stock option awards. As required by SFAS No. 123, the Company provides
the following disclosure of hypothetical values for these awards. The
weighted-average fair value of an option granted in 1998, 1997 and 1996 was
$2.30, $2.37 and $3.09, respectively. For purposes of fair market value
disclosures, the fair market value of an option grant was estimated using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Risk-free interest rate ....... 4.6% 6.1% 6.0%
Average life of options (years) 3.0 3.0 3.0
Volatility .................... 49.2% 48.0% 48.4%
Dividend Yield ................ -- -- --
</TABLE>
Had the compensation expense been recorded based on these hypothetical values,
pro forma net earnings (loss) for 1998, 1997 and 1996 would have been
$6,457,825, $519,731 and $(541,855), respectively, and pro forma diluted net
earnings (loss) per common share for 1998, 1997 and 1996 would have been $.76,
$.06 and $(.06), respectively. Because option grants prior to 1995 are not
considered in the pro forma amounts, as permitted by SFAS No. 123, the pro forma
effects on net earnings (loss) are not likely to be representative of the
effects on reported amounts in future years.
(8) COMMITMENTS AND CONTINGENCIES
The Company has no material commitments under non-cancelable operating leases.
Total rent expense under operating leases included in continuing operations for
the years ended December 31, 1998, 1997 and 1996 was $8,782, $8,617 and $32,493,
respectively.
The Company is a party to product liability claims related to ANS
neurostimulation devices. Product liability insurers have assumed responsibility
for defending the Company against these claims. While historically product
liability claims for ANS neurostimulation devices have not resulted in
significant monetary liability for the Company beyond its insurance coverage,
there can be no assurances that the Company will not incur significant monetary
liability to the claimants if such insurance is inadequate or that the Company's
neurostimulation business and future ANS product lines will not be adversely
affected by these product liability claims.
Except for such product liability claims and other ordinary routine litigation
incidental or immaterial to its business, the Company is not currently a party
to any other pending legal proceeding. The Company maintains general liability
insurance against risks arising out of the normal course of business.
(9) FINANCIAL INSTRUMENTS, RISK CONCENTRATION, AND MAJOR CUSTOMERS
In the United States, the Company's accounts receivable are due primarily from
hospitals and distributors located throughout the country. Internationally, the
Company's accounts receivable are due primarily from distributors located in
Europe and Australia. The Company generally does not require collateral for
trade receivables. The Company maintains an allowance for doubtful accounts
based upon expected collectibility. Any losses from bad debts have historically
been within management's expectations.
-10-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Net sales of implantable neurostimulation systems to a major customer for each
of the three years ended December 31, as a percentage of net revenue from
product sales from continuing operations, were as follows: 1998 - 20 percent,
1997 - 25 percent and 1996 - 22 percent. Foreign sales, primarily Europe and
Australia, for the years ended December 31, 1998, 1997 and 1996 were
approximately 10 percent, 8 percent and 15 percent of net revenue from product
sales from continuing operations, respectively.
(10) EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement savings plan (the "Plan")
available to substantially all employees. The Plan permits employees to elect
salary deferral contributions of up to 15 percent of their compensation and
requires the Company to make matching contributions equal to 50 percent of the
participants' contributions to a maximum of 6 percent of the participants'
compensation. The Board of Directors may change the percentage of matching
contribution at their discretion. The expense of the Company's contribution for
continuing operations was $119,543 in 1998, $72,635 in 1997 and $81,885 in 1996.
(11) SALE OF CVS OPERATIONS/DISCONTINUED OPERATIONS
On January 30, 1998, the Company sold its cardiovascular and intravenous fluid
product lines, including its Myocardial Protection System product line, to
Atrion Corporation. The Company received approximately $23 million from the sale
and utilized $8.0 million of the proceeds to retire debt and $1.2 million to pay
expenses related to the transaction. The remaining proceeds are being used for
working capital for the expanding ANS business and stock repurchases as deemed
appropriate by the Board of Directors. The Company reported a net gain (after
income tax expense) from the sale of $4.6 million. This gain is net of a pre-tax
expense of $969,204 recorded in connection with the sale of the corporate
facility to Atrion. As part of the sale of the CVS Operations to Atrion, the
Company granted Atrion a nine-month option to acquire the Company's principal
office and manufacturing facility in Allen Texas for $6.5 million. During
October 1998, Atrion exercised its option to acquire the facility. When the
Company built the facility in 1993, the Company entered a ten-year agreement
with the City of Allen granting tax abatements to the Company if a minimum job
base and personal property base were maintained in the City of Allen. The
agreement provided for abated taxes to be repaid to the City of Allen if the
Company defaulted under the agreement. The Company believes it incurred such a
liability due to the sale of the facility. If the Company, however, is
successful in petitioning the City of Allen to approve the assignment of the
agreement to Atrion and if Atrion meets the minimum requirements under the
agreement until 2003, then there may be no payment required. The gain is also
net of a pre-tax compensation expense of $1,004,654 recorded as a result of
changes made to the options held by employees of the CVS Operations (see Note 7
- - "Stockholders' Equity"). The Company also reported a net loss for the CVS
Operations of approximately $211,634 in January 1998 prior to the sale.
On February 1, 1999, the sale of the facility to Atrion was consummated. The
Company repaid the mortgage debt on the facility at the closing of the
transaction (see Note 5 - "Notes Payable"). After repayment of the mortgage debt
and expenses related to the transaction, the Company received $2.7 million of
net proceeds. No material gain or loss is expected on the sale of the facility
except related to the tax abatement liability described above. The Company
intends to move its operations to a 40,000 square foot leased facility in the
North Dallas area during May 1999. Until such time, the Company is leasing space
from Atrion at a monthly expense of $48,175 and is paying Atrion fifty percent
of certain operating expenses. The Company expects the expense of moving and
transitioning into the new leased facility to be immaterial.
-11-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Operating results of the CVS Operations have been reclassified and reported as
discontinued operations. Summary operating results for the years ended December
31, 1998, 1997 and 1996 for the CVS Operations were as follows (the 1998 period
includes results for one month until the sale on January 30, 1998):
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue ....................... $ 1,111,992 $ 14,306,127 $ 14,670,664
Gross profit .................. 206,481 6,500,654 6,980,659
Earnings (loss) from operations (307,120) 333,200 (415,115)
Interest expense .............. (34,225) (442,599) (348,523)
------------ ------------ -------------
Loss before income tax benefit (341,345) (109,399) (763,638)
Income tax benefit ............ (129,711) (15,909) (236,967)
------------ ------------ -------------
Net loss ...................... $ (211,634) $ (93,490) $ (526,671)
============ ============ =============
</TABLE>
The above operating results of the CVS Operations reflect the revenues and
expenses of the CVS Operations including direct and indirect expenses of the
Operations that are paid by the Company and charged directly to the CVS
Operations. Allocation of the general overhead from the Company includes charges
for regulatory, general corporate management, accounting and payroll services,
human resources, management information systems and facilities expenses based on
revenues of the CVS Operations to total revenues of the Company. Management
believes that the expenses charged to the CVS Operations on this basis are not
materially different from the costs that would have been incurred had the CVS
Operations borne such expenses on a direct basis.
Interest expense on the Company's corporate facility has been allocated to the
CVS Operations based on space utilization. Interest expense on the Company's
general credit facilities was allocated to the CVS Operations based on the ratio
of the net assets of the CVS Operations to the total net assets of the Company.
Assets and liabilities of discontinued CVS Operations for the years ended
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Accounts receivable ..................................... $ -- $ 2,481,278
Inventories ............................................. -- 5,208,676
Prepaid expenses ........................................ -- 131,735
----------- -----------
-- 7,821,689
----------- -----------
Noncurrent assets:
Net property, plant and equipment ....................... 6,310,985 3,633,855
Net intangible assets consisting of patents, purchased
technology and costs in excess of net assets acquired -- 2,043,107
Other assets ................................................. -- 8,631
----------- -----------
6,310,985 5,685,593
----------- -----------
Total assets ................................................. 6,310,985 13,507,282
----------- -----------
Current liabilities:
Accounts payable .................................... -- 410,483
Accrued liabilities ................................. -- 265,481
----------- -----------
-- 675,964
----------- -----------
Net assets of CVS Operations ................................. $ 6,310,985 $12,831,318
=========== ===========
</TABLE>
-12-
<PAGE>
Advanced Neuromodulation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(12) PRODUCT DEVELOPMENT AGREEMENT
In June 1998, the Company entered an agreement with Sofamor Danek Group, Inc.
("Sofamor Danek") under which the Company will develop and manufacture for
Sofamor Danek, products and systems for use in Deep Brain Stimulation ("DBS").
DBS products provide electrical stimulation to certain areas of the brain and
are intended to relieve the effects of various neurological disorders, such as
Parkinson's Disease and Essential Tremor. Under terms of the agreement, the
Company granted Sofamor Danek exclusive worldwide rights to use, market and sell
the DBS products developed and manufactured by ANS. The Company received a cash
payment of $4 million upon execution of the agreement that is being recognized
into income as revenue based upon the estimated percentage of completion of the
development project. During the year ended December 31, 1998, the Company
recognized $3.1 million into income as revenue. The agreement also called for
ANS to receive four additional payments of $2 million each, and would be
recognized into income upon the satisfactory completion of certain domestic and
international regulatory milestones over the next several years. In order for
Sofamor Danek to market the DBS products in the United States, FDA clearance
will be necessary, which will require clinical trials. Sofamor Danek accepted
the responsibility and expense for seeking regulatory approvals. Sofamor Danek
also agreed to purchase the DBS products exclusively from ANS and agreed to pay
ANS a royalty on Sofamor Danek sales of the DBS products.
In December 1998, the Company and Sofamor Danek agreed to terminate the June
1998 DBS agreement due to the impending merger of Sofamor Danek and Medtronic.
Under the termination agreement, Sofamor Danek agreed to accelerate payments due
the Company in the amount of $8 million and the Company agreed to release
Sofamor Danek from further contractual obligations, contingent upon the closing
of the Sofamor Danek/Medtronic merger. The Company received the $8 million
payment from Sofamor Danek on January 28, 1999, the day after the completion of
the merger. The $8 million payment will be recognized into revenue during 1999.
-13-
<PAGE>
Appendix B
----------
Schedule II - Valuation and Qualifying Accounts
Forming a Part of the Annual Report
Form 10-K
Item 14
of
ADVANCED NEUROMODULATION SYSTEMS, INC. and SUBSIDIARIES
(Name of issuer)
Filed with the
Securities and Exchange Commission
Washington, D.C. 20549
under
The Securities and Exchange Act of 1934
<PAGE>
Schedule II - Valuation and Qualifying Accounts
Advanced Neuromodulation Systems, Inc. and Subsidiaries
December 31, 1998
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Charged to Other at End
Description of Period Expenses Accounts Deductions of Period
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Continuing Operations:
Allowance for doubtful accounts $ 212,375 $ 25,000 $ -- $ (12,232)(1) $ 249,607(1)
Reserve for obsolete inventory 56,005 50,709 -- 20,115 86,599
----------- ----------- ----------- ----------- -----------
Total ......... $ 268,380 $ 75,709 $ -- $ 7,883 $ 336,206
=========== =========== =========== =========== ===========
Discontinued Operations:
Allowance for doubtful accounts $ 30,610 $ 96,238 $ -- $ 126,848 $ --
Reserve for obsolete inventory 154,347 -- -- 154,347 --
----------- ----------- ----------- ----------- -----------
Total ......... $ 184,957 $ 96,238 $ -- $ 281,195 $ --
=========== =========== =========== =========== ===========
Year ended December 31, 1997:
Continuing Operations:
Allowance for doubtful accounts $ 160,000 $ 64,453 $ -- $ 12,078 $ 212,375
Reserve for obsolete inventory -- 534,619 -- 478,614 56,005
----------- ----------- ----------- ----------- -----------
Total ......... $ 160,000 $ 599,072 $ -- $ 490,692 $ 268,380
=========== =========== =========== =========== ===========
Discontinued Operations:
Allowance for doubtful accounts $ 14,337 $ 54,098 $ -- $ 37,825 $ 30,610
Reserve for obsolete inventory 230,472 151,168 -- 227,293 154,347
----------- ----------- ----------- ----------- -----------
Total ......... $ 244,809 $ 205,266 $ -- $ 265,118 $ 184,957
=========== =========== =========== =========== ===========
Year ended December 31, 1996:
Continuing Operations:
Allowance for doubtful accounts $ 100,000 $ 60,000 $ -- $ -- $ 160,000
Reserve for obsolete inventory -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total ......... $ 100,000 $ 60,000 $ -- $ -- $ 160,000
=========== =========== =========== =========== ===========
Discontinued Operations:
Allowance for doubtful accounts $ 14,337 $ -- $ -- $ -- $ 14,337
Reserve for obsolete inventory 238,679 12,100 -- 20,307 230,472
----------- ----------- ----------- ----------- -----------
Total ......... $ 253,016 $ 12,100 $ -- $ 20,307 $ 244,809
=========== =========== =========== =========== ===========
</TABLE>
(1) Includes $96,238 transferred from discontinued operations for accounts
remaining with the Company.
<PAGE>
Appendix C
----------
Quarterly Financial Data
(unaudited)
Forming a Part of the Annual Report
Form 10-K
Item 8
of
ADVANCED NEUROMODULATION SYSTEMS, INC. and SUBSIDIARIES
(Name of issuer)
Filed with the
Securities and Exchange Commission
Washington, D.C. 20549
under
The Securities and Exchange Act of 1934
<PAGE>
<TABLE>
<CAPTION>
1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- ------------------------------------------------------ ------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net revenue- product sales $ 4,423,455 $ 4,730,672 $ 3,706,402 $ 4,145,878
Total net revenue 4,423,455 5,330,672 5,006,402 5,345,878
Gross profit- product sales 3,165,823 3,493,103 2,657,313 2,704,281
Earnings from operations 771,403 1,356,560 865,004 840,120
Earnings from continuing operations before income
taxes 847,373 1,520,187 1,032,775 931,675
Net earnings from continuing operations 501,644 921,188 613,637 549,237
Net earnings (loss) from discontinued operations
4,988,941 -- -- (615,445)
- ------------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Net earnings (loss) $ 5,490,585 $ 921,188 $ 613,637 $ (66,208)
- ------------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Basic earnings (loss) per share:
Continuing operations $ 0.06 $ 0.11 $ 0.07 $ 0.07
Discontinued operations $ 0.58 $ -- $ -- $ (0.08)
- ------------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Net earnings (loss) $ 0.64 $ 0.11 $ 0.07 $ (0.01)
- ------------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Diluted earnings (loss) per share:
Continuing operations $ 0.06 $ 0.10 $ 0.07 $ 0.07
Discontinued operations $ 0.56 $ -- $ -- $ (0.08)
- ------------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Net earnings (loss) $ 0.62 $ 0.10 $ 0.07 $ (0.01)
- ------------------------------------------------------ ------------------ ------------------- ------------------ ------------------
</TABLE>
<TABLE>
<CAPTION>
1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- ------------------------------------------------------ ------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net revenue $ 3,135,581 $ 3,465,753 $ 4,220,002 $ 3,896,385
Gross profit 2,218,003 1,805,158 3,065,411 2,789,888
Earnings (loss) from operations 361,973 (149,343) 1,125,084 748,594
Earnings (loss) from continuing operations before
income taxes 202,041 (269,154) 1,007,426 610,212
Net earnings (loss) from continuing operations 137,891 (222,013) 649,100 252,533
Net earnings (loss) from discontinued operations (43,525) 187,265 (199,738) (37,492)
- ------------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Net earnings (loss) $ 94,366 $ (34,748) $ 449,362 $ 215,041
- ------------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Basic earnings (loss) per share:
Continuing operations $ 0.02 $ (0.03) $ 0.08 $ 0.03
Discontinued operations (0.01) 0.03 (0.03) --
- ------------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Net earnings $ 0.01 $ -- $ 0.05 $ 0.03
- ------------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Diluted earnings (loss) per share:
Continuing operations $ 0.02 $ (0.03) $ 0.07 $ 0.03
Discontinued operations (0.01) 0.03 (0.02) (0.01)
- ------------------------------------------------------ ------------------ ------------------- ------------------ ------------------
Net earnings $ 0.01 $ -- $ 0.05 $ 0.02
- ------------------------------------------------------ ------------------ ------------------- ------------------ ------------------
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<C> <S>
2.4 Asset Purchase Agreement, dated December 29, 1997, by and among
Quest Medical, Inc., QMI Medical, Inc. (formerly known as QMI
Acquisition Corp.) and Atrion Corporation (including exhibits and
schedules 2.1.1, 2.1.2, 2.3(a) and 2.3.(b))(8)
3.1 Articles of Incorporation, as amended(5)
3.2 Articles of Amendment to the Articles of Incorporation dated June
12, 1998 changing the name of the Corporation from Quest Medical,
Inc. to Advanced Neuromodulation Systems, Inc.(11)
3.3 Bylaws(1)
4.1 Rights Agreement dated as of August 30, 1996, between Quest
Medical, Inc. and KeyCorp Shareholder Services, Inc. as Rights
Agent(6)
10.1 Quest Medical, Inc. 1979 Amended and Restated Employees Stock
Option Plan(2)
10.2 Form of 1979 Employees Stock Option Agreement(3)
10.3 Quest Medical, Inc. Directors Stock Option Plan (as amended)(2)
10.4 Form of Directors Stock Option Agreement(1)
10.5 Quest Medical, Inc. 1987 Stock Option Plan(5)
10.6 Form of 1987 Employee Stock Option Agreement(5)
10.7 Quest Medical, Inc. 1995 Stock Option Plan(5)
10.8 Form of 1995 Employee Stock Option Agreement(5)
10.9 Quest Medical, Inc. 1998 Stock Option Plan(12)
10.10 Employment Agreement dated April 9, 1998 between Christopher G.
Chavez and Quest Medical, Inc.(10) 10.11 Employment Agreement
dated April 9, 1998 between Scott F. Drees and Quest Medical,
Inc.(10) 10.12 Employment Agreement dated April 9, 1998 between
F. Robert Merrill III and Quest Medical, Inc.(10) 10.13 Form of
Employment Agreement and Covenant Not to Compete, between the
Company and key employees(1) 10.14 Promissory Note dated December
28,1993, between Quest Medical, Inc. and MetLife Capital
Financial Corporation(4)
10.15 Commercial Deed of Trust, Security Agreement and Assignment of
Leases and Rents and Fixture Filing dated December 28,1993,
between Quest Medical, Inc. and MetLife Capital Financial
Corporation(4)
10.16 Term Promissory Note dated December 28,1993, between Quest
Medical, Inc. and MetLife Capital Corporation(4)
10.17 Loan and Security Agreement dated December 28,1993, between Quest
Medical, Inc. and MetLife Capital Corporation(4)
10.18 Supplemental Security Agreement Number One dated December 28,
1993, between Quest Medical, Inc. and MetLife Capital
Corporation(4)
10.19 Third Amended and Restated Credit Agreement dated as of March 3,
1997, between Quest Medical, Inc. and NationsBank of Texas,
N.A.(7) 10.20 Promissory Note (Facility A. Note) in the original
principal amount of $5,650,000 dated March 3, 1997(7) 10.21
Promissory Note (Facility B. Note) in the original principal
amount of $350,000 dated March 3, 1997(7) 10.22 First Amended and
Restated Security Agreement dated March 3, 1997, between Quest
Medical, Inc. and NationsBank of Texas, N.A.(7)
10.23 First Amended and Restated Security Agreement dated March 3,
1997, between Advanced Neuromodulation Systems, Inc. and
NationsBank of Texas, N.A.(7)
10.24 First Amended and Restated Intellectual Property Security
Agreement and Assignment dated as of March 3, 1997, between Quest
Medical, Inc. and NationsBank of Texas N.A.(7)
10.25 First Amended and Restated Intellectual Property Security
Agreement and Assignment dated as of March 3, 1997, between
Advanced Neuromodulation Systems, Inc. and NationsBank of Texas,
N.A.(7)
10.26 First Amended and Restated License Agreement dated as of March 3,
1997, between Quest Medical, Inc. and NationsBank of Texas,
N.A.(7)
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<C> <S>
10.27 First Amended and Restated License Agreement dated as of March 3,
1997, between Advanced Neuromodulation Systems, Inc. and
NationsBank of Texas, N.A.(7)
10.28 Guaranty of Advanced Neuromodulation Systems, Inc. in favor of
NationsBank of Texas, N.A. under the Third Amended and Restated
Credit Agreement dated as of March 3, 1997(7)
10.29 Form of License Agreement, dated January 30, 1998, by and between
Quest Medical, Inc. and QMI Medical, Inc.(formerly known as QMI
Acquisition Corp.)(8)
10.30 Form of Lease Agreement, dated January 30, 1998, by and between
Quest Medical, Inc. and QMI Medical, Inc. (formerly known as QMI
Acquisition Corp.)(8)
10.31 Form of Option Agreement, dated January 30, 1998, by and between
Quest Medical, Inc. and QMI Medical, Inc. (formerly known as QMI
Acquisition Corp.)(8)
10.32 Agreement, dated December 31, 1997, by and among Quest Medical,
Inc., its subsidiaries and affiliates and Thomas C. Thompson(9)
10.33 Lease Agreement dated as of February 4, 1999, between Advanced
Neuromodulation Systems, Inc. and Legacy Lincoln I, LTD. (13)
11.1 Computation of Earnings Per Share(13)
21.1 Subsidiaries(13)
23.1 Consent of Independent Auditors(13)
27.1 Financial Data Schedule - December 31, 1998(13)
</TABLE>
- -------------------------------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-18,
Registration No. 2-71198-FW, and incorporated herein by reference.
(2) Filed as an Exhibit to the report of the Company on Form 10-K for the year
ended December 31, 1987, and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
Registration No. 2-78186, and incorporated herein by reference.
(4) Filed as an Exhibit to the report of the Company on Form 10-KSB for the
year ended December 31, 1993, and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Registration Statement on Form SB-2,
Registration No. 33-62991, and incorporated herein by reference.
(6) Filed as an Exhibit to the report of the Company on Form 8-K dated
September 3, 1996, and incorporated herein by reference.
(7) Filed as an Exhibit to the report of the Company on Form 10-K dated for
the year ended December 31, 1996, and incorporated herein by reference.
(8) Filed as an Exhibit to the report of the Company on Form 8-K dated
February 13, 1998, and incorporated herein by reference. Upon request, the
Company will furnish a copy of any omitted schedule to the Commission.
(9) Filed as an Exhibit to the report of the Company on Form 10-K dated for
the year ended December 31, 1997, and incorporated herein by reference.
(10) Filed as an Exhibit to the report of the Company on Form 10-Q dated for
the quarterly period ended March 31, 1998, and incorporated herein by
reference.
(11) Filed as an Exhibit to the report of the Company on Form 10-Q dated for
the quarterly period ended June 30, 1998, and incorporated herein by
reference.
(12) Filed as an Exhibit to the Definitive Proxy Statement on Schedule 14A
dated April 27, 1998, and incorporated herein by reference.
(13) Filed herewith.
<PAGE>
EXHIBIT 10.33
<PAGE>
LEASE AGREEMENT
---------------
This Lease Agreement (this "Lease") is entered into on this the 4th day of
February, 1999 by and between LEGACY LINCOLN I, LTD., a Texas limited
partnership ("Landlord"), and ADVANCED NEUROMODULATION SYSTEMS, INC., a
corporation ("Tenant").
1. PREMISES, TERM, AND INITIAL IMPROVEMENTS.
(a) Subject to and upon the terms, provisions and conditions hereinafter
set forth, and each in consideration of the duties, covenants and obligations of
the other hereunder, Landlord hereby leases to Tenant, and Tenant hereby leases
and takes from Landlord, approximately 40,680 square feet of Net Rentable Area
(hereinafter defined) (the "Premises") located in the approximately 64,017
square foot building (the "Building") to be constructed upon the land situated
in the City of Plano, Texas (the "Land"). The Building is known as "Building D"
of a four (4) building project containing an aggregate of approximately 182,000
square feet of Net Rentable Area located on the Land known as the "Lincoln R&D
Legacy Project" (the "Project"). A legal description of the Land is attached
hereto as Exhibit "A-1". A preliminary Site Plan depicting the Premises is
attached hereto as Exhibit "A". The Premises will be composed of (i)
approximately 30,140 square feet of Net Rentable Area of office and light
assembly space, (ii) approximately 7,000 square feet of Net Rentable Area of a
Class 10,000 "Clean Room", (iii) approximately 3,000 square feet of Net Rentable
Area of air-conditioned warehouse space, and (iv) approximately 540 square feet
of Net Rentable Area of "operating room" for physicians' training. Landlord
anticipates that it may be necessary for Landlord to make certain modifications
to the Site Plan with the consent of Tenant (such consent not be unreasonably
withheld or delayed); accordingly, if and when such Site Plan is revised by
Landlord after Tenant has consented thereto, such revised Site Plan shall be
initialed by Landlord and Tenant and substituted in place of the then current
Site Plan attached to this Lease. The term "Net Rentable Area" refers to the
area occupied by office and/or warehouse space, as calculated using the
methodology set forth in Standard Method for Measuring Floor Area in Office
Buildings as published by the Building Owners and Managers Association
International (approved June 7, 1996 by American National Standards Institute,
Inc.; ANSI/BOMA Z65.1-1996) (the "BOMA Method"), except that the boundaries
shall be measured from the exterior surface of the exterior walls and windows of
the Building, and the center line of any demising walls separating the Premises
from space to be occupied by another tenant. Tenant shall have the right to
calculate the Net Rentable Area within the Premises upon the parties' final
agreement to the Drawings (hereinafter defined) and upon such calculation, the
parties shall promptly execute an amendment to this Lease confirming the actual
Net Rentable Area in the Premises calculated pursuant to the BOMA Method, as
modified above, the monthly Base Rent and Tenant's Proportionate Share.
(b) The term of this Lease (the "Term") shall be sixty-three (63)
months, beginning on the date (the "Commencement Date") which is thirty (30)
days after the date on which Substantial Completion (hereinafter defined) of the
Improvements (hereinafter defined) has occurred in accordance with Exhibit "B"
attached hereto and made a part hereof, and ending on the last day of the 63rd
full month following the Commencement Date. Although the Term may not commence
until after the date hereof, from and after the date hereof this Lease shall be
deemed to be a contract between Landlord and Tenant and the provisions hereof
shall be effective for all purposes. Notwithstanding anything to the contrary
contained above, Tenant acknowledges that the Building has not yet been
constructed by Landlord. It is contemplated by Landlord and Tenant that the
Commencement Date shall occur on or before May 1, 1999. In the event the
Commencement Date does not occur on or before May 1, 1999 (which date shall be
extended by the number of days of delay (i) attributable to Events of Force
Majeure, and (ii) attributable to Tenant Delays, including any delays in the
parties' agreement to the final Drawings beyond February 1, 1999 due to Tenant
-1-
<PAGE>
Delays, and which May 1, 1999 date as so extended is referred to herein as the
"Deadline Date") (such period between the Deadline Date and the date on which
Substantial Completion of the Improvements has occurred is herein called the
"Holdover Period"), then Landlord shall pay to Tenant, as liquidated damages, an
amount equal to the product of the number of days in the Holdover Period times
$500.00. For purposes of this Lease, the term "Events of Force Majeure" shall
mean any delays due to strikes, riots, acts of God, shortages of labor or
materials, war, governmental laws, regulations or restrictions, or any other
causes of any kind whatsoever which are beyond the control of Landlord. In the
event the Commencement Date has not occurred by July 1, 1999 for reasons other
than Events of Force Majeure or Tenant Delays, then Tenant shall have the right,
at Tenant's option, to terminate this Lease by delivering written notice thereof
to Landlord on or before August 1, 1999, this Lease shall terminate and no
longer be of any force or effect. Notwithstanding anything to the contrary
contained above, in the event that substantial completion of the Improvements
occurs prior to May 1, 1999, Landlord shall make the Premises available for
occupancy at such time, and Tenant shall have the right to occupy the Premises
prior to May 1, 1999, subject to the terms and provisions of this Lease, except
that Tenant shall have no obligations to pay Base Rent or any other amount for
the period of any such early occupancy prior to May 1, 1999. Rental and Tenant's
other obligations under this Lease shall not commence until said Commencement
Date and the Term shall commence and the expiration date shall be extended so as
to give effect to the full stated Term. Landlord and Tenant shall enter into a
written agreement confirming the date on which the Commencement Date in fact
occurs in accordance with the terms of this Lease.
(c) Landlord shall construct the Building and the Premises in a good and
workmanlike manner in substantial accordance with the plans and specifications
referenced on Exhibit "B", and, by occupying the Premises, Tenant shall be
deemed to have accepted the Premises in their condition, subject only to latent
defects and the completion of any punch-list items. Neither Landlord nor
Landlord's agents have made any express or implied representations or promises
with respect to the Building or the Premises or the repair or alteration
thereof, except as expressly set forth in this Lease, and no rights or easements
or licenses are acquired by Tenant by implication or otherwise, except as
expressly set forth herein. Nothing contained in this paragraph (c) shall be
construed to limit or otherwise affect Landlord's obligations otherwise set
forth in this Lease.
2. BASE RENT. SECURITY DEPOSIT AND ADDITIONAL RENT.
(a) Tenant shall pay to Landlord monthly "Base Rent", in advance,
without demand, deduction or set off except as hereinbelow expressly provided,
equal to the total sum of $2,898,450.00, payable in the following installments
for the following periods of time:
Rate Per Square foot of Net
Months in Term Monthly Base Rent Rentable Area Per Year
- --------------------- ----------------------- ------------------------------
1-3 $0.00 $0.00
4-63 $48,307.50 $14.25
Notwithstanding the foregoing, the $2,898,450.00 and the monthly Base Rent
amounts set forth above shall be subject to Tenant's right to measure the square
feet of Net Rentable Area in the Premises in accordance with Section 1(a) above,
and upon Tenant's calculation of said area, Landlord and Tenant shall enter into
an amendment confirming the actual monthly Base Rent, annual Base Rent and total
-2-
<PAGE>
Base Rent payable during the Term of this Lease. In the event the cost of
construction of the Tenant's Work depicted on the Drawings is less than the Cash
Allowance, as defined in Exhibit "B" (the difference between the amount of the
Cash Allowance and the total cost of construction of the Tenant's Work herein
called the "Savings"), then the "Rate Per Square Foot of Net Rentable Area Per
Year" set forth hereinabove upon which the Base Rent is derived shall be reduced
by ten cents (10(cent)) for every one dollar ($1.00) of Savings per square foot
of Net Rentable Area in the Premises. Each monthly installment of Base Rent
payable hereunder shall be due on the first (1st) day of each calendar month
following the Commencement Date, beginning on the first (1st) day of the fourth
(4th) calendar month of the Term. If the Term begins on a day other than the
first day of a month or ends on a day other than the last day of a month, then
Base Rent and additional rent for such partial month shall be prorated.
(b) [INTENTIONALLY OMITTED - SECURITY DEPOSIT]
(c) For calendar year 2000, and each subsequent calendar year thereafter
during the Term and any renewals and extensions thereof, Tenant shall pay, as
additional rent, Tenant's Proportionate Share (hereinafter defined) of all
reasonable costs incurred by Landlord in owning, operating, maintaining,
repairing and replacing the Land, the Building, the Project and the facilities
and services provided for the common use of Tenant and any other tenants of the
Project (collectively, "Operating Expenses") in excess of the Operating Expenses
for calendar year 1999 ("Base Year") said Operating Expenses for the Base Year
being grossed up to 100% occupancy as provided in Section 2(d) below ("Operating
Expenses Excess"). Operating Expenses shall include the following items: (1)
Taxes (defined below) and the cost of any tax consultant employed to assist
Landlord in determining the fair tax valuation of the Project; (2) the cost of
all utilities used in the Project which are not billed separately to a tenant of
the Project for above building standard utility consumption and which are not
sub-metered to the Premises and paid for directly by Tenant; (3) insurance
premiums; (4) the cost of repairs, replacement, management fees (not to exceed
an annual amount equal to 4% of the annual gross revenues derived from the
Project) and expenses, landscape maintenance and replacement, janitorial
services to the extent set forth on Exhibit "G" attached hereto and made a part
hereof for all purposes, security service (if provided), sewer service (if
provided), trash service (if provided); (5) the cost of dues, assessments, and
other charges applicable to the Land payable to any property or community owner
association under restrictive covenants or deed restrictions to which the
Premises are subject; and (6) alterations, additions, and improvements made by
Landlord to comply with any change in any applicable Laws (defined in Section
23(a) below) enacted subsequent to the time of construction of the Building.
Throughout the Term on the same day that Base Rent is due, Tenant shall pay to
Landlord an amount equal to 1/12 of Landlord's reasonable estimate of Tenant's
Proportionate Share of annual Operating Expenses Excess. The initial monthly
payments are based upon Landlord's estimate of the Operating Expenses Excess for
the calendar year in question, and shall be increased or decreased annually to
reflect the actual Operating Expenses reasonably determined by Landlord for that
calendar year. If Tenant's total payments in respect of Operating Expenses
Excess for any calendar year are less than Tenant's Proportionate Share of
actual Operating Expenses Excess for that calendar year, Tenant shall pay the
difference to Landlord within ten (10) days after Landlord's request therefor;
if such payments are more than Tenant's Proportionate Share of actual Operating
Expenses Excess for that calendar year, Landlord shall refund the excess to
Tenant within ten (10) days after the determination of actual Operating Expenses
for the year in question. Landlord shall, on or before April 1 of each year,
provide to Tenant a statement showing the actual Operating Expenses for the
immediately preceding calendar year. In calculating Tenant's Proportionate Share
of actual Operating Expenses Excess, Tenant shall not be responsible for any
controllable Operating Expenses in excess of one hundred eight percent (108%) of
such controllable Operating Expenses in the immediately preceding calendar year.
For purposes of this provision, controllable Operating Expenses do not include
taxes, insurance or utilities. Operating Expenses shall not include the
following: (A) any costs for interest, amortization, or other payments on loans
-3-
<PAGE>
to Landlord; (B) expenses incurred in leasing or procuring tenants; (C) legal
expenses other than those incurred for the general benefit of the Project's
tenants; (D) allowances, concessions, and other costs of renovating or otherwise
improving space for occupants of the Project or vacant space in the Project; (E)
federal income taxes imposed on or measured by the income of Landlord from the
operation of the Project; (F) rents under ground leases; (G) costs incurred in
selling, syndicating, financing, mortgaging, or hypothecating any of Landlord's
interests in the Project; (H) the cost of any capital improvements (except for
the amortization of the cost of (1) capital improvements made by Landlord or
equipment purchased by Landlord as a means to accomplish savings in operating,
repairing, managing or maintaining the Project, and (2) capital improvements
made by Landlord to comply with any change in any applicable Laws enacted
subsequent to the time of construction of the Project); (I) the cost of electric
and gas service sub-metered to the Premises and paid for directly by Tenant; (J)
costs of alterations, maintenance, or repair attributable solely to specific
tenants or occupants of the Project; (K) any inheritance, estate, gift,
franchise, corporation, income, net profits, or similar tax which may be, or is,
assessed against or imposed upon Landlord and/or the Project; (L) depreciation
of the Project and Landlord's personal property; (M) fees for professional
services including legal, architectural, engineering, accounting, appraisal that
are not directly related to the management, operation, repair and maintenance of
the Premises, or are related to the purchase or leasing of the Project; (N) any
payments for air rights, licenses and easements benefiting the Project; (O)
costs incurred by Landlord to the extent that Landlord is entitled to receive
reimbursement for such costs from any source (including, but not limited to,
insurance, tenants of the Project, and warranties and guaranties provided to
Landlord in connection with the initial construction of the Project); (P) costs
(including permits, licenses, and inspection costs) incurred with respect to the
installation of tenant improvements for tenants in the Project or incurred in
renovating, decorating, painting or redecorating vacant space for tenants or
other occupants of the Project, including common areas of the Project; (Q) costs
and expenses incurred in connection with leasing space in the Project to tenants
(including Tenant), including, without limitation, marketing costs, leasing
commissions and the costs of any inducements provided to Tenants, including, but
not limited to, tenant finish allowances, costs incurred for materials and labor
in connection with the installation of multi-tenant floor corridor
configurations, security systems, rent allowances, lease takeover costs, payment
of moving costs and other similar costs and expenses; (R) real estate
commissions, attorneys' fees, and other costs and expenses incurred in
connection with negotiations with purchasers or potential purchasers of the
Project; (S) all costs and expenses (including, but not limited to attorneys'
fees) incurred in connection with disputes with tenants or other occupants of
the Project; (T) expenses in connection with services or other benefits which
are not provided to Tenant, but which are provided solely to other tenants or
occupants of the Project; (U) costs incurred by Landlord due to the violation by
Landlord, or any other tenants of the Project, of the terms and conditions of
any lease of space in the Project; (V) landlord's general overhead and general
administrative expenses; (W) rentals and other related expenses incurred in
leasing air conditioning systems, elevators or other equipment or machinery
ordinarily considered of a capital nature, if such machinery or equipment would
constitute a capital expenditure if purchased by Landlord; (X) advertising and
promotional expenditures, and costs of signs in or on the Project identifying
the owner of the Project or any tenant of the Project; (Y) utility for which any
occupant of the Project directly contracts with the utility company or which is
separately metered, and other costs which any occupant pays directly to any
utility company or other vendor; (Z) special assessments; (AA) penalties or
fines incurred by Landlord due to a violation by Landlord of any legal
requirement, building codes, or any other government rule or requirement; (BB)
interest and penalties on taxes; (CC) the cost of rent continuation insurance;
(DD) cost of insurance in excess of that required for Landlord to comply with
this lease; (EE) salaries and benefits for employees other than those directly
employed at the Project; (FF) salary of Landlord's officers, management
supervisors and leasing agents; (GG) expenses related to compliance with
environmental laws, and the law (including related regulations) commonly known
as the "Americans with Disabilities Act", as may be amended, or any successor
law or regulations, (collectively, the "ADA") unless such expenses relate to the
-4-
<PAGE>
interior of Tenant's Premises or arise because of Tenant's use of the Premises
or Project pursuant to the terms of this Lease in which event, the expense shall
be the responsibility of Tenant; (HH) expenses paid to affiliates of Landlord,
or to the Project's manager or its affiliates, to the extent the same exceed
expenses that would be incurred in an arm's-length transaction; (JJ) cost of
work performed or services rendered to any tenant which work or services are
above building-standard; (II) tort claims not fully covered by insurance; (JJ)
costs to remedy structural defects (including but not limited to latent defects)
in the Project or portion thereof; (KK) repair costs resulting from defects in
workmanship, materials, or equipment to the extent Landlord failed to act as a
prudent landlord in the selection or supervision of the person that performed
the applicable work; and (LL) cost necessitated by or resulting from the
negligence of Landlord, its agents, officers, employees or invitees or
Landlord's breach of its obligations under the lease.
In no event shall Landlord be entitled to recover more than its actual
Operating Expenses in any year. Landlord agrees that it will use its good faith
efforts to reasonably and fairly allocate Operating Expenses to the buildings in
the Project. Landlord shall keep books and records in accordance with sound
accounting practice or generally accepted accounting principles, consistently
applied. Landlord shall use its good faith efforts to keep Operating Expenses to
a minimum. There shall be no duplication of costs for reimbursements in
calculating Operating Expenses.
(d) If during any calendar year (including the Base Year) the Project is
less than 100% occupied, then, for purposes of calculating Tenant's
Proportionate Share of Operating Expenses Excess for that calendar year, the
amount of Operating Expenses that fluctuate with Project occupancy shall be
"grossed-up" to the amount which, in Landlord's estimation, would have been
incurred by Landlord had the Project been 100% occupied for that entire calendar
year. Without limiting the generality of the foregoing, it is agreed that the
component of Operating Expenses consisting of ad valorem taxes shall be
determined for the Base Year as though the Project were fully assessed for ad
valorem tax purposes assuming leasehold improvements constructed in the
remainder of the Project at building standard levels and the remaining Project
leased at market rental rates.
(e) Landlord, upon written request from Tenant, will provide Tenant with
a statement reflecting the Operating Expenses of the Building for any year in
which Operating Expenses Excess is due from Tenant under the terms of Section
2(c). In addition, Tenant shall have the right no more than one (1) time for
each calendar year during the Term, after reasonable notice to Landlord and at
times during normal business hours, to audit the records of Landlord relating to
the calculation of Operating Expenses and Tenant's Proportionate Share of
Operating Expenses Excess. Landlord will refund any overcharge discovered by
such audit. If the audit discloses more than a three percent (3%) overcharge by
Landlord, then Landlord shall pay to Tenant the reasonable cost of the audit.
(f) If any payment of Base Rent or the regularly scheduled monthly
payment of the Operating Expenses Excess based on Landlord's estimate thereof is
not paid within five (5) days after the date on which any such payment is due,
or if any other payment required of Tenant under this Lease is not paid within
five (5) days following written notice from Landlord advising Tenant of its
failure to make such payment, then except to the extent limited by any
applicable Laws, and not in limitation or waiver of any of Landlord's other
rights and remedies under this Lease, Landlord may charge Tenant and Tenant
shall pay to Landlord a fee equal to $500.00 to reimburse Landlord for its cost
and inconvenience incurred as a consequence of Tenant's delinquency.
(g) All payments and reimbursements required to be made by Tenant under
this Lease shall constitute "rent" (herein so called).
(h) The term "Tenant's Proportionate Share" means the ratio from time to
time of the Net Rentable Area of the Premises to the Net Rentable Area of the
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Project (which contains 182,290 square feet of Net Rentable Area). Tenant's
Proportionate Share has been initially determined to be 22.32%. If the Net
Rentable Area of the Premises or Project changes, Tenant's Proportionate Share
shall change accordingly. It is agreed that Tenant's Proportionate Share shall
be finally determined after Tenant has calculated the Net Rentable Area in the
Premises in accordance with the terms hereof.
3. TAXES.
(a) Landlord shall pay all taxes, assessments and governmental charges
whether federal, state, county, or municipal and whether they are imposed by
taxing or management districts or authorities presently existing or hereafter
created but excluding any interest or penalties for late or delinquent payments
(collectively, "Taxes") that accrue against the Premises and the Project subject
to Tenant's obligation to pay Tenant's Proportionate Share of Operating Expenses
Excess pursuant to Section 2(c). If, during the Term, there is levied, assessed
or imposed on Landlord a capital levy or other tax directly on the rent or a
franchise tax, assessment, levy or charge measured by or based, in whole or in
part, upon rent, then all such taxes, assessments, levies or charges, or the
part thereof so measured or based, shall be included within the term "Taxes". If
the Project is occupied by more than one tenant and the cost of any improvements
constructed in the premises occupied by any tenant is disproportionately higher
than the cost of improvements constructed in the premises of other tenants of
the Project, then Landlord may require that the tenant whose premises contain
such disproportionately higher cost improvements pay the amount of Taxes
attributable to such improvements in addition to such tenant's proportionate
share of Taxes.
(b) Tenant shall (1) pay when due all taxes levied or assessed against
any personal property, fixtures or alterations placed in the Premises and (2)
upon the request of Landlord, deliver to Landlord copies of receipts from the
applicable taxing authority or other evidence acceptable to Landlord to verify
that such taxes have been paid. If any such taxes are levied or assessed against
Landlord or Landlord's property and (A) Landlord pays them or (B) the assessed
value of Landlord's property is increased thereby and Landlord pays the
increased taxes, then Tenant shall pay to Landlord such taxes immediately upon
Landlord's request therefor.
4. LANDLORD'S MAINTENANCE.
(a) This Lease is intended by Landlord and Tenant to be a full service
lease, net of the utilities described in Section 8; accordingly, Landlord's
maintenance obligations include the repair and maintenance of the Premises, the
repair, maintenance and replacement (if Landlord, in Landlord's reasonable
business judgment, determines replacement is necessary) of the Building's roof
and repair, maintenance and replacement (if Landlord, in Landlord's reasonable
business judgment, determines replacement is necessary) of the foundation and
structural members of the exterior walls and load bearing columns of the
Building (collectively, the "Building's Structure"), the repair, maintenance and
replacement (if Landlord, in Landlord's reasonable business judgment, determines
replacement is necessary) of the mechanical, electrical, plumbing, heating,
ventilation, air-conditioning, sprinkler, and life-safety systems and equipment
of the Building, and any repair, maintenance or replacement (if Landlord, in
Landlord's reasonable business judgment, determines replacement is necessary) of
the Premises or any portion thereof to the extent such repair, maintenance or
replacement is necessitated due to design, construction or materials defects in
the initial construction of the Improvements pursuant to the terms hereof;
however, Landlord shall not be responsible (1) for any such work until Tenant
delivers to Landlord written notice of the need therefor, or (2) for alterations
to the Building's Structure required by any applicable Law (including, without
limitation, the Americans with Disabilities Act of 1990) because of Tenant's use
of the Premises (which alterations shall be performed by Tenant at Tenant's sole
cost and expense), or (3) repairs, maintenance or replacements required because
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of the negligence of Tenant or any Tenant Party, or resulting from a default by
Tenant or any Tenant Party under the terms of this Lease. Landlord hereby
represents to Tenant that, to the best of Landlord's actual knowledge, the
Building and the Premises will be completed substantially in accordance with all
applicable requirements of the Americans with Disabilities Act of 1990, and that
Landlord will be responsible for compliance with ADA requirements for all
portions of the Building other than the Premises except as otherwise provided
hereinabove. The Building's Structure does include skylights, windows, glass or
plate glass, doors, special store fronts or office entries, all of which shall
be maintained by Landlord. Landlord's liability for any defects, repairs,
replacement or maintenance for which Landlord is responsible hereunder shall be
limited to the cost of performing such work.
(b) Landlord shall maintain the parking areas, driveways, alleys and
grounds surrounding the Premises in a clean and sanitary condition, including,
without limitation, maintenance, repairs and replacements of (i) the exterior of
the Building (including painting and landscaping), (ii) sprinkler systems and
sewage lines, and (iii) any other items normally associated with the foregoing.
Tenant shall repair or replace, as applicable, and pay for any damage caused to
such parking areas, driveways, alleys and grounds by a Tenant Party (defined
below) or caused by Tenant's default hereunder.
(c) On or before the Commencement Date, Landlord shall deliver the
heating, air conditio0ning, and ventilation equipment and system (the "HVAC
System") in good repair and working order. Thereafter Landlord shall maintain
the HVAC System in good repair and condition.
(d) The cost of performing Landlord's maintenance and repair obligations
shall be an Operating Expense (except to the limited extent any such cost is
specifically excluded from being an Operating Expense pursuant to Section 2.(c)
above).
(e) So long as Tenant is not in default under this Lease, Landlord
agrees to furnish the following services: (i) water at points of supply as
reflected in the Drawings; (ii) janitorial service to the Premises to the extent
set forth on Exhibit "G" attached hereto; and (iii) electric lighting for all
public areas and special service areas of the Building in the manner and to the
extent deemed by the Landlord to be reasonable and standard including
replacement of Building standard light bulbs and tubes. In the event any
services to be provided by Landlord hereunder are interrupted for five (5)
consecutive business days (or ten [10] business days whether or not consecutive
during any twelve [12] month period) because of Landlord's negligence or willfu
misconduct, then Tenant shall have the right, in addition to its other rights
and remedies, to abate rent from the date such interruption commenced until all
services required to be provided by Landlord hereunder are fully restored. In
the event of any such interruption of service that Landlord is obligated to
provide hereunder, Landlord agrees that it will use its good faith efforts to
cause such service to be restored as soon as is reasonably possible. Nothing
contained in this Section 4(e) is intended to negate or act as a waiver of any
right Tenant may have at law or in equity to claim constructive eviction as a
result of Tenant's loss of use of the Premises because of an interruption of the
services described in this Section 4(e).
5. TENANT'S MAINTENANCE AND REPAIR OBLIGATIONS.
(a) Tenant shall maintain all parts of the Premises (except for
maintenance work for which Landlord is expressly responsible under Section 4
above) in good condition and promptly make all necessary repairs and
replacements to the Premises. Tenant shall be responsible for above average and
unusual trash and waste disposal from the Premises and will maintain adequate
receptacles for such disposal, the design, placement and capacity of such
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receptacles to be subject to the prior approval of Landlord. Outdoor storage of
trash or any other material and receptacles or containers not approved by
Landlord (which approval shall not be unreasonably withheld or delayed) is
strictly prohibited.
(b) If Tenant fails to perform any of Tenant's maintenance or repair
obligations, and if such failure continues for thirty (30) days after written
notice thereof is delivered to Tenant (provided, however, if such failure
cannot, through the exercise of reasonable diligence, be cured within 30 days,
Tenant shall be entitled to such additional time as is reasonably necessary to
cure such failure so long as Tenant commences its curative efforts within such
30 day period and thereafter diligently prosecutes same to completion), the
Landlord may perform such obligation, in which event Tenant shall pay to
Landlord the reasonable cost incurred by Landlord in performing such obligation
within thirty (30) days after Landlord's written request therefor.
(c) Tenant acknowledges that Landlord is not providing security services
of any kind to the Premises or for Tenant's property and that the keys given to
Tenant for the Premises may not be secure. At its expense, Tenant shall provide
whatever security and/or alarm systems Tenant deems necessary or appropriate for
the protection of the Premises and of Tenant's personal property and personnel
located therein, including, if Tenant desires to do so, installing new locks for
the Premises with new keys. Tenant shall provide to Landlord copies of all keys
and access codes to allow Landlord entry to the Premises. In no event shall
Landlord be responsible for, and Tenant waives any and all claims arising from,
the loss or damage to any of Tenant's personal property situated in and on the
Premises, even though Landlord may have provided general area security or guard
services, except to the extent such loss or damage results from the negligence
or willful misconduct of Landlord or its agents or contractors. Landlord may
elect to, but shall have no obligation to, provide general area security or
guard services. In the event Landlord elects to provide general area security or
guard services, it may discontinue such security or guard services without
notice. At its expense, Tenant is also responsible for the maintenance, repair,
or replacement of any mechanical, security and fire protection systems which
Tenant has installed within the Premises [provided, however, it shall be
Landlord's responsibility to repair, maintain and replace the mechanical,
security and fire protection systems initially installed as part of the
Improvements pursuant to Exhibit "B" pursuant to Section 4(a) hereinabove].
Tenant is expressly advised that if Tenant should place any fixtures, inventory
or equipment with, in or on the Premises prior to the time the Premises are
completed and delivered to the Tenant, the risk of loss or damage to such
inventory, fixtures, or equipment will be greatly increased in view of the fact
that, out of necessity, numerous people will be permitted access to the Premises
for the purpose of completion of any work. All such risk of loss or damage shall
be borne exclusively by the Tenant and not by the Landlord, and the Tenant
hereby waives any claim for any such loss or damage against the Landlord, except
to the extent such loss or damage results from the negligence or willful
misconduct of Landlord or its agents or contractors.
6. ALTERATIONS. Tenant shall not make any alterations, additions or
improvements to the Premises without the prior written consent of Landlord
(which consent shall not be unreasonably withheld or delayed with respect to
nonstructural alterations or additions). Landlord shall not be required to
notify Tenant of whether it consents to any alteration, addition or improvements
until it (a) has received plans and specifications therefor which are
sufficiently detailed to allow construction of the work depicted thereon to be
performed in a good and workmanlike manner, and (b) has had a reasonable
opportunity to review them (not to exceed five [5] business days). If the
alteration, addition or improvement will affect the Building's Structure, HVAC
System, or mechanical, electrical, or plumbing systems, then the plans and
specifications therefor must be prepared by a licensed engineer reasonably
acceptable to Landlord. Landlord's approval of any plans and specifications
shall not be a representation or warranty that the plans or the work depicted
thereon will comply with applicable Laws or be adequate for any purpose, but
shall merely be Landlord's consent to performance of the work by Tenant. Upon
completion of any alteration, addition, or improvement, Tenant shall deliver to
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Landlord accurate, reproducible as-built plans therefor. Notwithstanding the
foregoing, Tenant may, without Landlord's consent, erect shelves, bins,
machinery and trade fixtures, and may make non-structural alterations to the
interior of the Premises which individually cost less than $5,000.00 and in the
aggregate cost no more than $50,000.00, provided that such items (1) do not
alter the basic character of or damage the Premises or the Building; (2) do not
overload or damage the same; and (3) may be removed without damage to the
Premises. Unless Landlord specifies in writing otherwise, all alterations,
additions, and improvements shall be Landlord's property when installed in the
Premises; provided, however, the following shall remain Tenant's property: (a)
furniture, movable equipment and other personal property that is not attached to
the floors, walls, or ceiling of the Premises; and (b) any other fixture,
equipment, or other item, regardless of the manner of attachment, that is used
primarily in Tenant's trade or business and that can be removed as a separate
physical unit without damage to the Building and without interference with other
tenants' use and enjoyment of their leased premises. All work performed by a
Tenant Party in the Premises (including that relating to the installation,
repair, replacement, or removal of any item) shall be performed in accordance
with all applicable Laws and with Landlord's reasonable specifications and
requirements, in a good and workmanlike, lien-free manner, and so as not to
damage or alter the Building's Structure or the Premises. In connection with any
such alteration, addition, or improvement, Landlord shall not be entitled to
charge a construction management or supervision fee or other fee in connection
with such work, provided, however, any fees of third party consultants shall be
the responsibility of Tenant. Upon expiration of the Term or termination of
Tenant's right to possess the Premises, Landlord may require Tenant to remove
alterations installed in the Premises by or at the request of Tenant (excluding
the initial Improvements constructed pursuant to Exhibit "B")so long as Landlord
advised Tenant, at the time Landlord approved of the alterations in question
that such alterations would be required to be removed upon the expiration or
termination of this Lease or of Tenant's right to possession of the Premises to
repair any damage to the Premises, caused by such removal, and to restore the
Premises to the same condition and state of repair as existed prior to the
installation of the alterations in question, ordinary wear and tear excepted. If
Landlord elects to require Tenant to remove any alterations, it must do so by
delivering to Tenant written notice thereof at the time Landlord consented to
the alteration. Attached hereto as Exhibit "C" is a list of trade fixtures,
equipment, or other items that shall remain the property of Tenant. Subject to
Landlord's prior written approval (which approval shall not be unreasonably
withheld or delayed and which approval shall in all events be deemed to have
been given with respect to any furniture, equipment or other personal property
that is not attached to the Premises or other fixture, equipment or other item,
regardless of the manner of attachment, that is used primarily in Tenant's trade
or business and which can be removed as a separate physical unit without damage
to the Building), this list may be updated as alterations and additions are made
to the Premises.
7. SIGNS. Tenant shall not place, install or attach any signage,
decorations,advertising media, blinds, draperies, window treatments, bars, or
security installations to the Premises or the Building without Landlord's prior
written consent. Landlord hereby grants the right to Tenant to install an
exterior building sign on the facade of the Building fronting Windcrest Drive,
the installation of which sign shall be at Tenant's sole cost (subject to the
availability of the cash allowance as hereinafter provided), subject however to
obtaining any approvals required by covenants, conditions and restrictions
applicable to the Project. Tenant shall repair, paint, and/or replace any
portion of the Premises or the Building damaged or altered as a result of its
signage when it is removed (including, without limitation, any discoloration of
the Building). Tenant shall not (a) make any changes to the exterior of the
Premises or the Building, (b) install any exterior lights, decorations,
balloons, flags, pennants, banners or paintings; or (c) erect or install any
signs, windows or door lettering, decals, window or storefront stickers,
placards, decorations or advertising media of any type that is visible from the
exterior of the Premises without Landlord's prior written consent (which consent
shall not be unreasonably withheld or delayed). Landlord shall not be required
to notify Tenant of whether it consents to any sign until it (1) has received
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detailed, to-scale drawings thereof specifying design, material composition,
color scheme, and method of installation, and (2) has had a reasonable
opportunity to review them (not to exceed five [5] business days). Landlord
hereby agrees to provide Tenant with an allowance of $3,000.00 to be used by
Tenant toward the cost for exterior signage at the entrance to the Premises to
be in a design and location subject to Landlord's approval (which consent shall
not be unreasonably withheld or delayed) and/or the signage to be installed on
the Building's facade facing Windcrest Drive subject however to obtaining any
approvals required by covenants, conditions and restrictions applicable to the
Project. All work in connection with the Building signs of Tenant shall be done
by Tenant at its sole cost and expense and all such signs must comply with all
applicable laws and governmental requirements. Landlord agrees to cooperate with
Tenant in obtaining any consents or approvals required from any governmental
authorities or architectural review boards with respect to the signage of
Tenant.
8. UTILITIES. Tenant shall obtain and pay for all gas, electricity and
telephone services used at the Premises, together with any taxes, penalties,
surcharges, deposits, maintenance charges, and the like pertaining to the
Tenant's use of such utilities within the Premises. All such utilities shall be
separately metered and Tenant shall pay for the use of any such utility service
directly to the utility provider. The utility services described in this Section
8 (but not any other utilities provided to the Premises) shall not be duplicated
in Tenant's obligation to pay Tenant's Proportionate Share of Operating Expenses
Excess under Section 2.(c) above. Except as provided in Section 4(e) above,
Landlord shall not be liable for any interruption or failure of any utility
service to the Premises including, but not limited to, utility service described
in this Section 8.
9. INSURANCE. Tenant shall maintain (a) workers' compensation insurance
(with a waiver of subrogation endorsement reasonably acceptable to Landlord) and
commercial general liability insurance (with contractual liability endorsement),
including personal injury and property damage in the amount of $1,000,000 per
occurrence combined single limit for personal injuries and death of persons and
property damage occurring in or about the Premises, plus umbrella coverage of at
least $2,000,000 per occurrence, and (b) fire and extended coverage insurance
covering (1) the replacement cost of all alterations, additions, partitions and
improvements installed in the Premises by or on behalf of a Tenant Party
(including the initial Tenant's Work described on Exhibit "B"), and (2) the
replacement cost of all of Tenant's personal property in the Premises. Such
policies shall (A) name Landlord, Landlord's agents, and their respective
Affiliates (defined below) of whose identity Landlord has given Tenant written
notice in accordance with the terms hereof, as additional insureds, (B) be
issued by an insurance company licensed to do business in the State of Texas
with a Best's Guide Insurance Rating of A-VII, or better, and otherwise
reasonably acceptable to Landlord, (C) provide that such insurance may not be
canceled unless thirty (30) days' prior written notice is first given to
Landlord, (D) be delivered to Landlord by Tenant before the Commencement Date
and at least 30 days before each renewal thereof, and (E) provide primary
coverage to Landlord when any policy issued to Landlord is similar or duplicate
in coverage, in which case Landlord's policy shall be excess over Tenant's
policies. The commercial general liability insurance required to be carried by
Tenant pursuant to subsection (a) above may be carried by Tenant under blanket
or umbrella policies covering other liabilities, properties and locations of
Tenant.
Landlord shall procure and maintain throughout the Term, the cost of which shall
be included as an Operating Expense, (1) fire and extended coverage insurance
covering the Building in an amount not less than the full replacement cost of
the Building, and (2) such other insurance as Landlord or Landlord's Mortgagee
(hereinafter defined) shall require.
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10. CASUALTY DAMAGE.
(a) Tenant immediately shall give written notice to Landlord of any
damage to the Premises or the Building. If the Premises or the Building are
totally destroyed by an insured peril, or so damaged by an insured peril that,
in Landlord's reasonable estimation, rebuilding or repairs cannot be
substantially completed within 180 days after the date of Landlord's actual
knowledge of such damage, then either Landlord or Tenant may terminate this
Lease by delivering to the other written notice thereof within thirty (30) days
after such damage, in which case, the rent shall be abated during the unexpired
portion of this Lease, effective upon the date such damage occurred. Time is of
the essence with respect to the delivery of such notices.
(b) If this Lease is not terminated under Section 10.(a), then Landlord
shall restore the Premises to substantially its previous condition, except that
Landlord shall not be required to rebuild, repair or replace any part of the
partitions, fixtures, additions and other improvements or personal property
required to be covered by Tenant's insurance under Section 9 (unless Tenant
makes available to Landlord the insurance proceeds received by Tenant with
respect to the Tenant's Work in which event Landlord shall restore the Tenant's
Work to their former condition to the extent of the insurance proceeds so made
available by Tenant to Landlord). If the Premises are untenantable, in whole or
in part, during the period beginning on the date such damage occurred and ending
on the date of substantial completion of Landlord's repair or restoration work
(the "Repair Period"), then the rent for such period shall be reduced to such
extent as may be fair and reasonable under the circumstances.
(c) If the Premises are destroyed or substantially damaged and any
Landlord's Mortgagee requires that insurance proceeds be applied to the
indebtedness secured by its Mortgage (defined below) obligations, Landlord may
terminate this Lease by delivering written notice of termination to Tenant
within thirty (30) days after such destruction or damage or such requirement is
made known by any such Landlord's Mortgagee, as applicable, whereupon all rights
and obligations hereunder shall cease and terminate, except for any liabilities
of Tenant which accrued before this Lease is terminated. Notwithstanding the
foregoing provisions of this Section 10(c), Landlord agrees that it will use its
best efforts to obtain the approval of any such Landlord's Mortgagee for the use
of such insurance proceeds for the purpose of restoration of the Improvements in
accordance with the terms of the Mortgage of such Landlord's Mortgagee.
11. LIABILITY, INDEMNIFICATION, WAIVER OF SUBROGATION AND NEGLIGENCE.
(a) Subject to Section 11.(c) below, Tenant shall indemnify, defend, and
hold harmless Landlord, its successors, assigns, agents, employees, contractors,
partners, directors, officers and affiliates (collectively, the "Landlord
Indemnified Parties") from and against all fines, suits, losses, costs,
liabilities, claims, demands, actions and judgments of every kind or character
(1) arising from Tenant's failure to perform its covenants hereunder, (2)
recovered from or asserted against any of the Landlord Indemnified Parties on
account of any loss to the extent that any such loss may be incident to, arise
out of, or be caused, wholly or in part, by a Tenant Party or any other person
entering upon the Premises under or with a Tenant Party's express or implied
invitation or permission, (3) arising from or out of the occupancy or use of the
Premises by a Tenant Party or arising from or out of any occurrence in the
Premises, howsoever caused, or (4) suffered by, recovered from or asserted
against any of the Landlord Indemnified Parties by the employees, agents,
contractors, or invitees of Tenant or its subtenants or assignees; provided,
however, such indemnification of the Landlord Indemnified Parties by Tenant
shall not be applicable to the extent such loss, damage, or injury is caused by
the negligence or willful misconduct of Landlord or any of its duly authorized
agents or employees or Landlord's breach of its obligations hereunder.
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(b) Subject to Section 11.(c) below, Landlord shall indemnify, defend,
and hold harmless Tenant, its successors, assigns, agents, employees,
contractors, partners, directors, officers and affiliates (collectively, the
"Tenant Indemnified Parties") from and against all fines, suits, losses, costs,
liabilities, claims, demands, actions and judgments of every kind or character
(1) arising from Landlord's failure to perform its covenants hereunder, (2)
recovered from or asserted against any of the Tenant Indemnified Parties on
account of any loss to the extent that any such loss may be incident to, arise
out of, or be caused, wholly or in part, by Landlord or any agent, employee,
invitee or contractor of Landlord (individually a "Landlord Party") or any other
person entering upon the Premises under or with a Landlord Party's express or
implied invitation or permission, (3) arising from or out of the use of the
Lincoln R&D Legacy Project by a Landlord Party, or arising from or out of any
occurrence in the Lincoln R&D Legacy Project caused by a Landlord Party, or (4)
suffered by, recovered from or asserted against any of the Tenant Indemnified
Parties by the employees, agents, contractors, or invitees of Landlord;
provided, however, such indemnification of the Tenant Indemnified Parties by
Landlord shall not be applicable to the extent such loss, damage, or injury is
caused by the negligence or willful misconduct of Tenant or any of its duly
authorized agents or employees or Tenant's breach of its obligations hereunder.
(c) Landlord and Tenant both waive any claim it might have against the
other for any damage to or theft, destruction, loss, or loss of use of any
property, to the extent the same is insured against under any insurance policy
maintained by it (or that is required to be maintained by it under the terms of
this Lease) that covers the Building, the Premises, Landlord's or Tenant's
fixtures, personal property, leasehold improvements, or business, or is required
to be insured against by the waiving party under the terms hereof, regardless of
whether the negligence or fault of the other party caused such loss. Each party
shall cause its insurance carrier to endorse all applicable policies waiving the
carrier's rights of recovery under subrogation or otherwise against the other
party.
12. USE.
(a) The Premises shall be used only for general office purposes and/or
for purposes of receiving, storing, shipping and selling products, materials and
merchandise made or distributed by Tenant and for such other lawful purposes as
may be incidental thereto; however, no retail sales may be made from the
Premises. Tenant shall not use, or permit the use of, the Premises to receive,
store or handle any product, material or merchandise that is explosive or highly
inflammable or hazardous except in accordance with the requirements of all
applicable Laws. Outside storage is prohibited. Tenant shall be solely
responsible for complying with all Laws applicable to the specific use by Tenant
of the Premises and/or the Building (it being agreed that any Laws that are
applicable to buildings generally, and not with respect to the Premises and
Tenant's use thereof, shall be complied with by Landlord at its own expense and
shall not be Tenant's obligations hereunder). Tenant and all Tenant Parties
shall comply with all rules and regulations governing the use and occupancy of
the Premises which are now or hereafter imposed by Landlord (provided, however,
Tenant shall not be required to comply with any such rules and regulations
hereinafter imposed by Landlord unless they are reasonable and written notice
thereof is provided by Landlord to Tenant). Landlord shall enforce all such
rules and regulations in a nondiscriminatory manner. In the event of any
conflict or inconsistency between the terms of this Lease and any such rules and
regulations, the terms of this Lease shall control. A copy of the rules and
regulations now in force are attached as Exhibit "D". Tenant shall not cause or
permit any reasonably objectionable or unpleasant odors, smoke, dust, gas,
light, noise or vibrations to emanate from the Premises; nor take or permit any
other action that would constitute a nuisance or would unreasonably disturb,
unreasonably interfere with, or endanger Landlord or any other person; nor cause
or permit the Premises to be used for any purpose or in any manner that would
(1) void the insurance thereon, (2) materially increase the insurance risk, or
(3) cause the disallowance of any sprinkler credits. Tenant shall pay to
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Landlord within 10 days after demand any increase in the cost of any insurance
on the Premises or the Building incurred by Landlord which is caused by Tenant's
use of the Premises.
(b) Tenant and its employees and invitees shall have the non-exclusive
right to use, in common with others, a maximum of one hundred forty-four (144)
parking spaces (one [1] space for each two hundred fifty [250] square feet of
Net Rentable Area in the Premises) associated with the Premises which Landlord
has designated for such use, subject to (1) such reasonable written rules and
regulations as Landlord may promulgate from time to time (and written notice of
which rules and regulations is provided by Landlord to Tenant) and (2) rights of
ingress and egress of other tenants and their employees, agents and invitees.
Tenant shall have the right to designate five (5) of such parking spaces as
"reserved visitor parking spaces" in a location agreed to by Landlord near the
main entrance to the Premises. Landlord shall not be responsible for enforcing
Tenant's parking rights against third parties.
13. INSPECTION. Landlord and Landlord's agents and representatives may
enter the Premises during business hours to do the following (provided that
Landlord shall not unreasonably interfere with Tenant's use and enjoyment of the
Premises in connection therewith): inspect the Premises; to make such repairs as
may be required or permitted under this Lease; to perform any unperformed
obligations of Tenant hereunder; and to show the Premises to prospective
purchasers, mortgagees, ground lessors, and (during the last six (6) months of
the Term) tenants. During the last six (6) months of the Term, Landlord may
erect a sign on the Premises indicating that the Premises are available. At
least thirty (30) days before the date on which Tenant is anticipated to vacate
the Premises ("Vacation Date"), Tenant and Landlord shall meet for a joint
inspection of the Premises. After such inspection, Landlord and Tenant shall
prepare a list of items, if any, that Tenant must perform before the Vacation
Date and which are consistent with Tenant's obligations under this Lease. If
Tenant fails to perform such work before the Vacation Date, then Landlord may
perform such work at Tenant's cost. Tenant shall pay all reasonable costs
incurred by Landlord in performing such work within ten days after Landlord's
request therefor.
14. ASSIGNMENT AND SUBLETTING.
(a) Tenant shall not, without the prior written consent of Landlord, (1)
advertise that any portion of the Premises is available for lease or cause or
allow any such advertisement, (2) assign, transfer, or encumber this Lease or
any estate or interest herein, whether directly or by operation of law, (3)
sublet any portion of the Premises, or (4) grant any license, concession, or
other right of occupancy of any portion of the Premises, or (5) permit the use
of the Premises by any party other than Tenant (any of the events listed in
Sections 14.(a)(1) through 14.(a)(5) being a "Transfer"). Landlord will not
unreasonably withhold or delay its consent to an assignment of Tenant's interest
in the Lease or a sublease of the Premises or to the grant of a license,
concession or other right of occupancy if the proposed use of the Premises by
the assignee, sublessee, licensee or occupant is reasonably acceptable to
Landlord. If Tenant requests Landlord's consent to a Transfer, then Tenant shall
provide Landlord with a written description of all terms and conditions of the
proposed Transfer, copies of the proposed documentation, and the following
information about the proposed transferee: name and address; information about
its business and business history; its proposed use of the Premises; banking,
financial, and other credit information; and general references sufficient to
enable Landlord to determine the proposed transferee's creditworthiness and
character. Tenant shall reimburse Landlord for its reasonable attorneys' fees
incurred in connection with considering any request for its consent to a
Transfer. If Landlord consents to a proposed Transfer, then the proposed
transferee shall deliver to Landlord a written agreement whereby it expressly
assumes the Tenant's obligations hereunder (however, any transferee of less than
all of the space in the Premises shall be liable only for obligations under this
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Lease that are properly allocable to the space subject to the Transfer, and only
to the extent of the rent it has agreed to pay Tenant therefor) that accrue or
are performable from and after the date of the Transfer in question. Landlord's
consent to a Transfer or a Permitted Transaction shall not release Tenant from
performing its obligations under this Lease, but rather Tenant and its
transferee shall be jointly and severally liable therefor. Landlord's consent to
any Transfer shall not waive Landlord's rights as to any subsequent Transfers.
If an Event of Default occurs while the Premises or any part thereof are subject
to a Transfer, then Landlord, in addition to its other remedies, may collect
directly from such transferee all rents becoming due to Tenant and apply such
rents against Tenant's rent obligations. Tenant authorizes its transferees to
make payments of rent directly to Landlord upon receipt of notice from Landlord
to do so. Notwithstanding the foregoing, Tenant may, without Landlord's consent,
(i) assign this Lease or sublet the Premises to any affiliate of Tenant, and
(ii) assign this Lease in connection with the sale of substantially all of the
assets of Tenant as an entirety. In addition, the merger, consolidation,
reorganization or other change in the ownership or control of Tenant shall not
constitute an assignment or subletting or require Landlord's consent. The
transactions prescribed in the preceding two sentences shall be referred to
herein as the "Permitted Transactions".
(b) Tenant hereby assigns, transfers and conveys fifty percent (50%) of
all consideration received by Tenant under any Transfer, which are in excess of
the rents payable by Tenant under this Lease to Landlord, and Tenant shall hol
such amounts in trust for Landlord and pay them to Landlord within ten (10) days
after receipt. Notwithstanding the foregoing, this Section 14(b) shall not apply
to any Permitted Transaction.
15. CONDEMNATION. If any portion of the Premises is taken for any public
or quasi-public use by right of eminent domain or private purchase in lieu
thereof (a "Taking"), or any portion of the Building or the parking area
associated with the Building is taken such that the Taking prevents or
materially and adversely interferes with the use of the remainder of the
Premises for the purpose for which they were leased to Tenant, either party may
terminate this Lease by delivering to the other written notice thereof within
thirty (30) days after the Taking, in which case rent shall be abated during the
unexpired portion of the Term, effective as of the date of such Taking. Tenant
shall not have the right to terminate this Lease if a portion of the parking
area associated with the Building is taken provided that Landlord provides
Tenant with alternative parking in some other area of the Project or otherwise
in close proximity to the Premises, and which complies with all applicable laws
and ordinances. If this Lease is not terminated as provided above, the rent
payable during the unexpired portion of the Term shall be reduced to such extent
as may be fair and reasonable under the circumstances and Landlord shall
reconstruct the Building and the Premises to an architecturally and functionally
complete unit comparable in condition and utility to that which exists prior to
the Taking to the extent reasonably possible. All compensation awarded for any
Taking shall be the property of Landlord and Tenant assigns any interest it may
have in any such award to Landlord; however, Landlord shall have no interest in
any award made to Tenant for loss of business or goodwill or for the taking of
Tenant's trade fixtures.
16. SURRENDER OF PREMISES, HOLDING OVER.
(a) No act by Landlord shall be an acceptance of a surrender of the
Premises, and no agreement to accept a surrender of the Premises shall be valid
unless it is in writing and signed by Landlord. At the end of the Term or the
termination of Tenant's right to possess the Premises, Tenant shall (1) deliver
to Landlord the Premises with all improvements located thereon in the same
condition and state of repair as when received by Tenant (provided that Tenant
shall not have any obligation to remove any alterations which it is not
otherwise required to remove under Section 6 hereof), reasonable wear and tear
(subject however to Tenant's maintenance obligations), (2) deliver to Landlord
all keys to the Premises, and (3) remove all signage placed on the Premises, the
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Building, or the Land by or at Tenant's request. All fixtures, alterations,
additions, and improvements (whether temporary or permanent) shall be Landlord's
property and shall remain on the Premises except as provided in Section 6 above.
All items so requested to be removed which are not so removed shall, at the
option of Landlord, be deemed abandoned by Tenant and may be appropriated, sold,
stored, destroyed, or otherwise disposed of by Landlord without notice to Tenant
and without any obligation to account for such items and Tenant shall pay for
the reasonable costs incurred by Landlord in connection therewith. All work
required of Tenant under this Section 16.(a) shall be coordinated with Landlord
and be done in a good and workmanlike manner, in accordance with all applicable
Laws, and so as not to damage the Building or unreasonably interfere with other
tenants' use of their premises. Tenant shall, at its expense, repair all damage
caused by any work performed by Tenant under this Section 16.(a). Without
limiting the generality of the foregoing, delivery of the Premises in compliance
with this Section 16.(a) shall require that Tenant cause the following (which is
not an exclusive list) to be true as of the date of surrender:
(1) Warehouse floor is broom swept and clean of all trash and materials.
(2) Warehouse floor is cleaned of excessive oils, fluids and other
foreign materials.
(3) All electrical, plumbing, and other utilities which are terminated
are disconnected, capped and/or terminated according to applicable
building codes and all other governmental requirements.
(4) All electrical conduit and wiring installed by Tenant specifically
for Tenant's equipment are removed to originating electrical panel
if Landlord so requires.
(5) Overhead interior and exterior doors are operational and in good
condition.
(6) Any bolts secured to floor are cut off flush and sealed with epoxy.
(7) Warehouse fencing or partitions are removed if Landlord so requires.
(8) All furniture, trash and debris are removed.
(9) All pictures, posters, signage, stickers and all similar items are
removed from all walls, windows, doors and all other interior and
exterior surfaces of the Premises.
(10) Carpet areas are vacuumed.
(11) All uncarpeted office floors are swept.
(12) All doors, windows, and miscellaneous hardware are operational if
Landlord so requires.
(13) Ceiling tiles, grid, light lenses, air grills and diffusers are in
place with no holes or stains.
(14) There are no broken windows or other glass items.
(15) Bathroom walls, floors, and fixtures are clean.
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(16) All plumbing fixtures are intact and operational and do not leak.
(17) All downspouts are undamaged and operational.
(18) Inside walls are reasonably clean and any holes in the walls or roof
are properly and permanently patched.
Notwithstanding the foregoing, Tenant shall in all events have the right to
remove its modular cleaning room and in connection therewith, Tenant shall at
its expense repair any roof penetration associated with such cleaning room.
Tenant shall in all events be responsible for repairing any and all damage
caused to the Premises and the Building in connection with its vacation of the
Premises. Nothing contained herein shall require Tenant to deliver the Premises
to Landlord in a condition or state of repair that is better than that in which
Tenant receives same from Landlord.
(b) If Tenant fails to vacate the Premises at the end of the Term, then
Tenant shall have the right to holdover for a period of 90 days following the
expiration of the Term (with the actual period of holdover to be determined by
Tenant), and after said initial 90-day holdover period Tenant shall be a tenant
at will and Tenant shall pay, in addition to the other rent due hereunder, a
daily Base Rent equal to (i) the Base Rent payable during the last month of the
Term for the first ninety (90) days of holding over, and (ii) one hundred fifty
percent (150%) of the daily Base Rent payable during the last month of the Term
for each day thereafter. Additionally, Tenant shall defend, indemnify, and hold
harmless Landlord from any damage, liability and expense (including attorneys'
fees and expenses) incurred because of such holding over. No payments of money
by Tenant to Landlord after the Term shall reinstate, continue or extend the
Term, and no extension of this Term shall be valid unless it is in writing and
signed by Landlord and Tenant.
17. QUIET ENJOYMENT. Provided Tenant has fully performed its obligations
under this Lease, Tenant shall peaceably and quietly hold and enjoy the Premises
for the Term, without hindrance from any party claiming by, through, or under
Landlord.
18. EVENTS OF DEFAULT. Each of the following events shall constitute an
"Event of Default" under this Lease:
(a) Tenant fails to pay any rent when due, or any payment or
reimbursement required under any other provisions of this Lease, and such
failure continues for a period of ten (10) days after written notice from
Landlord to Tenant [provided, however, Tenant shall be entitled to such notice
and opportunity to cure on only two (2) occasions during any twelve (12) month
period].
(b) The filing of a petition by or against Tenant or any guarantor of
Tenant's obligations hereunder (1) in any bankruptcy or other insolvency
proceeding; (2) seeking any relief under any debtor relief Law; (3) for the
appointment of a liquidator, receiver, trustee, custodian, or similar official
for all or substantially all of Tenant's property or for Tenant's interest in
this Lease; or (4) for reorganization or modification of Tenant's capital
structure [however, if any such petition is filed against Tenant, then the
filing of such petition shall not constitute an Event of Default, unless it is
not dismissed within sixty (60) days after the filing thereof].
(c) Tenant fails to discharge any lien placed upon the Premises in
violation of Section 22 below within thirty (30) days after Tenant's knowledge
of any such lien or encumbrance having been filed against the Premises.
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(d) Tenant fails to comply with any term, provision or covenant of this
Lease (other than those listed above in this Section 18), and such failure
continues for thirty (30) days after written notice thereof to Tenant (provided,
however, if such failure cannot through the exercise of reasonable diligence be
cured within thirty (30) days, then Tenant shall be entitled to such additional
time as is reasonably necessary to cure such failure so long as Tenant commences
its curative efforts within such 30 day period and diligently prosecutes same to
completion).
19. REMEDIES.
(a) Upon any Event of Default, Landlord may, in addition to all other
rights and remedies afforded Landlord hereunder or by Law, take any of the
following actions:
(1) Terminate this Lease by giving, Tenant written notice
thereof, in which event, Tenant shall pay to Landlord the sum of (A) all
rent accrued hereunder through the date of termination, (B) all amounts due
under Section 19.(b) below, and (C) an amount equal to (i) the total rent
that Tenant would have been required to pay for the remainder of the Term
discounted to a present value at a per annum rate equal to the "Prime Rate"
as published on the date this Lease is terminated by The Wall Street
Journal, Southwest Edition, in its listing of "Money Rates", minus (ii) the
then present fair rental value of the Premises for such period, similarly
discounted; or
(2) Terminate Tenant's right to possess the Premises without
terminating this Lease by giving written notice thereof to Tenant, in which
event Tenant shall pay to Landlord (A) all rent and other amounts accrued
hereunder to the date of termination of possession, (B) all amounts due
from time to time under Section 19.(b) below, and (C) all rent and
other sums required hereunder to be paid by Tenant during the remainder
of the Term, diminished by any net sums thereafter received by Landlord
through reletting the Premises during such period; however, Landlord
shall not be liable for, nor shall Tenant's obligations hereunder be
diminished because of, Landlord's failure to relet the Premises or to
collect rent due for a reletting. Tenant shall not be entitled to the
excess of any consideration obtained by reletting over the rent due
hereunder. Reentry by Landlord in the Premises shall not affect
Tenant's obligations hereunder for the unexpired Term; rather, Landlord
may, from time to time, bring action against Tenant to collect amounts
due by Tenant, without the necessity of Landlord's waiting until the
expiration of the Term. Unless Landlord delivers written notice to
Tenant expressly stating that it has elected to terminate this Lease,
all actions taken by Landlord to exclude or dispossess Tenant of the
Premises shall be deemed to be taken under this Section 19.(a)(2). If
Landlord elects to proceed under this Section 19.(a)(2), it may at any
time elect to terminate this Lease under Section 19.(a)(1) above.
Additionally, without notice, except as may be provided by Laws, Landlord may
alter locks or other security devices at the Premises to deprive Tenant of
access thereto, and Landlord shall not be required to provide a new key or right
of access to Tenant; provided, however, that Landlord shall provide Tenant
reasonable access to remove its personal property as provided in Section 16
hereof.
(b) Tenant shall pay to Landlord all costs and expenses incurred by
Landlord (including court costs and reasonable attorneys' fees and expenses) in
(1) obtaining possession of the Premises, (2) removing and storing Tenant's or
any other occupant's property, (3) repairing, restoring, altering, remodeling,
or otherwise putting the Premises into condition acceptable to a new tenant, (4)
if Tenant is dispossessed of the Premises and this Lease is not terminated,
reletting all or any part of the Premises (including brokerage commissions, cost
of tenant finish work, and other costs incidental to such reletting), (5)
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performing Tenant's obligations which Tenant failed to perform, and (6)
enforcing, or advising Landlord of, its rights, remedies, and recourses.
Landlord's acceptance of rent following an Event of Default shall not waive
Landlord's rights regarding such Event of Default. Landlord's receipt of rent
with knowledge of any default by Tenant hereunder shall not be a waiver of such
default, and no waiver by Landlord of any provision of this Lease shall be
deemed to have been made unless set forth in writing and signed by Landlord. No
waiver by either party of any violation or breach of any of the terms contained
herein shall waive such party's rights regarding any future violation of such
term or violation of any other term. If Landlord repossesses the Premises
pursuant to the authority herein granted, then Landlord shall have the right
after notice to Tenant and a reasonable opportunity for Tenant to remove the
property described on Exhibit "C" to (A) keep in place or (B) remove and store,
at Tenant's expense, all of the furniture, fixtures, equipment and other
property deemed abandoned by Tenant in the Premises, including that which is
owned by or leased to Tenant at all times before any repossession thereof by any
lessor thereof or third party having a lien thereon. Landlord may relinquish
possession of all or any portion of such furniture, fixtures, equipment and
other property to any person (a "Claimant") who presents to Landlord a copy of
any instrument represented by Claimant to have been executed by Tenant (or any
predecessor of Tenant) granting Claimant the right under various circumstances
to take possession of such furniture, fixtures, equipment or other property,
(provided, however, Landlord shall exercise due care in ascertaining the
authenticity or legality of the instrument in question). The rights of Landlord
herein stated are in addition to any and all other rights that Landlord has or
may hereafter have at law or in equity, and Tenant agrees that the rights herein
granted Landlord are commercially reasonable except that other than as
specifically provided hereinabove, Landlord shall not be entitled to recover
consequential, special or punitive damages from Tenant). In connection with any
Event of Default, Landlord shall use its reasonable efforts to mitigate any
damages arising out of such Event of Default.
For good and valuable consideration, Landlord hereby waives any and all
landlord's liens (whether statutory, constitutional or otherwise) and agrees,
upon Tenant's request, to execute such further instruments as may be reasonably
required by Tenant to further evidence such waiver.
20. LANDLORD'S DEFAULT. If Landlord fails to perform any of its
obligations hereunder and such failure continues beyond the time reasonably
necessary for Landlord to cure such failure following written notice thereo
from Tenant to Landlord, then Landlord shall be deemed in default, and Tenant
may pursue such remedies as are provided in this Lease or otherwise available at
law or in equity. In addition, in the event the default by Landlord is (a)
failure to complete the Premises in accordance with the provisions of the
ConstructionAgreement attached hereto as Exhibit "B", (b) failure to pay the
Cash Allowance in accordance with the provisions of such Construction Agreement,
(c) failure to perform its maintenance and repair obligations pursuant to
Section 4 of the Lease, or (d) failure to pay Taxes prior to the date such Taxes
become delinquent in accordance with the provisions of Section 3(a) or failure
to maintain the insurance required to be maintained by Landlord pursuant to the
provisions of Section 9, then, after a second written notice to Landlord
advising Landlord that it intends to cure such failure, Tenant may proceed with
the cure of such failure on behalf of Landlord so long as in doing so in
connection with the curing of the matters described in subsections (a) and (c)
hereinabove, Tenant does not interfere with the rights of any other tenant of
the Building, and all such improvements, alterations and repairs are made with
new materials and in a good and workmanlike manner. Landlord shall pay to
Tenant, within ten (10) business days after demand, all reasonable sums expended
by Tenant in curing such failure (together with interest thereon at the highest
non-usurious interest rate permitted by applicable law, from the date the
expense in question was incurred by Tenant until the amount in question is
repaid to Tenant). In the event Landlord fails to reimburse Tenant within said
ten (10) business day period with respect to any matter pursuant to which Tenant
exercised its self help remedy granted above, then Tenant shall have the right
to offset the amount it is owed by Landlord against the next accruing
installments of Base Rent in an amount equal to twenty-five percent (25%) of the
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amount of each such installment of Base Rent until such time as Tenant has been
fully reimbursed for the amount due from Landlord. Unless Landlord fails to so
cure such default after such notice, Tenant shall not have remedy or cause of
action by reason thereof In the event Landlord or Tenant shall be delayed,
hindered or prevented from the performance of any act required hereunder of
Landlord or Tenant (as the case may be) by reason of Events of Force Majeure,
then the performance of such act shall be excused for the period of the delay
and the period for the performance of any such act shall be extended for a
period equivalent to the period of such delay; provided, however, this provision
shall in no event operate to extend any period of time for Tenant to pay any
Rent or any other monetary obligation of Tenant under the terms of this Lease.
Liability of Landlord to Tenant for any default by Landlord shall be limited to
the actual and direct, but not consequential, special or punitive, damages
therefor and shall be recoverable only from the interest of Landlord in the
Building and the Land, and neither Landlord nor Landlord's partners,
shareholders, officers, directors, employees, agents or attorneys shall have any
personal liability therefor; provided, however, the foregoing shall not be
construed to limit Tenant's equitable remedies or remedies expressly provided in
this Lease.
21. MORTGAGES.
(a) This Lease shall be subordinate to any deed of trust, mortgage or
other security instrument (a "Mortgage"), and any ground lease, master lease, or
primary lease (a "Primary Lease") that now or hereafter covers any portion of
the Premises (the mortgagee under any Mortgage or the lessor under any Primary
Lease is referred to herein as "Landlord's Mortgagee"), and to increases,
renewals, modifications, consolidations, replacements, and extensions thereof;
provided, however, the subordination of this Lease to the Mortgage affecting the
Premises as of the effective date of this Lease and to any future Mortgage is
expressly conditioned upon Tenant and the Landlord's Mortgagee in question
entering into a subordination non-disturbance and attornment agreement in a form
and substance reasonably acceptable to Tenant ("SNDA"). Landlord will use its
good faith efforts to obtain a SNDA from any future Landlord's Mortgagee. Any
Landlord's Mortgagee may elect to subordinate its Mortgage or Primary Lease (as
the case may be) to this Lease by delivering written notice thereof to Tenant.
Tenant shall from time to time within ten (10) days after request therefor,
execute any instruments that may be required by any Landlord's Mortgagee to
evidence the subordination of this Lease to any such Mortgage or Primary Lease
consistent with the terms hereof. Landlord agrees that it will, concurrently
with the execution hereof, obtain an SNDA from Landlord's Mortgagee as of the
date of this Lease in a form reasonably acceptable to Tenant, consenting,
agreeing to and recognizing the continuation of Tenant's rights under this Lease
so long as no Event of Default by Tenant exists hereunder, and such form of SNDA
shall be attached to this Lease as Exhibit "l" and made a part hereof for all
purposes. Tenant agrees that an SNDA in substantially the form as attached
hereto as Exhibit "I" from any future Landlord's Mortgagee will be acceptable to
Tenant.
(b) Tenant shall attorn to any party succeeding to Landlord's interest
in the Premises, whether by purchase, foreclosure, deed in lieu of foreclosure,
power of sale, termination of lease, or otherwise, upon such party's request,
and shall execute such agreements confirming such attornment as such party may
reasonably request provided such agreements are consistent with the terms of the
applicable SNDA entered into by Tenant and such party. Tenant shall not seek to
enforce any remedy it may have for any default on the part of Landlord without
first giving written notice by certified mail, return receipt requested,
specifying the default in reasonable detail to any Landlord's Mortgagee whose
address has been given to Tenant, and affording such Landlord's Mortgagee the
same opportunity to which Landlord is entitled hereunder to perform such
obligations (which cure period for Landlord's Mortgagee shall run concurrently
with Landlord's cure period).
22. ENCUMBRANCES. Tenant has no authority, express or implied, to create
or place any lien or encumbrance of any kind or nature whatsoever upon, or in
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any manner to bind Landlord's property or the interest of Landlord or Tenant in
the Premises or the Building or to charge the rent for any claim in favor of any
person dealing with Tenant, including those who may furnish materials or perform
labor for any construction or repairs. Tenant shall pay or cause to be paid all
sums due for any labor performed or materials furnished in connection with any
work performed on the Premises by or at the request of Tenant. Tenant shall give
Landlord immediate written notice of the placing of any lien or encumbrance
against the Premises. The provisions of this Section 22 shall not be applicable
to the initial Improvements constructed by Landlord pursuant to the terms
hereof.
23. MISCELLANEOUS.
(a) Words of any gender used in this Lease shall include any other
gender, and words in the singular shall include the plural, unless the context
otherwise requires. The captions inserted in this Lease are for convenience only
and in no way affect the interpretation of this Lease. The following terms shall
have the following meanings: "Laws" shall mean all federal, state and local
laws, rules, and regulations; all court orders, governmental directives, and
governmental orders; and all restrictive covenants affecting Tenant or the
Premises, and "Law" shall mean any of the foregoing; "affiliate" shall mean any
person or entity which, directly or indirectly, controls, is controlled by, or
is under common control with the party in question; and "Tenant Party" shall
include Tenant, any assignees claiming by, through, or under Tenant, any
subtenants claiming by, through, or under Tenant, and any of their respective
agents, contractors, employees, and invitees.
(b) Landlord may transfer and assign, in whole or in part, its rights
and obligations in the Building and property that are the subject of this Lease,
in which case Landlord shall have no further liability hereunder with the
respect to covenants performable from and after the date of such transfer and
assignment, provided that Landlord's assignee assumes all of Landlord's
obligations under this Lease. Each party shall furnish to the other, promptly
upon demand, a corporate resolution, proof of due authorization by partners, or
other appropriate documentation evidencing the due authorization of such party
to enter into this Lease.
(c) Tenant shall, from time to time, within ten (10) days after request
of Landlord, deliver to Landlord, or Landlord's designee, the most recent
publicly available financial statements for Tenant and an estoppel certificate
stating that this Lease is in full effect, the date to which rent has been paid,
the unexpired Term and such other factual matters pertaining to this Lease as
may be requested by Landlord (provided, however, Tenant shall be entitled to
make such changes to such estoppel certificate as are necessary to make the
statements therein factually accurate). Tenant's obligation to furnish the
above-described items in a timely fashion is a material inducement for
Landlord's execution of this Lease.
(d) This Lease constitutes the entire agreement of the Landlord and
Tenant with respect to the subject matter of this Lease, and contains all of the
covenants and agreements of Landlord and Tenant with respect thereto. Landlord
and Tenant each acknowledge that no representations, inducements, promises or
agreements, oral or written, have been made by Landlord or Tenant, or anyone
acting on behalf of Landlord or Tenant, which are not contained herein, and any
prior agreements, promises, negotiations, or representations not expressly set
forth in this Lease are of no effect. This Lease may not be altered, changed or
amended except by an instrument in writing signed by both parties hereto.
(e) All obligations of Tenant hereunder not fully performed by the end
of the Term shall survive, including, without limitation, all payment
obligations with respect to Taxes and insurance and all obligations concerning
the condition and repair of the Premises. Landlord's obligation to return the
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Security Deposit, if any, shall survive the expiration of the Term. Tenant
shall, prior to vacating the Premises, pay to Landlord the prorated amount, as
estimated by Landlord, of Tenant's obligation hereunder for Operating Expenses
Excess for the year in which the Term ends (which amount shall be reconciled
once the actual Operating Expense Excess for the year in question is determined
pursuant to Section 2(c) above, at which time a cash settlement shall be
effected between Landlord to Tenant to reconcile such payment). All such amounts
shall be used and held by Landlord for payment of such obligations of Tenant
hereunder, with Tenant being liable for any additional costs therefor upon
demand by Landlord or with any excess to be returned to Tenant after all such
obligations have been determined and satisfied as the case may be. Any Security
Deposit held by Landlord may be credited against the amount due by Tenant under
this Section 23.(e).
(f) If any provision of this Lease is illegal, invalid or unenforceable,
then the remainder of this Lease shall not be affected thereby, and in lieu of
each such provision, there shall be added, as a part of this Lease, a provision
as similar in terms to such illegal, invalid or unenforceable clause or
provision as may be possible and be legal, valid and enforceable.
(g) All references in this Lease to "the date hereof" or similar
references shall be deemed to refer to the last date, in point of time, on which
all parties hereto have executed this Lease.
(h) Landlord and Tenant each warrant to the other that it has not dealt
with any broker or agent in connection with this Lease except for Daniel M.
Arnold of Swearingen Realty Group, LLC ("Broker"). Tenant and Landlord shall
each indemnify the other against all costs, attorneys' fees, and other
liabilities for commissions or other compensation claimed by any broker or agent
claiming the same by, through, or under the indemnifying party. Landlord shall
pay Broker a real estate commission pursuant to the terms and conditions of a
separate agreement between Landlord and Broker.
(i) If and when included within the term "Tenant", as used in this
instrument, there is more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of a notice
specifying an individual at a specific address within the continental United
States for the receipt of notices and payments to Tenant. All parties included
within the terms "Landlord" and "Tenant", respectively, shall be bound by
notices given in accordance with the provisions of Section 24 to the same effect
as if each had received such notice.
(j) The terms and conditions of this Lease are confidential and neither
party shall disclose the terms of this Lease to any third party except as may be
required by law or to enforce its rights hereunder; provided, however, each
party may disclose the terms hereof to its attorneys, accountants, consultants,
and advisors, as well as present and prospective investors, lenders and other
financing sources.
(k) Tenant shall pay interest on all past-due rent from the date due
until paid at the maximum lawful rate. In no event, however, shall the charges
permitted under this Section 23.(k) or elsewhere in this Lease, to the extent
they are considered to be interest under applicable Law, exceed the maximum
lawful rate of interest.
(l) This Lease may be executed in any number of counterparts, each of
which shall be an original, but such counterparts together shall constitute one
and the same instrument.
24. NOTICES. Each provision of this instrument or of any applicable Laws
and other requirements with reference to the sending, mailing or delivering of
notice or the making of any payment hereunder shall be deemed to be complied
with when and if the following steps are taken:
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(a) All rent shall be payable to Landlord at the address for Landlord
set forth below its signature on the signature page of this Lease, or at such
other address as Landlord may specify from time to time by written notice
delivered in accordance herewith. Tenant's obligation to pay rent shall not be
deemed satisfied until such rent has been actually received by Landlord.
(b) All payments required to be made by Landlord to Tenant hereunder
shall be payable to Tenant at the address set forth below its signature on the
signature page of this Lease, or at such other address within the continental
United States as Tenant may specify from time to time by written notice
delivered in accordance herewith.
(c) Any written notice or document required or permitted to be delivered
hereunder shall be delivered to the parties at their respective addresses set
forth below their signatures on the signature page on this Lease, or at such
other address as either such party may specify from time to time by written
notice delivered in accordance herewith, and shall be deemed to be delivered
upon the earlier to occur of (1 ) tender of delivery (in the case of a hand
delivered notice), (2) deposit in the United States Mail, postage prepaid,
certified mail, return receipt requested, or (3) receipt by facsimile
transmission, in each case, addressed to the parties hereto at the respective
addresses set out below, or at such other address as they have theretofore
specified by written notice delivered in accordance herewith. If Landlord has
attempted to deliver notice to Tenant at Tenant's address reflected on
Landlord's books but such notice was returned or acceptance thereof was refused,
then Landlord may post such notice in or on the Premises, which notice shall be
deemed delivered to Tenant upon the posting thereof.
25. HAZARDOUS WASTE. The term "Hazardous Substances", as used in this
Lease, shall mean pollutants, contaminants, toxic or hazardous wastes, or any
other substances, the removal of which is required or the use of which is
restricted, prohibited or penalized by any "Environmental Law", which term shall
mean any Law relating to health, pollution, or protection of the environment.
Tenant hereby agrees that (a) no activity will be conducted on the Premises that
will produce any Hazardous Substances, except for such activities that are part
of the ordinary course of Tenant's business activities (the "Permitted
Activities") provided such Permitted Activities are conducted in accordance with
all Environmental Laws; (b) the Premises will not be used in any manner for the
storage of any Hazardous Substances except for storage of such materials that
are used in the ordinary course of Tenant's business (the "Permitted Materials")
provided such Permitted Materials are properly stored in a manner and location
satisfying all Environmental Laws; (c) no portion of the Premises will be used
as a landfill or a dump; (d) Tenant will not install any underground tanks of
any type; (e) Tenant will not cause any surface or subsurface conditions come
into existence that constitute, or with the passage of time may constitute a
public or private nuisance; and (f) Tenant will not permit any Hazardous
Substances to be brought onto the Premises, except for the Permitted Materials,
and if so brought or found located thereon, the same shall be immediately
removed by Tenant, with proper disposal, and all required cleanup procedures
shall be diligently undertaken pursuant to all Environmental Laws. If at any
time during or after the Term, the Premises are found to be so contaminated or
subject to such conditions as a result of Tenant's use of the Premises or breach
of this Lease, or if Tenant is in violation of any Environmental Law, Tenant
shall defend, indemnify and hold Landlord harmless from all claims, demands,
actions, liabilities, costs, expenses, damages and obligations of any nature
arising from or as a result of the use of the Premises by Tenant. The Hazardous
Substances which will be used and/or stored by Tenant on the Premises in
accordance with the terms of this Section 25 are reflected on Exhibit "J"
attached hereto and made a part hereof for all purposes, and no other Hazardous
Substances will be brought on the Premises without the prior written approval of
Landlord, which approval shall not be unreasonably withheld or delayed, and if
approved, such additional Hazardous Substances will be added to Exhibit "J" to
this Lease. Landlord may enter the Premises and conduct environmental
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inspections and tests therein as it may require from time to time, provided that
Landlord shall use reasonable efforts to minimize the interference with Tenant's
business. Such inspections and tests shall be conducted at Landlord's expense,
unless they reveal the presence of Hazardous Substances (other than Permitted
Materials) that are caused by Tenant, or that Tenant has not complied with the
requirements set forth in this Section 25, in which case Tenant shall reimburse
Landlord for the reasonable cost thereof within ten (10) days after Landlord's
request therefor. Nothing in this Section shall require Tenant to indemnify
Landlord for any matters arising out of or caused by the actions or omissions of
Landlord, its employees, agents, contractors, licensees, or invitees. Landlord
represents to Tenant that, to the best of Landlord's actual knowledge, the
Building will not contain asbestos, PCBs or any other Hazardous Substances.
Landlord agrees that it will provide Tenant with a copy of any environmental
report relating to the Building that Landlord has in its possession as of the
date of execution of this Lease.
26. ROOF DISH. Subject to the provisions of this Section 26, and subject
to any applicable restrictive covenants and applicable laws, Tenant shall have
the right to install, maintain and operate upon the roof of the Building (in a
location approved by Landlord) a satellite dish and related equipment
(collectively, the "Communications Equipment") for its use in the conduct of
Tenant's business so long as the installation of such Communications Equipment
does not affect the structural integrity or aesthetics of the Building as
determined in Landlord's reasonable discretion (provided, however, if Landlord
reasonably determines that the aesthetics of the Building are affected thereby,
Tenant shall have the right to screen such installation in a manner reasonably
acceptable to Landlord in order to mitigate the effect on the aesthetics of the
Building). Tenant agrees to pay all costs incurred in connection with Tenant's
installation, operation, utilization, replacement, maintenance and removal of
such Communications Equipment. Such Communications Equipment must be designed,
installed and operated in complete compliance with all laws and installed and
operated so as not to adversely affect structural, mechanical, electrical,
elevator or other systems of or serving the Building, or customary telephone
service for the Building, and so as not to cause injury to persons or property.
Tenant shall be permitted to use third party contractors to undertake the
installation of such Communications Equipment, subject to Landlord's approval of
the qualifications of such contractors (which approval shall not be unreasonably
withheld or delayed); provided, however, in the event the use of third party
contractors would jeopardize Landlord's warranty on the roof of the Building,
then Tenant shall be required to use Landlord's contractor. Any such work
conducted in connection with the installation of such Communications Equipment
must be done in accordance with the Building Rules and any other reasonable
regulations promulgated by Landlord pertaining to construction in or on the
Building. Tenant shall be fully responsible for any and all damage caused to the
roof, the Building, or to any property or persons in or around the Building, and
Tenant shall indemnify, defend and hold Landlord harmless from and against any
loss, cost, expense, liability, claim or other action arising out of Tenant's
installation, operation, utilization, replacement, maintenance and removal of
such Communications Equipment. Upon the expiration or earlier termination of
this Lease, Tenant shall remove all of the Communications Equipment and shall
repair any damage to the roof caused thereby, all at Tenant's sole cost and
expense.
27. CONDITION PRECEDENT. The obligations of Landlord and Tenant pursuant
to the terms of this Lease are conditioned upon the transaction by and between
the Tenant and Atrion Corporation or its designee set forth in that certain
Option Agreement for the Purchase and Sale of Real Property dated January 30,
1998 (as it may be amended from time to time), being finally consummated on or
before February 8, 1999. If Tenant notifies Landlord in writing prior to
February 8, 1999 that such transaction has not been consummated, then this Lease
shall be null and void and the parties shall have no further obligations or
liabilities hereunder. If Tenant fails to notify Landlord of the consummation of
said transaction prior to February 8, 1999, then this condition shall be deemed
waived, and no longer of any force or effect, and the Lease shall be fully
effective, binding and enforceable against both Landlord and Tenant.
Concurrently with the execution hereof, Tenant has paid Landlord the sum of
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$100.00 as independent consideration for Tenant's right to terminate this Lease
pursuant to Section 27, the receipt and adequacy of which is hereby acknowledged
and confessed.
TENANT ACKNOWLEDGES THAT (1) NO REPRESENTATIONS AS TO THE REPAIR OF THE
PREMISES, NOR PROMISES TO ALTER, REMODEL OR IMPROVE THE PREMISES HAVE BEEN MADE
BY LANDLORD (EXCEPT AS MAY BE SET FORTH IN THIS LEASE), AND (2) THERE ARE NO
REPRESENTATIONS OR WARRANTIES, EXPRESSED, IMPLIED OR STATUTORY, THAT EXTEND
BEYOND THE DESCRIPTION OF THE PREMISES. NOTHING IN THIS PARAGRAPH SHALL BE
DEEMED TO AFFECT LANDLORD'S REPRESENTATIONS, WARRANTIES AND COVENANTS EXPRESSLY
SET FORTH IN THIS LEASE.
SIGNATURES ON FOLLOWING PAGE
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EXECUTED by Tenant on February 4, 1999.
TENANT:
ADVANCED NEUROMODULATION SYSTEMS, INC.
By: Name: /s/Stuart B. Johnson
Title: Vice President, Operations
Address: One Allentown Parkway
Allen, Texas 75002-4211
Telephone: 972-390-9800, Ext. 322
Fax: 972-390-8465
EXECUTED by Landlord on February 4, 1999.
LANDLORD:
LEGACY LINCOLN I, LTD.,
Texas limited partnership
By: LINCOLN PROPERTY COMPANY No 2698, LTD.,
a Texas limited partnership, its General Partner
By: LINCOLN PROPERTY COMPANY
No 2699, INC.,
a Texas corporation, its General Partner
By: Name: /s/John H. Walter
Title: Vice President
Address: 3300 Lincoln Plaza
500 North Akard
Dallas, Texas 75201
Telephone: (214) 740-3300
Fax: (214) 740 3404
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EXHIBIT "A"
LINCOLN R&D LEGACY PROJECT
Plano, Texas
Approximately 37,622 square feet
SITE PLAN OF PREMISES
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EXHIBIT "A-1"
THE LAND
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BEING a 14.9216 acre tract of land situated in the Maria C. Vela Survey,
Abstract No. 935, City of Plano, Collin County, Texas, and being a part of a
1,094.07 acre tract conveyed to Quorum Development Corporation by Deed recorded
in Volume 1171, Page 174, Land Records of Collin County, Texas, and being more
particularly described as follows (bearings referenced to EDS monumentation
system):
COMMENCING at a found 3-inch aluminum disk stamped "T.U. ELECTRIC" for the
southwest corner of Plano Tennyson Parkway Substation, an addition to the City
of Plano, Texas, as recorded in Cabinet G, Page 437, Map Records of Collin
County, Texas, said point South 74 degrees 09 minutes 03 seconds West, a
distance of 3,302.03 feet from a found brass disk in concrete stamped "EDS 10",
having EDS truncated surface coordinates North 75014.8828 feet, East 90574.1977
feet;
THENCE North 00 degrees 00 minutes 18 seconds East, along the west line of said
Plano Tennyson Parkway Substation, a distance of 500.00 feet to a found 3-inch
aluminum disk stamped "T.U. ELECTRIC" for the northwest corner of said Plano
Tennyson Parkway Substation;
THENCE South 89 degrees 59 minutes 42 seconds East, along the north line of said
Plano Tennyson Parkway Substation, a distance of 105.36 feet to a 1/2-inch iron
rod found with yellow plastic cap stamped "Halff Associates, Inc." for the POINT
OF BEGINNING;
THENCE North 00 degrees 40 minutes 47 seconds West, departing the north line of
said Plano Tennyson Parkway Substation, a distance of 989.29 feet to a 1/2-inch
iron rod found with yellow plastic cap stamped "Halff Associates, Inc." for
corner;
THENCE North 89 degrees 19 minutes 13 seconds East, a distance of 653.20 feet to
a 1/2 inch iron rod found with yellow plastic cap stamped "Halff Associates,
Inc." for corner, said point being in the West line of Windcrest Drive (a 60'
R.O.W.) and being the beginning of a curve to the left having a central angle of
15 degrees 13 minutes 35 seconds, a radius of 530.00 feet, a tangent length of
70.84 feet, and a chord bearing South 06 degrees 56 minutes 01 minutes West,
140.43 feet;
THENCE in a southerly direction along said curve to the left, and with the
West line of Windcrest Drive, an arc distance of 140.85 feet to a 1 inch iron
rod found for corner;
THENCE South 00 degrees 40 minutes 47 seconds East, with the West line of
Windcrest Drive, a distance of 1136.28 feet to a 1 inch iron rod found for
corner, said point being the beginning of a curve to the right having a central
angle of 03 degrees 08 minutes 58 seconds, a radius of 670.00 feet, a tangent
length of 18.42 feet, and a chord bearing South 00 degrees 53 minutes 42 seconds
West, 36.82 feet;
THENCE in a southerly direction along said curve to the right, and with the
west line of Windcrest Drive, an arc distance of 36.83 feet to a 1 inch iron rod
found for corner;
THENCE South 89 degrees 42 minutes 57 seconds West, departing said West line of
Windcrest Drive, a distance of 58.99 feet to a 1/2 inch iron rod found with
yellow plastic cap stamped "Halff Associates, Inc." for corner in the east line
of the abovementioned Plano Tennyson Parkway Substation;
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THENCE North 00 degrees 40 minutes 47 seconds West, with the East line of said
Plano Tennyson Parkway Substation, a distance of 315.72 feet to a 1/2 inch iron
rod found with yellow plastic cap stamped "Halff Associates, Inc." for corner,
said point being the Northeast corner of said Plano Tennyson Parkway Substation;
THENCE North 89 degrees 59 minutes 42 seconds West, with the North line of said
Plano Tennyson Parkway Substation, a distance of 574.64 feet to the POINT OF
BEGINNING and containing 649.985 square feet or 14.9216 acres of land.
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EXHIBIT "B"
CONSTRUCTION AGREEMENT
----------------------
1. DEFINITIONS. The terms defined in this Paragraph 1, for all purposes
of this Construction Agreement, shall have the meanings herein specified, and,
in addition to the terms defined herein, the definitions in the Lease shall also
apply to this Construction Agreement.
(a) "Building Standard" shall mean the quantity and quality of
materials, finishing and workmanship specified by Landlord in the
plans and specifications for the Building set forth on Schedule B-1
attached hereto and made a part hereof.
(b) "Drawings" shall mean the working drawings for Tenant's Work
that are agreed to in writing by Landlord and Tenant or deemed
approved in accordance with the terms hereof.
(c) "Expenditure Authorization" shall mean an authorization by
Tenant to Landlord to expend funds on behalf of Tenant for Tenant's
Work on the Premises.
(d) "Improvements" shall mean the aggregate of the Landlord's
Work and Tenant's Work.
(e) "Landlord's Contractor" shall mean the person or firm
selected to perform Tenant's Work in the Premises in accordance with
the terms of this Exhibit "B".
(f) "Landlord's Work" shall mean (i) the construction of the
Building, together with all exterior improvements, including paving
and landscaping, in accordance with the plans and specifications
therefor dated October 15, 1998, prepared by HKS, Inc. ("Building
Plans"), (ii) the work required to place the Premises in Shell
Condition and (iii) the Overhead Doors (hereinafter defined).
(g) "Net Rentable Area of the Building" shall have the meaning
specified in the Lease.
(h) "Net Rentable Area of the Premises" shall have the meaning
specified in the Lease.
(i) "Shell Condition" shall mean the condition of the Building
substantially completed with the following improvements in
accordance with the Building Plans: (a) outside walls and unfinished
concrete floors; (b) Building Standard power supplied to panels
provided on the Building; and (c) sprinkler risers and main loop
installed without the dropping of sprinkler heads.
(j) "Tenant's Architect" shall mean MBA Architects, Inc. who
shall prepare Tenant's plans and working drawings for Tenant's Work.
(k) "Tenant's Work" shall mean the items which are supplied,
installed and finished by Landlord on behalf of Tenant (unless
Tenant elects to supply, install and finish such items), as provided
for hereinbelow, which exceed Shell Condition, and which shall be
paid for by Tenant as provided for herein.
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2. SPACE PLANNING.
(a) Landlord's designated space planner, at no cost to Tenant, will
prepare a space plan (including initial "block" diagrams and a preliminary
layout with one revision) for the Premises showing the location of all
partitions and doors. Tenant will cooperate with Landlord's space planner,
furnishing all reasonable information and material concerning Tenant's
organization, staffing, growth expectations, physical facility needs, equipment
inventory and other information and material necessary for the space planner to
efficiently and expeditiously arrive at an acceptable layout of the Premises.
(b) The space plan must be approved in writing by both Landlord and
Tenant by January 19, 1999, and preparation of the working drawings by Tenant's
Architect shall not commence prior to such approval. The space plan as so
approved by Landlord and Tenant in writing is referred to as the "Approved Space
Plan". If at anytime after approval of the Approved Space Plan, any redrawing of
the space plan is necessitated by Tenant's requested changes, the expense of any
redrawing shall be borne by Tenant. Based upon the Approved Space Plan, Landlord
shall cause Tenant's Architect to prepare working drawings for the construction
of the Improvements, which working drawings shall be consistent with the
Approved Space Plans. Landlord shall not unreasonably withhold or delay its
approval of the working drawings and shall, in all events, grant such approval
within ten (10) days after the proposed working drawings are submitted to
Landlord (provided, however, if Landlord fails to approve or reasonably
disapproves such drawings within such ten (10) day period, Landlord shall be
deemed to have approved same.). After Tenant has received Landlord's reasonable
comments with regard to the proposed working drawings, Tenant shall cause
Tenant's Architect to revise the working drawings to incorporate Landlord's
reasonable comments thereto. The term "Drawings" as used herein shall mean the
final working drawings which are approved by Landlord (or deemed approved by
Landlord) and Tenant.
(c) If Tenant shall arrange for interior design services, whether with
Landlord's space planner or with any other planner or designer, it shall be
Tenant's responsibility and expense to cause necessary coordination of its
planners' and designers' efforts with the efforts of the planners and designers
of Landlord to insure that no delays are caused to either the planning or
construction of the required Landlord's Work.
3. COMPLETION OF PREMISES.
(a) Landlord shall cause to be constructed the Improvements in
accordance with the Drawings and all Laws. Landlord shall solicit competitive
bids for the construction of the Improvements from at least three (3) general
contractors approved by Tenant (which approval shall not be unreasonably
withheld or delayed). Tenant shall have the right to be involved in all aspects
of the bidding process (including, but not limited to, the process of
"qualifying" the bidders). Landlord shall select the general contractor who
submits the lowest qualifying bid (unless Tenant designates a different general
contractor who has submitted a bid and who is properly insured to be the
"Landlord's Contractor" in which case Landlord shall select such other
contractor that is so designated by Tenant) as the "Landlord's Contractor" for
the construction of the Improvements. Landlord shall enter into the construction
contract with the Landlord's Contractor ("Contract"), which Contract shall be a
"stipulated sum" contract (as opposed to being on a cost-plus basis). Tenant
shall have the right to approve all subcontractors, which approval shall not be
unreasonably withheld or delayed. Unless otherwise agreed to in writing by
Landlord and Tenant, all work involved in completion of Landlord's Work and
Tenant's Work shall be carried out by Landlord's Contractor under the sole
direction of Landlord. Tenant shall cooperate with Landlord and Landlord's
Contractor to promote the efficient and expeditious completion of such work.
Landlord and Tenant shall reasonably cooperate so that the Tenant's Architect
may submit final plans, working drawings, information, and instructions with
respect to such Tenants' Work on or before February 1, 1999. Within fifteen (15)
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days after receipt of such final plans and specifications, drawings, information
and instructions with respect to Tenant's Work by Landlord, Landlord will submit
to Tenant written estimates of the cost of Tenant's Work. Tenant agrees that it
shall be responsible for any and all reasonable increases in costs of Tenant's
Work resulting from governmental requirements during Tenant's Work, whether such
increases occur before the cost estimates are initially submitted to Tenant, or
after all final bids have been taken and such cost estimates have been approved
by Tenant.
(1) Any delay caused by Tenant in connection with the completion
of Tenant's Work by Landlord's Contractor pursuant to this Section 3.1
(collectively, the "Tenant Delays") shall extend the time allowed for
Landlord's Contractor to complete the work in question. By way of
illustration, and not in limitation, of the foregoing:
(a) Any delay caused by Tenant or Tenant's Architect in
the preparation of the Drawings shall be charged to Tenant.
(b) Any delay resulting from a failure by Tenant to
approve or reasonably reject any shop drawings, samples or models
within five (5) business days of submission thereof shall be charged
to Tenant.
(c) In the event Tenant requires specific products to be
used in completion of Tenant's Work, any delay in Tenant's review of
shop drawings, samples or models, or which results from Tenant's
unreasonable later rejection of the specified products, shall be
charged to Tenant, and if Tenant specifies particular suppliers of
any material, any delay which results from a failure by such
supplier to comply with delivery schedules necessary to maintain the
normal progression of the work shall be charged to Tenant.
(d) Any delay which results from unavailability or delay
in the delivery of any special equipment, including, but not limited
to, computer systems, special communications equipment, or other
equipment not associated with normal office uses, shall be charged
to Tenant.
(e) Any delay which results from Tenant's requests for
changes in the components of the Shell Condition of the Premises.
(2) In the event Landlord's Contractor is unable to substantially
complete Tenant's Work on or before May 1, 1999 (except to the extent such
delays are chargeable to Tenant as set forth in this Section 3), Tenant
shall be entitled to postpone the commencement of the payment of Base Rent
with respect to the Premises in question until the thirtieth (30th) day
after substantial completion is achieved. For purposes of this Construction
Agreement, the term "Substantial Completion" shall occur when each of the
following conditions is satisfied: the improvements are substantially
completed in accordance with the Drawings and a Certificate of Substantial
Completion has been delivered to Tenant by Landlord's space planner; a
certificate of occupancy has been issued for the Premises so that the
Premises may be lawfully occupied; and Landlord has tendered to Tenant
physical possession thereof. Substantial Completion shall have occurred
even though minor details of construction, decoration, landscaping and
mechanical adjustment remain to be completed by Landlord so long as
Tenant can lawfully occupy and conduct its business in the Premises as
contemplated by Tenant. Tenant shall prepare and deliver to Landlord a
punch-list of incomplete, minor, detail items within thirty (30) days
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after substantial completion, and Landlord shall use all reasonable
efforts to complete such items within thirty (30) days thereafter except as
to such items that, by their nature, will take a longer period to complete
as set forth in the punch-list in which case Landlord shall have such time
as is reasonably necessary to complete same so long as such work is
diligently prosecuted to completion.
(b) If there are any changes in Tenant's Work by or on behalf of Tenant,
from the work as reflected in the Drawings, each such change must receive the
prior written approval of Landlord (which approval shall not be unreasonably
withheld or delayed) and must be paid for by Tenant to the extent that the cost
thereof exceeds the Cash Allowance, and in the event of any such approved change
in the Drawings, Tenant shall, upon completion of Tenant's Work, furnish
Landlord with accurate "as-built" plans of Tenant's Work as constructed, which
plans shall be incorporated into this Construction Agreement by this reference
for all intents and purposes.
(c) Under no circumstances whatsoever will Tenant or Tenant's authorized
representative ever alter or modify or in any manner disturb any system or
installation of the Building, including, but not limited to, Central plumbing
system, Central electrical system, Central heating, ventilating and air
conditioning systems, Central fire protection and fire alert systems, Central
building maintenance systems, Central structural systems, or anything located
within the Central core of the Building (except as reflected in the Drawings).
Only with Landlord's express written permission (which permission shall not be
unreasonably withheld or delayed) and under direct supervision of Landlord or
Landlord's Contractor shall Tenant or Tenant's authorized representative alter,
add to or modify, or in any manner disturb any Branch of any system or
installation of the Building which is located within the Premises (except that
Tenant shall be entitled to alter, add or modify such Branch systems to the
extent reflected in the Drawings), including, but not limited to, Branch
plumbing system, Branch electrical system, Branch heating, ventilating and air
conditioning system, and Branch fire protection and alert system (for the
purposes of this Section 3.3 "Central" shall be defined as that portion of any
Building system or component which is within the core and/or common to and/or
serves or exists for the benefit of other tenants in the Building, and shall
include, but not be limited to, main fire loops on each floor of the Building
and duct work to the VAV box; and "Branch" shall be defined as that portion of
any Building system or component which serves to connect or extend Central
systems into the Premises).
(d) All design, construction and installation shall conform to the
requirements of applicable building, plumbing, electrical and fire codes and the
requirements of any authority having jurisdiction over or with respect to such
work, as such codes and requirements may from time to time be amended,
supplemented, changed or interpreted.
(e) Tenant shall bear all costs of completing Tenant's Work, including,
without limitation, costs of all drawings, permits, direct supervision of
Tenant's Work and all costs of construction to improve the Premises to a
condition greater than Shell Condition. Tenant shall be entitled to a cash
allowance equal to the product of (a) Twenty and No/100 Dollars ($20.00)
multiplied by (b) the total number of square feet of Net Rentable Area in the
Premises (the "Cash Allowance"), but all costs incurred by Landlord in
completing the Tenant's Work in excess of the Cash Allowance shall be borne by
Tenant and paid to Landlord upon Substantial Completion. Tenant agrees that in
the event it defaults in the payment of such excess, Landlord (in addition to
all other remedies) will have the same rights as in the event of default of
payment of rent under the Lease (after the expiration of the applicable notice
and cure periods provided for herein). Tenant shall be entitled to use up to
$1.00 per square foot of Net Rentable Area of the Cash Allowance for the payment
of the costs associated with preparation of the Drawings. In addition, in the
event Tenant does not use all of the Cash Allowance in connection with the
completion of the Tenant's Work, then Tenant shall be entitled to use such
excess Cash Allowance to reduce the Rate Per Square Foot of Net Rentable Area
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Per Year in determining the Base Rent due under this Lease in the manner
provided in Section 2(a) of the Lease. Notwithstanding any provision contained
herein to the contrary, it is understood and agreed that Landlord shall have no
obligation to commence installation of any work in the Premises until Tenant
shall have caused to be furnished to Landlord and Landlord shall have approved
the Drawings as required by the provisions hereof. Notwithstanding the review
and approval by Landlord of Tenant's Drawings, Landlord shall have no
responsibility or liability in regard to the safety, sufficiency, adequacy or
legality thereof and Tenant shall be solely responsible for the compliance of
such Drawings with all applicable laws and regulations, the architectural
completeness and sufficiency thereof and other matters relating thereto;
provided, however, Landlord shall implement all construction of the Tenant's
Work in compliance with all Laws.
4. LANDLORD'S WORK.
(a) As Landlord's contribution to the Improvements, Landlord will
provide in or to the Premises the Building Standard items required to complete
the Premises to Shell Condition and the Cash Allowance to be used by Tenant to
pay for all or a portion of the cost of completion of the Tenant's Work. In
addition, prior to delivery and possession of the Premises to Tenant, Landlord
will cause to be removed from the Premises by Landlord's Contractor all rubbish,
tools, scaffolding, and surplus materials and will cause the Premises, interior
and exterior to be cleaned and ready for occupancy. All floors, floor coverings,
roof areas and glass will be cleaned, both interior and exterior. In addition,
it is agreed that Landlord's Work shall include the construction of two 10' x
10' grade level overhead doors in the back of the Building (collectively,
the "Overhead Doors")and the cost of same shall not be deducted from the Cash
Allowance or otherwise be chargeable to Tenant.
(b) Landlord shall not charge a construction management or other fee in
connection with the work required to be done pursuant to this Exhibit "B".
5. MISCELLANEOUS.
(a) Landlord shall assign to Tenant, upon the completion of the Tenant's
Work, all warranties and guaranties provided by contractors, subcontractors,
manufacturers, and suppliers in connection with the construction of the
Improvements. Landlord shall cooperate with Tenant in securing the performance
by the warrantor or guarantor under any such warranty or guaranty.
(b) Tenant shall the right to enter the Premises at least fifteen (15)
days prior to Substantial Completion of the Tenant's Work for the purpose of
installing its furniture, fixtures, telephones and data systems, to "debug" the
systems, and for otherwise preparing the Premises for occupancy by Tenant. Such
early occupancy by Tenant shall be subject to all terms and conditions of this
Lease other than the payment of rent which shall commence on the Commencement
Date. In connection with such early entry, Tenant shall use all reasonable
efforts to minimize interference with the construction of the Tenant's Work.
Landlord shall use good faith efforts to give Tenant at least thirty (30) days'
prior written notice of the date on which Landlord reasonably anticipates
Substantial Completion of the Tenant's Work will occur. Tenant shall be fully
responsible for any delays in the Commencement Date as a result of Tenant's
early entry and shall be responsible for any damage to property or injury to
person caused by any Tenant party because of such early entry, and in such
event, Tenant shall indemnify and hold Landlord harmless from and against any
claims, liabilities, costs or expenses incurred by Landlord and rising out of
Tenant's early entry to the Premises.
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EXHIBIT "C"
TENANT'S PERSONAL PROPERTY
--------------------------
All furniture, movable equipment and other personal property that is
not attached to the floors, walls or ceiling of the Premises; and any other
fixture, equipment, or other item, regardless of the manner of attachment, that
is used primarily in Tenant's trade or business and that can be removed as a
separate physical unit without material damage to the Building and without
unreasonable interference with other tenants' use and enjoyment of their
Premises, including, without limitation, the following:
1. the personal property and fixtures of Tenant's Customers, Contractors
or Employees.
[To be completed by Tenant after execution of Lease, with final Exhibit C to be
slip sheeted into original executed Lease].
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<PAGE>
EXHIBIT "D"
RULES AND REGULATIONS
---------------------
Landlord shall have the right to reasonably prescribe the weight, position
and manner of installation of heavy equipment which, if considered reasonably
necessary by Landlord, shall be installed in a manner which shall insure
satisfactory weight distribution. The time, routing and manner of moving such
heavy equipment shall be subject to prior approval by Landlord (which approval
shall not be unreasonably withheld or delayed).
1. Tenant, or the employees, agents, visitors or licensees of Tenant, shall
not at any time place, leave or discard any rubbish, paper, articles or
objects of any kind whatsoever outside the doors of the Premises or the
Property. No animals or birds shall be brought or kept in or about the
Premises or the Property.
2. Canvassing, soliciting or peddling in or about the Premises or the Property
is prohibited and Tenant shall cooperate to prevent same.
3. Landlord shall have the right to exclude any person from the Property
(other than employees and personnel of Tenant) other than during customary
business hours, and any person in the Property will be subject to
identification by employees and agents of Landlord. All persons in or
entering the Property shall be required to comply with the security
policies of the Property. If Tenant desires any additional security service
for the Premises or the Property, Tenant shall have the right (with the
prior written consent of Landlord, which approval shall not be unreasonably
withheld or delayed) to obtain such additional service at Tenant's sol
cost and expense. Tenant shall keep doors to unattended areas locked and
shall otherwise exercise reasonable precautions to protect its property
from theft, loss or damage. Landlord shall not be responsible for the
theft, loss or damage of any property or for any error with regard to the
exclusion from or admission to the Premises or the Property of any person
(except to the extent attributable to the negligence or willfulness
misconduct of Landlord). In case of invasion, mob, riot or public
excitement, Landlord reserves the right to prevent access to the Premises
or the Property during the continuance of same by closing the doors or
taking other measures for the safety of the tenants and protection of the
Premises or the Property and property or persons therewith.
4. Tenant shall not cause or permit any odors to permeate in or emanate from
the Premises or the Property, or permit or suffer the Premises or the
Property to be occupied or used in a manner reasonably objectionable to
Landlord or other occupants of the Premises or the Property by reason o
light, radiation, magnetism, noise, odors, and/or vibrations, or
unreasonably interfere in any way with other tenants or those having
business in the Premises or the Property.
5. All keys shall be returned to Landlord upon the termination of this Lease
and Tenant shall give to Landlord the explanations of the combinations of
all safes, vaults and combination locks remaining with the Premises.
Landlord may at all times keep a pass key to the Premises. All entrance
doors to the Premises shall be left closed at all times and left locked
when the Premises are not in use.
6. Tenant shall give immediate notice to Landlord in case of any known
emergency at the Premises or the Property.
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<PAGE>
7. Tenant shall not advertise for temporary manual laborers (as opposed to
temporary secretarial or other professional support staff) giving the
Premises or the Property as an address, nor pay such laborers at a location
in the Premises or the Property.
8. No portion of the Premises or any part of the Property shall at any time be
used or occupied as sleeping or lodging quarters.
9. The toilet rooms, urinals, wash bowls and other apparatus in the Premises
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein and the expense of any breakage, stoppage or damage resulting from
the violation of this rule shall be borne by the Tenant who or whos
employees or invitees shall have caused it.
10. Landlord reserves the right to exclude or expel from the Property any
person who, in the reasonable judgment of Landlord, is intoxicated or under
the influence of liquor or drugs, or who shall in any manner do any act in
violation of any of the Rules and Regulations of the Premises or the
Property.
11. Landlord reserves the right to rescind any of these rules and regulations
and to make such other and further rules and regulations as in its
reasonable judgment shall, from time to time, be required for the safety,
protection, care and cleanliness of the Property, the operation thereof,
the preservation of good order therein and the protection and comfort of
the tenants and their agents, employees, and invitees, which rules and
regulations shall be binding upon it in like manner as if originally herein
prescribed.
12. Tenant shall park trailers and other oversized vehicles only in areas
designated by Landlord for the parking of trailers or oversized vehicles.
13. Tenant shall not utilize the Premises for outside storage except with the
written consent of Landlord (which consent shall not be unreasonably
withheld or delayed).
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EXHIBIT "E"
RIGHT OF FIRST REFUSAL
----------------------
Landlord hereby grants to Tenant a continuing right of first refusal ("Refusal
Right") with respect to any space contiguous to the Premises ("Refusal Space");
however, the Refusal Right shall not be applicable during any time when there is
an uncured Event of Default under the Lease.
1. Exercise of Refusal Right. If Landlord receives an offer from a
third party to lease all or a part of the Refusal Space which Landlord desires
to accept, or Landlord makes an offer to a third party to lease all or a part of
the Refusal Space which offer the third party desires to accept, Landlord shall
so notify Tenant ("Refusal Notice"), describing all material terms of the offer
(i.e., rent, location of premises, size of premises, length of term, improvement
allowance [if any]). Tenant shall have five (5) business days from the receipt
of the Refusal Notice to notify Landlord in writing of the exercise by Tenant of
Tenant's Refusal Right with respect to the subject Refusal Space. If Tenant
fails to so notify Landlord within such five (5) business day period, Tenant
shall be deemed to have waived its Refusal Right and all rights under this
Exhibit "E" with respect to such offer and the Refusal Space in question, and
Landlord shall have the right to enter into a lease with such third party with
respect to the Refusal Space in question upon the same terms as set forth in the
Refusal Notice. If the Refusal Space in question is not subsequently leased to
such third party upon terms set forth in the Refusal Notice within six (6)
months after the expiration of such five (5) business day period, the Refusal
Right shall be reinstated. Moreover, if such Refusal Space is so leased to the
third party, then upon the expiration of the term of such lease (including any
renewals or extensions thereof, if any) or upon the termination of such lease or
the termination of the tenant's right of possession thereunder, Tenant's Refusal
Right as to such Refusal Space shall be reinstated. If Tenant properly exercises
its Refusal Right in the manner and within the time period specified herein,
then Tenant shall lease all, but in no event less than all, of the Refusal Space
on the same terms and conditions as are contained in the Lease with respect to
the Premises except that (a) if the Lease has at least thirty-six (36) months
remaining on its initial Term at the time Tenant exercises its Refusal Right,
then the Base Rent for the Refusal Space shall be at the same rate as the Base
Rent for the Premises at that time and Tenant shall be entitled to receive from
Landlord a Cash Allowance equal to the product of 33(cent) times the number of
square feet of Net Rentable Area in the Refusal Space times the number of months
remaining on the initial Term of the Lease at that time, and (b) in the event
there are less than thirty-six (36) months remaining on the initial Term of the
Lease or during any Renewal Term, then the Base Rent for the Refusal Space and
the Cash Allowance shall be as set forth in the Refusal Notice. The term of the
Lease as it relates to the Refusal Space shall expire (a) coterminous with the
Term for the Premises in the event there are at least thirty-six (36) months
remaining on the initial Term at the time Tenant exercises its Refusal Right,
and (b) on the expiration date of the proposed term for the Refusal Space
contained in the Refusal Notice in the event there are less than thirty-six (36)
months remaining on the initial Term at the time Tenant exercises its Refusal
Right or in the event the Refusal Right is exercised at anytime during a Renewal
Term. Within thirty (30) days after Tenant delivers to Landlord notice of its
election, Landlord and Tenant will enter into a written amendment modifying and
supplementing the Lease and containing such other terms and provisions as
Landlord may reasonably deem appropriate.
If a Refusal Notice pertains only to a portion of the Refusal Space, Tenant's
rights hereunder shall remain in full force and effect with respect to the
remaining Refusal Space.
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2. Termination of Refusal Right. The Refusal Right shall automatically
terminate upon (a) the termination of the Term, whether by Landlord upon the
occurrence of an Event of Default or otherwise, and (b) the failure of Tenant to
exercise the Refusal Right with respect to any Refusal Space as and within the
time period specified in this Exhibit "E".
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EXHIBIT "F"
RENEWAL OPTIONS
---------------
Tenant shall have the right to renew and extend this Lease with respect to
the Premises then subject to this Lease for the Renewal Term(s) upon and
subject to the following terms and conditions:
1. Tenant may renew this Lease for two (2) Renewal Terms of five (5) years
each. Each Renewal Term, herein so called, shall commence immediately upon
the expiration of the original Term or preceding Renewal Term, as the case
may be, by Tenant's giving written notice thereof to Landlord no later than
six (6) months prior to the expiration of the original Term or the
expiration of the preceding Renewal Term, as the case may be. If Tenant
does not renew this Lease for a Renewal Term, then Tenant shall have no
further renewal rights. The term "Term" as used herein shall mean the
initial Term specified in Section 1(b) of the Lease as may be extended
pursuant to the exercise of any renewal option provided herein.
2. The exercise by Tenant of any renewal option granted hereinabove must be
made, if at all, by written notice executed by Tenant and delivered to
Landlord on or before the date set forth hereinabove. Once Tenant shall
exercise the renewal option, Tenant may not thereafter revoke such
exercise. Tenant shall not have the right to exercise the renewal option at
a time when there is an uncured Event of Default under this Lease. Tenant's
failure to exercise timely the renewal option for any reason whatsoever
shall conclusively be deemed a waiver of such renewal option.
3. Tenant shall take the Premises "as is" for each Renewal Term and Landlord
shall have no obligation to make any improvements or alterations to the
Premises, except that Landlord will provide Tenant with a Market Rate
Refurbishment Allowance at the beginning of each Renewal Term. For purposes
of this provision, the term "Market Rate Refurbishment Allowance" shall
mean refurbishment allowances being offered for renewals of comparable
office/light assembly buildings in the Plano, Texas area on the effective
date for the Renewal Term in question which shall be determined using the
same procedures as set forth in paragraph 5 below with respect to Fair
Market Value Rate.
4. Base Rent for the Renewal Term attributable to the Premises shall be at an
annual rate per square foot of Rentable Area of the Premises equal to 95%
of the Fair Market Value Rate, as hereinafter defined, which shall be
increased, adjusted, or augmented as provided in and under this Lease,
except that the Base Year shall be changed to the first (1st) year of the
Renewal Term in question.
5. As used in this Exhibit "F", "Fair Market Value Rate" shall mean the fair
market value base rent rate per square foot of rentable area per year in
effect on the effective date for the Renewal Term in question for
comparable tenants, taking comparable space, in comparable condition, under
comparable terms in comparable office/light assembly buildings in the
Plano, Texas area, taking into consideration the credit standing of Tenant
and all other relevant factors. Within five (5) days after Tenant's
exercise of a renewal option, Landlord shall deliver to Tenant in writing
the proposed Fair Market Value Rate for the renewal term in question. If
Tenant disagrees with such Fair Market Value Rate, Landlord and Tenant will
attempt to come to agreement as to an acceptable Fair Market Value Rate for
such Renewal Term. If Landlord and Tenant cannot agree within 30 days after
Tenant's exercise of the renewal option in question, then either Landlord
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<PAGE>
or Tenant may serve a written notice to the other stating that an appraisal
should be conducted pursuant to this Paragraph 5 of Exhibit "F", in which
event five (5) days after such notice is given, Landlord and Tenant shall
each nominate and appoint one (1) appraiser to determine the Fair Market
Value Rate. Upon the appointment of the two (2) appraisers as hereinabove
provided, said two (2) appraisers shall be sworn faithfully and fairly to
determine the Fair Market Value Rate as of the effective date of the
Renewal Term. The two (2) appraisers shall afford to Landlord and Tenant
the right to submit evidence with respect to such value and shall, with all
possible speed, make their respective determinations in writing and give
notice thereof to Landlord and Tenant. If there is a variance of less than
five percent (5%) in the fair market values determined by the two (2)
appraisers, the average of the values so determined shall be controlling
and shall be binding upon Landlord and Tenant. If there is a variance of
more than five percent (5%) in the fair market values determined by the two
(2) appraisers, said appraisers shall forthwith and within five (5) days
after both of such appraisers have made their determinations appoint in
writing a third (3rd) appraiser and give written notice of such appointment
to Landlord and Tenant. In the event the two (2) appraisers fail to appoint
or agree upon such third (3rd) appraiser within said five (5) day period, a
third (3rd) appraiser shall be selected by Landlord and Tenant if they so
agree upon such third (3rd) appraiser within a further period of five (5)
days. If any appraiser shall not be appointed or agreed upon within the
time herein provided, then Landlord or Tenant may apply to any state
district court judge of the State of Texas in the Dallas/Fort Worth, Texas
area for the appointment of such appraiser. Such appraiser shall be sworn
faithfully and fairly to determine, pursuant to the procedures set forth
above, the question at issue. The Fair Market Value Rate shall be the
average of the two determinations that are closer to each other than the
third determination. If the appraisal mechanism is utilized to determine
Fair Market Value Rate hereunder, such determination shall, in all events,
be made within 90 days following the date upon which Tenant exercised the
renewal option in question. Landlord and Tenant shall pay the fees and
expenses of the appraiser it appoints, and the fees and expenses of the
third (3rd) appraiser and any general expenses incurred by the panel of
appraisers in connection with the appraiser shall be divided equally
between Landlord and Tenant. In the event any appraiser appointed as
aforesaid shall thereafter die or becomes unable or unwilling to act, such
appraiser's successor shall be appointed in the same manner as provided in
this paragraph for the appointment of the appraiser's dying or becoming
unable or unwilling to act. Any appraiser appointed hereunder shall have no
less than ten (10) years' experience in the appraisal of real property of
the type comparable to the property, and shall hold the professional
designation of M.A.I. or its equivalent, or any such appraiser may be a
licensed real estate broker who is a member of the Society of Industrial
and Office Realtors and who has at least ten (10) years' experience in
leasing premises similar to the Premises.
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EXHIBIT "G"
DESCRIPTION OF JANITORIAL SERVICES
----------------------------------
Landlord shall be responsible for providing janitorial services five (5) days
per week, excluding national holidays, for the interior of the Premises in a
good and workmanlike manner in accordance with the specifications deemed
customary by Landlord or such additional and/or alternative specifications as
from to time are mutually acceptable to and set forth in writing by Landlord and
Tenant. Those specifications are more particularly described as follows:
A. OFFICE LEASE:
1. Empty, clean and damp dust all waste receptacles and remove wast
paper and rubbish from the premises nightly; wash receptacles as
necessary.
2. Empty and clean all ash trays nightly.
3. Vacuum all rugs and carpeted areas in office, lobbies and corridors
nightly.
4. Hand dust and wipe clean with damp or treated cloth all office
furniture, files, fixtures, and all other horizontal surfaces
nightly; window sills weekly and wash window sills when necessary.
5. Clean all vertical surfaces, including doors, door frames, around
light switches, private entrance glass, and partitions weekly.
6. Wash clean all water coolers nightly.
7. Damp mop spillage in office and public areas as required.
8. Hand dust all telephones with treated cloth as necessary.
B. TOILETS:
1. Damp mop, rinse and dry floors nightly.
2. Scrub floors as necessary.
3. Clean all mirrors, bright work and enameled surfaces nightly.
4. Wash and disinfect all basins, urinals and bowls nightly, using
scouring powder to remove stains and clean undersides of rim of
urinals and bowls.
5. Wash both sides of all toilet seats with soap and water or
disinfectant nightly.
6. Damp wipe nightly, wash with disinfectant when necessary, all
partitions, tile walls and outside surface of all dispensers and
receptacles.
7. Empty and sanitize all receptacles and sanitary disposals nightly;
thoroughly clean and wash at least once per week.
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8. Fill toilet tissue, soap, towel and sanitary napkin dispensers
daily.
9. Clean flushometers, piping, toilet seat hinges and other metal work
nightly.
10. Wash all wall partitions, tile walls and enamel surfaces from trim
to floor monthly.
C. FLOORS:
1. Ceramic tile, marble or terrazzo floors to be swept nightly and
washed or scrubbed as necessary.
2. Vinyl, asphalt, rubber or other composition floors and bases to be
cleaned nightly.
3. Tile floors in office areas will be waxed and buffed monthly.
4. All tile floors stripped, machine cleaned and rewaxed semi-annually.
5. All carpeted areas and rugs to be vacuum cleaned nightly.
6. Carpet shampooing will be performed at Tenant's request and billed
to Tenant at Lessor's contractor's reasonable cost thereof.
D. GLASS:
1. Clean all perimeter windows, inside and outside, a minimum of net
less than two (2) times per year with respect to outside windows and
one (1) time per year with respect to inside windows.
E. HIGH DUSTING (Quarterly):
1. Dust and wipe clean all closet shelving when empty and carpet sweep
or dry mop all floors in closets if such are empty.
2. Dust all picture frames, charts, graphs and similar wall hangings.
3. Dust clean all vertical surfaces such as walls, partitions, doors,
door bucks and other surfaces above shoulder height.
4. Damp dust all ceiling air conditioning diffusers, wall grilles,
registers and other ventilating louvers.
5. Dust the exterior surfaces of lighting fixtures, including glass and
plastic enclosures.
F. DRAPERIES:
1. Spot clean all blinds at a minimum of not less often than three (3)
times a year.
2. Cleaning of individual pairs of draperies will be performed at
Tenant's request and billed to Tenant at Lessor's Contractor's
reasonable cost thereof.
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G. GENERAL:
1. Where "as needed", "as necessary", or "as required" is used in this
janitorial specification, the Lessor shall be the sole judge.
2. It is expressly understood the Lessor shall maintain all common
areas of the Building in a first-class manner comparable to other
Class A Office/Tech/R&D buildings in Plano, Texas.
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EXHIBIT "H"
RIGHT OF FIRST OFFER
--------------------
If Landlord desires to sell one or more of the Buildings in the Project, or all
of the Project (the "Sale Property"), then Landlord shall notify Tenant thereof,
setting forth in such notice the complete terms and conditions pursuant to which
Landlord would sell the Sale Property (including the closing date of such sale).
Said notice shall be accompanied with rent rolls, operating statements and other
information relating to the Sale Property as is necessary for Tenant to evaluate
the proposed transaction. Within fifteen (15) days after such notice from
Landlord, Tenant shall have the right to deliver a contract to Landlord to
purchase the Sale Property on the terms set forth in Landlord's notice. If
Tenant exercises its rights described hereinabove, then Landlord shall have the
option to either accept or reject Tenant's contract to purchase the Sale
Property by delivering written notice thereof to Tenant within fifteen (15) days
after receiving Tenant's contract. If Landlord accepts Tenant's contract, then
Tenant shall be required to purchase the Sale Property on the closing date set
forth in Landlord's notice, and otherwise in accordance with the terms and
provisions of Tenant's contract. If Landlord rejects Tenant's offer in Tenant's
contract, then Landlord shall be free to sell the Sale Property for a purchase
price and on financial terms not more favorable to the third party than those
stated in Tenant's contract within the one hundred eighty (180) day period
following Landlord's rejection of Tenant's contract. If Landlord desires to sell
the Sale Property to such third party on terms and conditions that are more
favorable to the third party than those stated in Tenant's contract, then
Landlord shall again be required to comply with the provisions of this Exhibit
"H". If a contract is not entered into by Landlord and a third party covering
the sale to such third party of the Sale Property in accordance with this
Exhibit "H" within such one hundred eighty (180) day period, then Landlord may
not sell the Sale Property without again complying with the provisions of this
Exhibit "H". For purposes of determining whether or not the purchase price of a
particular offer is more or less favorable than the purchase price of Tenant's
contract, the consideration to be received by Landlord from Tenant thereunder
shall be net of any brokerage commissions or fees which Landlord would be
obligated to pay in the case of a sale to Tenant. The provisions of this Exhibit
"H" shall not apply, and Tenant shall have no rights whatsoever in the event the
Sale Property is being sold or offered for sale to a partner in Landlord
pursuant to the buy-sell provisions of the Landlord's partnership agreement
existing as of the date of this Lease; provided, however, the rights of Tenant
pursuant to the terms of this Exhibit "H" shall survive after any such sale to a
partner of Landlord.
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EXHIBIT "I"
FORM OF SNDA
------------
SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT
------------------------------------------------------
This SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT (this
"Agreement") is made and entered into as of the 4th day of February, 1999, by
and among ADVANCED NEUROMODULATION SYSTEMS, INC., a corporation, hereinafter
referred to as ("Tenant"), LEGACY LINCOLN I, LTD., a Texas limited partnership
("Landlord"), and NATIONSBANK, N.A., a national banking association
("Mortgagee");
WHEREAS, Mortgagee has made a loan to Landlord, which is evidenced by
that certain Promissory Note (herein, as it may be from time to time renewed,
extended, amended or supplemented, called the "Note") executed by Landlord,
payable to the order of Mortgagee, and secured by, among other things, that
certain Deed of Trust, Assignment, Security Agreement and Financing Statement
(herein, as it may have been or may be from time to time renewed, extended,
amended or supplemented, called the "Mortgage") recorded in Volume 4247, Page
2425 in the real property records of Collin County, Texas, covering among other
property, the land (the "Land") described in Exhibit "A" which is attached
hereto and incorporated herein by reference, and the improvements thereon (such
Land and improvements being herein together called the "Property");
WHEREAS, Tenant is the tenant under a Lease Agreement (with any addenda
and as amended or modified from time to time, the "Lease") dated February
4, 1999, executed by Tenant and Landlord, pertaining to certain space (the
"Premises") in the building on the Land; and
WHEREAS, the term "Landlord" as used herein means the present landlord
under the Lease or, if the landlord's interest is transferred in any manner, the
successor(s) or assign(s) occupying the position of landlord under the Lease at
the time in question, but not Mortgagee or any Purchaser (as defined in Section
3 below);
THEREFORE, for and in consideration of Ten Dollars ($10.00), and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged and confessed, and in consideration of the mutual covenants and
agreements herein contained, Tenant, Landlord, and Mortgagee hereby agree as
follows:
1. SUBORDINATION. Tenant hereby agrees and covenants that the Lease,
all of Tenant's rights thereunder, Tenant's leasehold estate created thereby,
including, without limitation, all renewal, expansion and purchase rights, if
any, all of Tenant's right, title and interest in and to the Premises, are and
shall be completely and unconditionally subject, subordinate and inferior to (a)
the Mortgage and the rights of Mortgagee thereunder and all right, title and
interest of Mortgagee in the Property, and (b) all other security documents now
or hereafter securing payment of any indebtedness of the Landlord (or any prior
landlord) to Mortgagee which cover or affect any or all of the Property (the
"Security Documents"). Without limitation of any other provision hereof,
Mortgagee may at its option and without joinder or further consent of Tenant,
Landlord, or anyone else, at any time after the date hereof subordinate the lien
of the Mortgage (or any other lien or security interest held by Mortgagee which
covers or affects the Property) to the Lease by executing an instrument which is
intended for that purpose and which specifies such subordination; and in the
event of any such election by Mortgagee to subordinate, Tenant shall promptly at
Mortgagee's request execute any documents required to evidence or confirm such
subordination; provided, however, notwithstanding that the Lease may by
unilateral subordination by Mortgagee hereafter be made superior to the lien of
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the Mortgage, the provisions of the Mortgage relative to the rights of Mortgagee
with respect to proceeds arising from an eminent domain taking (including a
voluntary conveyance by Landlord) and/or insurance payable by reason of damage
to or destruction of the Premises or the Property shall be prior and superior to
and shall control over any contrary provisions in the Lease.
2. NON-DISTURBANCE. Mortgagee agrees that so long as the Lease is in
full force and effect and Tenant is not in default in the payment of rent,
additional rent or other payments or in the performance of any of the other
terms, covenants or conditions of the Lease on Tenant's part to be performed
(beyond the period, if any, specified in the Lease within which Tenant may cure
such default),
(a) Tenant's possession of the Premises under the Lease and Tenant's
rights and privileges thereunder, and under any extensions or renewals thereof,
shall not be disturbed, diminished or interfered with by Mortgagee or any other
party acting by, through or under Mortgagee in the exercise of any of its rights
under the Mortgage or any of the Security Documents, including any foreclosure
or conveyance in lieu of foreclosure, and
(b) Mortgagee will not terminate the Lease, nor join Tenant as a party
defendant in any proceeding for foreclosure of the Mortgage or any of the
Security Documents.
3. ATTORNMENT
(a) Tenant covenants and agrees that in the event of foreclosure of the
Mortgage or any of the Security Documents, whether by power of sale or by court
action, or upon a transfer of the Property or the Premises by conveyance in lieu
of foreclosure (the purchaser at foreclosure or the transferee in lieu of
foreclosure, including Mortgagee if it is such purchaser or transferee, and
their successors and assigns being herein called "Purchaser"), Tenant shall
attorn to Purchaser as Tenant's new landlord, and Tenant and Mortgagee agree
that the Lease shall continue in full force and effect as a direct lease between
Tenant and Purchaser upon all of the terms, covenants, conditions and agreements
set forth in the Lease; provided, however, that in no event shall Purchaser be:
(1) liable for any act or omission of any previous landlord (including
Landlord);
(2) subject to any offset, defense, deduction or counterclaim which
Tenant might be entitled to assert against any previous landlord (including
Landlord)(other than offsets arising from Landlord's failure to perform any
maintenance or repair obligation required of Landlord under the Lease if,
and only if, (i) Tenant has provided Purchaser with written notice of such
failure and a reasonable opportunity to cure the same prior to exercising
any of Tenant's rights under the Lease, (ii) Tenant duly exercises its
rights under the Lease to cure such default by making such repairs or
performing such maintenance to the Premises or the Building on behalf of
Landlord (A) in compliance with all applicable laws, (B) with materials of
a quality and grade at least equal to that in place as of the date of
delivery of the Premises to Tenant, and (C) without interference with the
rights of other tenants of the Property, (iii) the total liability for such
default shall not exceed the fair and reasonable cost to Tenant to make
such repairs or perform such maintenance on Landlord's behalf);
(3) bound by any payment of rent or additional rent made by Tenant to
any previous landlord (including Landlord) for more than one (1) month in
advance (except for the escrow of pass-through expenses as provided in the
Lease);
-46-
<PAGE>
(4) bound by any amendment or modification of the Lease hereafter made
that results in a reduction of rent or other sums due and payable pursuant
to the Lease, terminates the Lease (except pursuant to an express right of
termination set forth in the Lease as of the date of this Agreement),
modifies the terms of the Lease regarding surrendering possession of the
Premises, provides for payment of rent more than one (1) month in advance,
permits the subordination of the Lease to any lien other than the Mortgage,
modifies the permitted uses under the Lease, modifies the provisions
regarding Tenant's obligation to comply with all laws (including
environmental laws) or otherwise makes Landlord's obligations thereunder
more onerous without the prior written consent of the Mortgagee;
(5) liable for any deposit that Tenant may have given to any previous
landlord (including Landlord) which has not, as such, been transferred to
and received by Purchaser; or
(6) otherwise liable, except as provided above, with respect to any act,
omission, event, condition or circumstance to the extent that the same
occurred or arose before such transfer of the Property or the Premises to
Purchaser.
The above listed items (1)-(6) shall not be construed to modify or limit any
rights Tenant may have at law or in equity against Landlord or any other prior
owner of the Premises.
(b) The provisions of this Agreement regarding attornment by Tenant
shall be self-operative and effective without the necessity of execution of any
new lease or other document on the part of any party hereto or the respective
heirs, legal representatives, successors or assigns of any such party. Tenant
agrees, however, to execute and deliver at any time and from time to time,
promptly upon the written request of Landlord or of any holder(s) of any of the
indebtedness or other obligations secured by the Mortgage, any instrument or
certificate which, in the reasonable judgment of Landlord or of such holder(s),
may be necessary or appropriate in any such foreclosure proceeding or otherwise
to evidence such attornment in accordance with the terms hereof, including, if
requested, a new lease of the Premises on the same terms and conditions as the
Lease and for the then unexpired term of the Lease.
4. ESTOPPEL CERTIFICATE. Tenant agrees to execute and deliver from time
to time, upon the written request of Landlord or of any holder(s) of any of the
indebtedness or other obligations secured by the Mortgage and Security
Documents, a certificate regarding the status of the Lease, including
statements, if true (or if not, specifying why not), (i) that the Lease is in
full force and effect, (ii) of the date through which rentals have been paid,
(iii) of the date of the commencement of the term of the Lease, (iv) of the
nature of any amendments or modifications of the Lease, (v) that no default, or
state of facts which with the passage of time or notice (or both) would
constitute a default, exists under the Lease, and (vi) of such other matters as
may reasonably be requested.
5. ACKNOWLEDGMENT AND AGREEMENT BY TENANT. Tenant hereby acknowledges
and agrees as follows:
(a) Tenant acknowledges and recognizes the Mortgage and the agreements
evidencing and securing the loan evidenced by the Note.
(b) Tenant acknowledges that it is aware that the Landlord's interest
in the Lease has been assigned to Mortgagee in connection with the financing of
the Property and that Mortgagee will rely upon this instrument in connection
with such financing.
-47-
<PAGE>
(c) Mortgagee, in making any disbursements to Landlord, is under no
obligation or duty to oversee or direct the application of the proceeds of such
disbursements, and such proceeds may be used by Landlord for purposes other than
improvement of the Property.
(d) From and after the date hereof, in the event of any default by
Landlord under the Lease or any act or omission by Landlord which would give
Tenant the right, either immediately or after a lapse of time, to terminate the
Lease or claim a partial or total eviction (except the failure of Landlord to
initially deliver the Premises to Tenant on or before the date specified in the
Lease), Tenant shall not exercise any such right or remedy unless and until all
of the following conditions are met: (1) Mortgagee shall have received from
Tenant written notice of such default, act or omission; and (2) Mortgagee shall
have had a period for cure of such default, act or omission beginning upon the
later of Mortgagee's receipt of such notice or Mortgagee's becoming entitled
under the Mortgage to remedy the same and continuing for a period equal to the
period provided to Landlord for cure under the Lease, but in any event at least
thirty (30) days after receipt of such notice or for such longer period of time
as may be reasonably necessary to cure or remedy such default, act or omission,
including such period of time as may be necessary to obtain possession of the
Property and thereafter cure or remedy such default, act, or omission (not to
exceed, in any event, 120 days), during which period of time Mortgagee shall be
permitted to cure or remedy such default, act or omission; provided, however,
that Mortgagee shall have no duty or obligation to cure or remedy any breach or
default.
(e) From and after the date hereof, in the event of any default by
Landlord under the Lease or any act or omission by Landlord which would give
Tenant the right, either immediately or after a lapse of time, to exercise any
right of self-help, Tenant shall not exercise any such right unless and until
all of the following conditions are met: (1) Mortgagee shall have received from
Tenant written notice of such default, act or omission; and (2) Mortgagee shall
have had a period for cure of such default, act or omission beginning upon the
date of Mortgagee's receipt of such notice and continuing for a period equal to
the period provided to Landlord for cure under the Lease, but in any event at
least fifteen (15) days after receipt of such notice.
(f) Tenant has notice that the rent and all other sums due under the
Lease have been assigned to Mortgagee as additional security. Tenant shall not
prepay any rents or other sums due under the Lease for more than one (1) month
in advance of the due dates therefor (except as may be provided otherwise in the
Lease). In the event that Mortgagee notifies Tenant in writing of a default
under the Mortgage and demands that Tenant pay its rent and all other sums due
under the Lease directly to Mortgagee, Tenant shall honor such demand and pay
its rent and all sums due under the Lease directly to Mortgagee or as otherwise
required pursuant to such written notice. Landlord hereby authorizes Tenant to
make such payments to Mortgagee and hereby releases and discharges Tenant of and
from any liability to Landlord resulting from Tenant's payment to Mortgagee in
accordance with this Agreement, and hereby agrees that such described payment to
Mortgagee shall be deemed to discharge Tenant's obligations to Landlord under
the Lease in respect of such described payment.
(g) Tenant shall send a copy of any notice or statement under the Lease
to Mortgagee at the same time such notice or statement is sent to Landlord, by
registered or certified mail, postage prepaid, at the address of Mortgagee set
forth in this Agreement or such other address as Mortgagee may designate to
Tenant.
(h) This Agreement satisfies any condition or requirement in the Lease
relating to the granting of a non-disturbance agreement in connection with the
Mortgage, and Tenant waives any provision to the contrary in the Lease.
-48-
<PAGE>
(i) Mortgagee and any Purchaser shall have no obligation or liability
to Tenant or any other party with respect to any conflict between the Lease and
any law, rule, regulation or ordinance, whether federal, state or local, the
provisions of the Lease giving rise to such conflict shall be null and void to
the extent of such conflict, without the remaining provisions of the Lease being
impaired or affected, and Tenant shall have no right to terminate or cancel the
Lease or take any other remedial action against Mortgagee or any Purchaser or
against any other party for which Mortgagee or any Purchaser would be liable on
account of such conflict.
(j) Mortgagee and any Purchaser shall have no obligation or incur any
liability w7ith respect to the erection or completion of the improvements in
which the Premises are located or for completion of the Premises or any
improvements for Tenant's use and occupancy, either at the commencement of the
term of the Lease, upon any renewal or extension thereof or upon the addition of
additional space pursuant to any expansion rights contained in the Lease.
Nothing herein shall be deemed to prohibit Tenant from exercising any express
right in the Lease to terminate the Lease if Landlord shall fail to deliver to
Tenant the completed Premises on or before the outside date specified in the
Lease.
(k) Mortgagee and any Purchaser shall have no obligation or liability
with respect to any warranty of any nature whatsoever, express or implied, made
to Tenant by landlord, any agent or employee of Landlord, or any other party,
whether pursuant to the Lease or otherwise, including without limitation any
warranties respecting use, compliance with zoning, Landlord's title, Landlord's
authority, habitability, fitness for any purpose or possession.
(l) In the event that Mortgagee or any Purchaser shall acquire title to
the Premises or the Property through foreclosure, deed-in-lieu of foreclosure,
or otherwise, Mortgagee or such Purchaser shall have no obligation or liability
beyond Mortgagee's or Purchaser's then equity interest, if any, in the Property
or the Premises, and Tenant shall look solely to such equity interest of
Mortgagee or Purchaser, if any, for the payment and discharge of any obligations
imposed upon Mortgagee or Purchaser hereunder or under the Lease or for recovery
of any judgment or award from Mortgagee or Purchaser, and in no event shall
Mortgagee or Purchaser ever be personally liable for such judgment or award.
This subparagraph (l) shall not be construed as a limitation of Tenant's
self-help rights under the Lease or rights under applicable law to pursue
equitable remedies which may be available to Tenant.
(m) Nothing herein contained is intended, nor shall it be construed, to
abridge or adversely affect any right or remedy of Landlord or Tenant under the
Lease in the event of any default by the other party or in the performance of
any of the other terms, covenants or conditions of the Lease.
(n) Landlord has not agreed to any abatement of rental or period of
"free rent" for the Premises unless same is specifically provided in the Lease,
and Tenant agrees that in the event Mortgagee or any Purchaser becomes the owner
of the Property, no agreement for abatement of rent not specifically provided
for in the Lease shall be binding on Mortgagee or Purchaser.
(o) Tenant hereby acknowledges and agrees that in the event of a
failure or disruption in building services of any kind (including, but not
limited to, janitorial, elevator, maintenance, electrical, water, sewer or any
other utility service), for any length of time, Landlord, Mortgagee and/or
Purchaser shall not be liable for any damages, actual or consequential, arising
from or relating to such failure or disruption of service if such failure or
disruption is cured or remedied in accordance with the terms of the Lease.
6. ACKNOWLEDGMENT AND AGREEMENT BY LANDLORD. Landlord, as landlord
under the Lease and grantor under the Mortgage, acknowledges and agrees for
-49-
<PAGE>
itself and its heirs, representatives, successors and assigns, that: (a) this
Agreement does not constitute a waiver by Mortgagee of any of its rights under
the Mortgage, Note or Security Documents and does not in any way release
Landlord from its obligations to comply with the terms, provisions, conditions,
covenants, agreements and clauses of the Mortgage, Note and Security Documents;
(b) the provisions of the Mortgage, Note and Security Documents remain in full
force and effect and must be complied with by Landlord; and (c) in the event of
a default under the Mortgage, Note or Security Documents, Tenant may pay all
rent and all other sums due under the Lease to Mortgagee as provided herein or
in the Mortgage, Note and Security Documents or any separate assignment.
Landlord represents and warrants to Mortgagee that a true and complete copy of
the Lease has been delivered by Landlord to Mortgagee.
7. LEASE STATUS. Landlord and Tenant each certify to Mortgagee that
neither Landlord nor Tenant has knowledge of any default on the part of the
other under the Lease, and the Lease is bona fide and contains all of the
agreements of the parties thereto with respect to the letting of the Premises
and all of the agreements and provisions therein contained are in full force and
effect. Tenant hereby agrees that, without the prior written consent of
Mortgagee, Tenant shall not amend, alter, terminate, or waive any provision of,
or consent to the amendment, alteration, termination or waiver of any provision
of the Lease if such amendment, alteration, termination or waiver would (i)
result in a reduction of rent or other sums due and payable pursuant to the
Lease, (ii) terminate the Lease (except pursuant to an express right of
termination set forth in the Lease as of the date of this Agreement, (iii)
modify the terms of the Lease regarding surrendering possession of the Premises,
(iv) provide for payment of rent more than one (1) month in advance, (v) permit
the subordination of the Lease to any lien other than the Mortgage, (vi) modify
the permitted uses under the Lease, (vii) modify the provisions regarding
Tenant's obligation to comply with all laws (including environmental laws), or
(viii) otherwise make Landlord's obligations thereunder more onerous.
8. NOTICES. All notices, requests, consents, demands and other
communications required or which any party desires to give hereunder shall be in
writing and shall be deemed sufficiently given or furnished if delivered by
personal delivery, by telegram, telex, or facsimile, by expedited delivery
service with proof of delivery, or by registered or certified United States
mail, postage prepaid, at the addresses specified at the end of this Agreement
(unless changed by similar notice in writing given by the particular party whose
address is to be changed). Any such notice or communication shall be deemed to
have been given either at the time of personal delivery or, in the case of
delivery service or mail as a certified or registered item, as of the date such
notice is deposited in an official depository of the United States Mail properly
addressed to the address of the intended recipient, or, in the case of telegram,
telex, or facsimile, upon receipt. Notwithstanding the foregoing, no notice of
change of address shall be effective except upon receipt. This Section shall not
be construed in any way to affect or impair any waiver of notice or demand
provided in this Agreement or in the Lease or in any document evidencing,
securing or pertaining to the loan evidenced by the Note or to require giving of
notice or demand to or upon any person in any situation or for any reason.
9. MISCELLANEOUS.
(a) This Agreement supersedes any inconsistent provision of the Lease.
(b) Nothing contained in this Agreement shall be construed in derogation
of or in any way to impair or affect the liens, security interests or provisions
of the Mortgage or Security Documents.
(c) This Agreement shall inure to the benefit of and be binding upon
Mortgagee, Landlord, Tenant and their respective successors and permitted
assigns (including, but not limited to any party who purchases the Property
pursuant to a foreclosure of the Mortgage and the grantee of a deed in lieu of
-50-
<PAGE>
foreclosure and their respective successors and assigns), and any Purchaser, and
its successors and assigns; provided, however, that in the event of the
assignment or transfer of the interest of Mortgagee, all obligations and
liabilities of the assigning Mortgagee under this Agreement shall terminate, and
thereupon all such obligations and liabilities shall be the responsibility of
the party to whom Mortgagee's interest is assigned or transferred, and provided
further that, the interest of Tenant under the Lease and this Agreement may not
be assigned or transferred without the prior written consent of Mortgagee;
provided, however, that Tenant shall have the right, without Mortgagee's
consent, to assign the Lease as permitted by the terms of the Lease (in which
case Tenant may assign its rights under this Agreement to such assignee without
Mortgagee's consent).
(d) If any provision of this Agreement shall be held to be invalid,
illegal, or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not apply to or affect any other provision hereof, but
this Agreement shall be construed as if such invalidity, illegality, or
unenforceability did not exist.
(e) This Agreement and its validity, enforcement and interpretation
shall be governed by the laws of the State of Texas and applicable United States
federal law except only to the extent, if any, that the laws of the state in
which the Property is located necessarily control.
(f) The words "herein," "hereof" and "hereunder" and other similar
compounds of the word "here" as used in this Agreement refer to this entire
Agreement and not to any particular section or provision.
(g) This Agreement may not be modified orally or in any manner other
than by an agreement in writing signed by the parties hereto or their respective
successors in interest.
- --------------------------------------------------------------------------------
THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK
- --------------------------------------------------------------------------------
-51-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
MORTGAGEE:
NATIONSBANK, N.A.,
a national banking association
By: /s/Robert H. Shore
Name: Robert H. Shore
Title: Vice President
TENANT:
ADVANCED NEUROMODULATION SYSTEMS, INC.,
a Texas corporation
By: /s/Stuart B. Johnson
Name: Stuart B. Johnson
Title: Vice President, Operations
LANDLORD:
LEGACY LINCOLN I, LTD.,
a Texas limited partnership
By: Lincoln Property Company No. 2698, Ltd.,
a Texas limited partnership, its General
Partner
By: Lincoln Property Company No.
2699, Inc., a Texas corporation,
its General Partner
By: /s/ John H. Walter
Name: John H. Walter
Title: Vice President
Address of Mortgagee:
NationsBank, N.A.
901 Main Street, 51st Floor
Dallas, Texas 75202
Attention: Real Estate Loan Administration
-52-
<PAGE>
Address of Tenant:
One Allentown Parkway
Allen, Texas 75002-4211
Attention: Stuart B. Johnson
Address of Landlord:
Legacy Lincoln I Ltd.
3300 Lincoln Plaza
500 North Akard Street
Dallas, Texas 75201
Attention: Thomas H. Kuhlmann
-53-
<PAGE>
EXHIBIT A
Legal Description of the Land
-----------------------------
BEING a 14.9216 acre tract of land situated in the Maria C. Vela Survey,
Abstract No. 935, City of Plano, Collin County, Texas, and being a part of a
1,094.07 acre tract conveyed to Quorum Development Corporation by Deed recorded
in Volume 1171, Page 174, Land Records of Collin County, Texas, and being more
particularly described as follows (bearings referenced to EDS monumentation
system):
COMMENCING at a found 3-inch aluminum disk stamped "TU Electric" for the
southwest corner of Plano Tennyson Parkway Substation, an addition to the City
of Plano, Texas, as recorded in Cabinet G, Page 437, Map Records of Collin
County, Texas, said point South 74 degrees 09 minutes 03 seconds West, a
distance of 3,302.03 feet from a found brass disk in concrete stamped "EDS 10",
having EDS truncated surface coordinates North 75014.8828 feet, East 90574.1977
feet;
THENCE North 00 degrees 00 minutes 18 seconds East, along the west line of said
Plano Tennyson Parkway Substation, a distance of 500.00 feet to a found 3-inch
aluminum disk stamped "TU Electric" for the northwest corner of said Plano
Tennyson Parkway Substation;
THENCE South 89 degrees 59 minutes 42 seconds East, along the north line of said
Plano Tennyson Parkway Substation, a distance of 1095.36 feet to a 1/2 inch iron
rod found with yellow plastic cap stamped "Halff Associates, Inc." for the POINT
OF BEGINNING;
THENCE north 00 degrees 40 minutes 47 seconds West, departing the north line of
said Plano Tennyson Parkway Substation, a distance of 989.29 feet to a 1/2 inch
iron rod found with yellow plastic cap stamped "Halff Associates, Inc." for
corner;
THENCE North 89 degrees 19 minutes 13 seconds East, a distance of 653.20 feet to
a 1/2 inch iron rod found with yellow plastic cap stamped "Halff Associates,
Inc." for corner, said point being in the West line of Windcrest Drive (a 60'
ROW) and being the beginning of a curve to the left having a central angle of 15
degrees 13 minutes 35 seconds, a radius of 530.00 feet, a tangent length of
70.84 feet, and a chord bearing South 06 degrees 56 minutes 01 seconds West
140.43 feet;
THENCE in a southerly direction along said curve to the left, and with the West
line of Windcrest Drive, an arc distance of 140.85 feet to a 1 inch iron rod
found for corner;
THENCE South 00 degrees 40 minutes 47 seconds East, with the West line of
Windcrest Drive, a distance of 1136.28 feet to a 1 inch iron rod found for
corner, said point being the beginning of a curve to the right having a central
angle of 03 degrees 08 minutes 58 seconds, a radius of 670.00 feet, a tangent
length of 18.42 feet, and a chord bearing South 00 degrees 53 minutes 42 seconds
West, 36.82 feet;
THENCE in a southerly direction along said curve to the right, and with the west
line of Windcrest Drive, an arc distance of 36.38 feet to a 1 inch iron rod
found for corner;
THENCE South 89 degrees 42 minutes 57 seconds West, departing said West line of
Windcrest Drive, a distance of 58.99 feet to a 1/2 inch iron rod found with
yellow plastic cap stamped "Halff Associates, Inc." for corner in the east line
of the above mentioned Plano Tennyson Parkway Substation;
-54-
<PAGE>
THENCE North 00 degrees 40 minutes 47 seconds West, with the East line of said
Plano Tennyson Parkway Substation, a distance of 315.72 feet to a 1/2 inch iron
rod found with yellow plastic cap stamped "Halff Associates, Inc." for corner,
said point being the Northeast corner of said Plano Tennyson Parkway Substation;
THENCE North 89 degrees 59 minutes 42 seconds West, with the North line of said
Plano Tennyson Parkway Substation, a distance of 574.64 feet to the POINT OF
BEGINNING and containing 649,985 square feet or 14.9216 acres of land.
-55-
<PAGE>
EXHIBIT "J"
HAZARDOUS SUBSTANCES
--------------------
Isopropyl Alcohol
Mek
Toluene
Acetone
AK-225
Wavieide
Dimethyl Siloxane
Acid Flux
Sulfuric Acid
Liquid Vinyl
Naphtha Methoysilane
Sodium Dichromate
Dichloromethane
Bleach
-56-
<PAGE>
EXHIBIT 11.1
<PAGE>
Advanced Neuromodulation Systems, Inc.
Computation of Earnings Per Share
Years Ended December 31
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
Basic earnings (loss) per share:
<S> <C> <C> <C>
Weighted average common
shares outstanding .......................... 8,314,290 8,428,393 8,259,129
------------ ------------ ------------
Net earnings from continuing operations ......... $ 2,585,706 $ 817,511 $ 114,514
Net earnings (loss) from discontinued operations 4,373,496 (93,490) (526,671)
------------ ------------ ------------
Net earnings (loss) ............................. $ 6,959,202 $ 724,021 $ (412,157)
------------ ------------ ------------
Net earnings from continuing operations
per share ................................... $ 0.31 $ 0.10 $ 0.01
Net earnings (loss) from discontinued operations
per share ................................... 0.53 (0.01) (0.06)
------------ ------------ ------------
Net earnings (loss) per share ................... $ 0.84 $ 0.09 $ (0.05)
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Diluted earnings (loss) per share:
<S> <C> <C> <C>
Weighted average common
shares outstanding .......................... 8,314,290 8,428,393 8,259,129
Stock options and warrants--based on the treasury
stock method using average market price ..... 229,750 429,693 550,454
------------ ------------ ------------
Diluted common and common equivalent
shares outstanding .......................... 8,544,040 8,858,086 8,809,583
------------ ------------ ------------
Net earnings from continuing operations ......... $ 2,585,706 $ 817,511 $ 114,514
Net earnings (loss) from discontinued operations 4,373,496 (93,490) (526,671)
------------ ------------ ------------
Net earnings (loss) ............................. $ 6,959,202 $ 724,021 $ (412,157)
------------ ------------ ------------
Net earnings from continuing operations
per share ................................... $ 0.30 $ 0.09 $ 0.01
Net earnings (loss) from discontinued operations
per share ................................... 0.51 (0.01) (0.06)
------------ ------------ ------------
Net earnings (loss) per share ................... $ 0.81 $ 0.08 $ (0.05)
------------ ------------ ------------
</TABLE>
<PAGE>
EXHIBIT 21.1
<PAGE>
SUBSIDIARIES
------------
The Company has no "significant subsidiaries" as defined in Rule 1-02 (w) of
Regulation S-X.
<PAGE>
EXHIBIT 23.1
<PAGE>
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 - Nos. 2-82414, 2-91410, 33-235312, and 33-00967, and Form S-3 - No.
33-40927) pertaining to the Advanced Neuromodulation Systems, Inc. 1979 Amended
and Restated Employees' Stock Option Plan; the Advanced Neuromodulation Systems,
Inc. Directors' Stock Option Plan; the Advanced Neuromodulation Systems, Inc.
1987 Employees' Stock Option Plan; the Advanced Neuromodulation Systems, Inc.
1995 Stock Option Plan; the Advanced Neuromodulation Systems, Inc. Sales and
Marketing Employees Stock Option Plan; the Heaton Stock Option Plan; the
registration of 100,000 shares of Common Stock issued pursuant to a Common Stock
Purchase Warrant between Advanced Neuromodulation Systems, Inc. and Robert L.
Swisher, Jr. and the related Prospectuses of our report dated February 26, 1999,
with respect to the consolidated financial statements of Advanced
Neuromodulation Systems, Inc. and Subsidiaries, included in the Annual Report
(Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Dallas, Texas
March 26, 1999
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FDS --
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.1, Financial Data Sheet
</LEGEND>
<CIK> 0000351721
<NAME> Advanced Neuromodulation Systems, Inc.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,697,209
<SECURITIES> 566,072
<RECEIVABLES> 3,385,222
<ALLOWANCES> 249,607
<INVENTORY> 2,643,262
<CURRENT-ASSETS> 26,217,288
<PP&E> 2,949,482
<DEPRECIATION> 1,060,890
<TOTAL-ASSETS> 45,485,368
<CURRENT-LIABILITIES> 9,791,146
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 435,418
<OTHER-SE> 32,868,329
<TOTAL-LIABILITY-AND-EQUITY> 45,485,368
<SALES> 17,006,407
<TOTAL-REVENUES> 20,106,407
<CGS> 4,985,887
<TOTAL-COSTS> 11,287,433
<OTHER-EXPENSES> (830,391)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 331,468
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