U. S. Securities and Exchange Commission
Washington, D.C. 20549
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
For the transition period from to
Commission file number 0-28604
ENCISION INC.
(Exact name of small business issuer as specified in its charter)
Colorado |
|
84-1162056 |
(State or other jurisdiction of
|
|
(I.R.S. Employer Identification No.) |
4828 Sterling Drive, Boulder, Colorado 80301
(Address of principal executive offices)
(303) 444-2600
(Registrants telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 of 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date:
Common Stock, No par value |
|
6,234,309 Shares |
Class |
|
(outstanding at July 31, 2004) |
Transitional Small Business Disclosure Format
Yes o No ý
ENCISION INC.
FORM 10-QSB
For the Quarter Ended June 30, 2004
INDEX
2
PART I FINANCIAL INFORMATION
ITEM 1 - CONDENSED INTERIM FINANCIAL STATEMENTS
ENCISION INC.
(Unaudited)
|
|
June 30,
|
|
March 31,
|
|
||
ASSETS |
|
|
|
|
|
||
CURRENT ASSETS: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
1,409,389 |
|
$ |
1,356,607 |
|
Accounts receivable, net of allowance for doubtful accounts of $65,000 and $62,000, respectively |
|
840,636 |
|
947,692 |
|
||
Inventory, net of reserve for obsolescence of $95,000 and $90,000, respectively |
|
1,128,665 |
|
1,060,251 |
|
||
Prepaid expenses |
|
152,223 |
|
67,120 |
|
||
Total current assets |
|
3,530,913 |
|
3,431,670 |
|
||
EQUIPMENT, at cost: |
|
|
|
|
|
||
Furniture, fixtures and equipment |
|
798,106 |
|
771,916 |
|
||
Customer-site equipment |
|
450,538 |
|
436,550 |
|
||
Less - accumulated depreciation |
|
(927,843 |
) |
(886,674 |
) |
||
Equipment, net |
|
320,801 |
|
321,792 |
|
||
PATENTS, net of accumulated amortization of $71,066 and $68,027, respectively |
|
114,721 |
|
117,760 |
|
||
OTHER ASSETS |
|
12,972 |
|
12,972 |
|
||
Total assets |
|
$ |
3,979,407 |
|
$ |
3,884,194 |
|
|
|
|
|
|
|
||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
||
|
|
|
|
|
|
||
CURRENT LIABILITIES: |
|
|
|
|
|
||
Accounts payable |
|
$ |
448,201 |
|
$ |
430,600 |
|
Accrued compensation |
|
153,733 |
|
107,266 |
|
||
Other accrued liabilities |
|
527,093 |
|
285,232 |
|
||
Capitalized lease obligation |
|
15,690 |
|
15,690 |
|
||
Total current liabilities |
|
1,144,717 |
|
838,788 |
|
||
|
|
|
|
|
|
||
LONG-TERM LIABILITIES: |
|
|
|
|
|
||
Capitalized lease obligation |
|
11,767 |
|
15,690 |
|
||
|
|
|
|
|
|
||
SHAREHOLDERS EQUITY: |
|
|
|
|
|
||
Preferred stock, no par value, 10,000,000 shares authorized, no shares issued or outstanding |
|
|
|
|
|
||
Common stock, no par value, 100,000,000 shares authorized, 5,901,059 (June 30, 2004) and 5,845,526 (March 31, 2004) shares outstanding |
|
18,370,133 |
|
18,285,991 |
|
||
Accumulated deficit |
|
(15,547,210 |
) |
(15,256,275 |
) |
||
Total shareholders equity |
|
2,822,923 |
|
3,029,716 |
|
||
Total liabilities and shareholders equity |
|
$ |
3,979,407 |
|
$ |
3,884,194 |
|
The accompanying notes are an integral part of these condensed financial statements.
3
ENCISION INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the Three Months
|
|
||||
|
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
||
REVENUE, NET |
|
$ |
1,763,264 |
|
$ |
1,701,940 |
|
|
|
|
|
|
|
||
COST OF SALES |
|
747,300 |
|
732,007 |
|
||
Gross profit |
|
1,015,964 |
|
969,933 |
|
||
OPERATING EXPENSES: |
|
|
|
|
|
||
Sales and marketing |
|
760,382 |
|
518,403 |
|
||
General and administrative |
|
352,845 |
|
226,294 |
|
||
Research and development |
|
193,857 |
|
188,574 |
|
||
Total operating expenses |
|
1,307,084 |
|
933,271 |
|
||
(LOSS) INCOME FROM OPERATIONS |
|
(291,120 |
) |
36,662 |
|
||
|
|
|
|
|
|
||
OTHER INCOME (EXPENSE): |
|
|
|
|
|
||
Interest income |
|
1,667 |
|
477 |
|
||
Other (expense), net |
|
(1,482 |
) |
(2,145 |
) |
||
NET (LOSS) INCOME |
|
$ |
(290,935 |
) |
$ |
34,994 |
|
|
|
|
|
|
|
||
NET (LOSS) INCOME PER SHARE: |
|
|
|
|
|
||
Basic and diluted net (loss) income per common share |
|
$ |
(0.05 |
) |
$ |
0.01 |
|
|
|
|
|
|
|
||
Weighted average shares used in computing basic net (loss) income per common share |
|
5,853,845 |
|
5,430,026 |
|
||
|
|
|
|
|
|
||
Weighted average shares used in computing diluted net (loss) income per common share |
|
5,853,845 |
|
5,881,529 |
|
The accompanying notes are an integral part of these condensed financial statements.
4
ENCISION INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the Three Months
|
|
||||
|
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
||
Net (loss) income |
|
$ |
(290,935 |
) |
$ |
34,994 |
|
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities- |
|
|
|
|
|
||
Depreciation and amortization |
|
44,208 |
|
38,670 |
|
||
Provision for bad debts |
|
3,000 |
|
(6,000 |
) |
||
Inventory reserves |
|
5,000 |
|
|
|
||
Changes in operating assets and liabilities- |
|
|
|
|
|
||
Accounts receivable |
|
104,056 |
|
226,433 |
|
||
Inventory |
|
(73,414 |
) |
(153,407 |
) |
||
Other assets |
|
(85,103 |
) |
(87,484 |
) |
||
Accounts payable |
|
17,601 |
|
66,525 |
|
||
Accrued compensation and other accrued liabilities |
|
284,405 |
|
(143,180 |
) |
||
Net cash provided by (used) in operating activities |
|
8,818 |
|
(23,449 |
) |
||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
||
Investment in equipment |
|
(40,178 |
) |
(89,215 |
) |
||
Net cash used in investing activities |
|
(40,178 |
) |
(89,215 |
) |
||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
||
Proceeds from the exercise of stock options |
|
84,142 |
|
|
|
||
Net cash provided by financing activities |
|
84,142 |
|
|
|
||
|
|
|
|
|
|
||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
52,782 |
|
(112,664 |
) |
||
|
|
|
|
|
|
||
CASH AND CASH EQUIVALENTS, beginning of period |
|
1,356,607 |
|
585,552 |
|
||
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
1,409,389 |
|
$ |
472,888 |
|
The accompanying notes are an integral part of these financial statements.
5
ENCISION INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
(1) ORGANIZATION AND NATURE OF BUSINESS
Encision Inc. (the Company) is a medical device company that designs, develops, manufactures and markets patented surgical instruments that provide greater safety to patients undergoing minimally-invasive surgery. The Company believes its patented AEM ® surgical instrument technology is changing the marketplace for electrosurgical devices and instruments by providing a solution to a patient safety risk in laparoscopic surgery. The Companys sales to date have been made principally in the United States.
On June 28, 2004, the Company announced that James A. Bowman resigned as President and CEO of the Company. Mr. Bowman also stepped down from his post on the Companys Board of Directors. On July 6, 2004, Mr. John R. Serino became President and CEO of the Company.
The Company achieved profitable operations in fiscal 2004 and 2003, but prior to that had incurred losses since its inception and has an accumulated deficit of $15,547,210 at June 30, 2004. Operations have been financed primarily through issuance of common stock.
During fiscal years 2004 and 2003, the Company achieved annual net income for the first time in its history. The Companys strategic marketing and sales plan is designed to expand the use of the Companys products in surgically active hospitals in the United States. Management expects these efforts to result in continued revenue increases for fiscal 2005 which, combined with planned controlled operating expenses and consistent gross profit margins, are expected to maintain profitable operations and conserve the Companys cash resources.
On July 30, 2003 the Company issued a total of 333,334 shares of its common stock to the Wasatch Micro Cap Fund and the Wasatch Micro Cap Value Fund, for gross proceeds of $1,000,002. Funds managed by Wasatch Advisors, Inc. held shares of the Companys common stock, constituting less than 5% of the issued and outstanding shares of its common stock, prior to that transaction.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The Companys financial instruments consist of cash and cash equivalents and short-term trade receivables and payables. The carrying values of cash and cash equivalents and short-term receivables and payables approximate their fair value due to their short maturities.
Concentration of Credit Risk
The Company has no significant off-balance sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintains the majority of its cash balances with two financial institutions in the form of demand deposits and money market funds.
Accounts receivables are typically unsecured and are derived from transactions with and from entities in the healthcare industry primarily located in the United States. Accordingly, the Company may be exposed to credit risk generally associated with the
6
healthcare industry. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.
The net accounts receivable balance at June 30, 2004 of $840,636 included $67,633, or approximately 8%, from one distributor. The net accounts receivable balance at March 31, 2004 of $947,692 included $48,212, or approximately 5%, from one distributor.
Warranty Accrual
The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Companys warranty obligation is based upon historical experience and is also affected by product failure rates and material usage incurred in correcting a product failure. Should actual product failure rates or material usage costs differ from the Companys estimates, revisions to the estimated warranty liability would be required.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or market. The Company reduces inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Inventory consisted of the following:
|
|
June 30,
|
|
March 31,
|
|
||
|
|
|
|
|
|
||
Raw materials |
|
$ |
914,016 |
|
$ |
724,553 |
|
Finished goods |
|
309,649 |
|
425,698 |
|
||
|
|
1,223,665 |
|
1,150,251 |
|
||
Less - Reserve for obsolescence |
|
(95,000 |
) |
(90,000 |
) |
||
|
|
$ |
1,128,665 |
|
$ |
1,060,251 |
|
Property and Equipment
Property and equipment are stated at cost, with depreciation computed primarily on a double-declining basis over the estimated useful life of the asset, generally three to five years. Company-owned AEM Monitors at customer sites are depreciated on a double-declining basis for a period of 5 years. Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated useful life of the asset. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A long-lived asset is considered impaired when estimated future cash flows related to the asset, undiscounted and without interest, are insufficient to recover the carrying amount of the asset. If deemed impaired, the long-lived asset is reduced to its estimated fair value. Long-lived assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less cost to sell.
Patents
The costs of applying for patents are capitalized and amortized on a straight-line basis over the lesser of the patents economic or legal life (17 years in the United States). Capitalized costs are expensed if patents are not granted. The Company reviews the carrying value of its patents periodically to determine whether the patents have continuing value and such reviews could result in the conclusion that the recorded amounts have been impaired.
Accrued Liabilities
The Company has accrued $116,000 related to warranty claims and $58,701 related to sales commissions and has included these amounts in accrued liabilities in the accompanying balance sheets as of June 30, 2004.
7
Income Taxes
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes (SFAS No. 109). SFAS No. 109 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. SFAS No. 109 also requires recognition of deferred tax assets for the expected future tax effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits which, more likely than not based on current circumstances, are not expected to be realized. Should the Company achieve sufficient, sustained income in the future, the Company may conclude that some or all of the valuation allowance should be reversed.
Revenue Recognition
Revenue from product sales is recorded when the Company ships the product and title has passed to the customer, provided that the Company has evidence of a customer arrangement and can conclude that collection is probable. The Companys shipping policy is FOB Shipping Point. The Company recognizes revenue from sales to stocking distributors when there is no right of return, other than for normal warranty claims. The Company has no ongoing obligations related to product sales, except for normal warranty.
Research and Development Expenses
The Company expenses research and development costs for products and processes as incurred.
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), and applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations in accounting for stock options granted to employees. If the Company had accounted for its stock-based compensation plans in accordance with SFAS 123, the Companys net income or loss and pro forma net income or loss per basic and diluted common share for the three months ended June 30, 2004 would have been reported as follows:
Three months ended June 30, 2004 |
|
|
|
|
Net (Loss) |
|
|
|
|
As Reported |
|
$ |
(290,935 |
) |
Stock-based compensation based upon estimated fair values |
|
(41,647 |
) |
|
Pro forma |
|
$ |
(332,582 |
) |
Pro Forma Net Income (Loss) Per Basic and Diluted Common Share |
|
|
|
|
As Reported |
|
$ |
(0.05 |
) |
Pro Forma |
|
$ |
(0.06 |
) |
Segment Reporting
The Company has concluded that it has one operating segment.
Basic and Diluted Income and Loss per Common Share
Net income or loss per share is calculated in accordance with SFAS No. 128, Earnings Per Share (SFAS No. 128). Under the provisions of SFAS No. 128, basic net income or loss per common share is computed by dividing net income or loss for the period by the weighted average number of common shares outstanding for the period. Diluted net income or loss per common share is computed by dividing the net income or loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. As a result of the Companys net loss for the three month period ended June 30, 2004, all potentially dilutive securities would be anti-dilutive and thus, are excluded from diluted earnings per share.
For the three month period ended June 30, 2004, the Company had financial instruments that could create future dilution to the Companys common shareholders and are not currently classified as outstanding common shares of the Company. The common stock number is based on specific conversion or issuance assumptions pursuant to the corresponding terms of each instrument. Potential stock issuance excluded from earnings per share because their effect was anti-dilutive are 775,286 for the three months ended June 30, 2004.
8
(3) COMMITMENTS AND CONTINGENCIES
The Company currently leases its facilities under noncancelable lease agreements through October 31, 2004. The minimum future lease payments are $38,260 for the fiscal year ended March 31, 2005. The Company has entered a new lease for its facilities under noncancelable lease agreements through August 14, 2009 at 6797 Winchester Circle, Boulder, Colorado. The minimum future lease payments are as follows:
Year ended March 31, |
|
|
|
|
2005 |
|
|
|
|
2006 |
|
86,826 |
|
|
2007 |
|
154,179 |
|
|
2008 |
|
166,930 |
|
|
2009 |
|
172,685 |
|
|
2010 |
|
65,566 |
|
|
|
|
$ |
646,186 |
|
The Company had notified one of its distributors that it was in breach of its Distributor Agreement with the Company in several respects, and that if the distributor did not cure the breaches the Agreement may be terminated. The distributor had informed the Company that it believed the Companys interpretations of the Agreement were incorrect. The distributor disputed the Companys position and asserted that the Company had breached the Agreement. The dispute was proceeding in arbitration pursuant to the terms of the Agreement. On July 23, 2004, the dispute was resolved. During the first quarter ended June 30, 2004, the Company had expensed approximately $201,000, and as of June 30, 2004, the balance in other accrued liabilities was $185,000 (including legal and arbitrator fees) for this dispute.
The Company is subject to regulation by the United States Food and Drug Administration (FDA). The FDA provides regulations governing the manufacture and sale of the Companys products and regularly inspects the Company and other manufacturers to determine their compliance with these regulations. As of June 30, 2004 the Company believes it was in substantial compliance with all known regulations. The Company was last inspected in November 1998 and has not been notified of any deficiencies from that inspection. FDA inspections are conducted periodically at the discretion of the FDA.
The results of operations for the quarter ended June 30, 2004 should not be taken as an indication of the results of operations for all or any part of the balance of the year.
The accounts receivable balance at June 30, 2004 of $840,636 included $27,960 (3%) from international customers.
(4) MANAGEMENTS REPRESENTATIONS
The condensed interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed interim financial statements and notes thereto should be read in conjunction with the financial statements and the notes thereto, included in the Companys Annual Report to the Securities and Exchange Commission for the fiscal year ended March 31, 2004, filed on Form 10-KSB on June 29, 2004.
The accompanying condensed interim financial statements have been prepared, in all material respects, in conformity with the standards of accounting measurements set forth in Accounting Principles Board Opinion No. 28 and reflect, in the opinion of management, all adjustments necessary to summarize fairly the financial position and results of operations for such periods in accordance with accounting principles generally accepted in the United States of America. All adjustments are of a normal recurring nature. The results of operations for the most recent interim period are not necessarily indicative of the results to be expected for the full year.
9
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this section on Managements Discussion and Analysis are not historical facts, including statements about the Companys strategies and expectations about new and existing products, market demand, acceptance of new and existing products, technologies and opportunities, market and industry segment growth, and return on investments in products and markets. These statements are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve substantial risks and uncertainties that may cause actual results to differ materially from those indicated by the forward looking statements. All forward looking statements in this section on Managements Discussion and Analysis are based on information available to the Company on the date of this document, and the Company assumes no obligation to update such forward looking statements. Readers of this Form 10-QSB are strongly encouraged to review the section entitled Factors Which May Affect Future Performance and Financial Condition.
General
Encision Inc. (Encision or the Company), a medical device company based in Boulder, Colorado, has developed and launched innovative technology that is emerging as a standard of care in minimally-invasive surgery. The Company believes its patented AEM ® Surgical Instruments are changing the marketplace for electrosurgical devices and laparoscopic instruments by providing a solution to a well documented patient safety risk in laparoscopic surgery.
Encision was founded to address market opportunities created by the increase in minimally-invasive surgery (MIS) and surgeons preference for using electrosurgery devices in these procedures. The product opportunity was created by surgeons continued widespread demand for using monopolar electrosurgery instruments which, when used in laparoscopic surgery, are susceptible to causing inadvertent collateral tissue damage outside the surgeons field of view. The risk of unintended electrosurgical burn injury to the patient in laparoscopic surgery has been well documented. This risk poses a threat to patient safety and creates liability exposure for surgeons and hospitals that do not adequately address the issue.
Encisions patented AEM technology provides surgeons with the desired tissue effects, while preventing stray electrosurgical energy that can cause unintended and unseen tissue injury. AEM Laparoscopic Instruments are equivalent to conventional instruments in size, shape, ergonomics and functionality but they incorporate active electrode monitoring technology to dynamically and continuously monitor the flow of electrosurgical current, thereby helping to prevent patient injury. With Encisions shielded and monitored instruments, surgeons are able to perform electrosurgical procedures more safely and effectively than is possible using conventional instruments. In addition, the AEM instruments are cost competitive with conventional non-shielded, non-monitored instruments. The result is advanced patient safety at comparable cost and with no change in surgeon technique.
AEM technology has been recommended and endorsed by sources from all groups involved in minimally-invasive surgery. Surgeons, nurses, biomedical engineers, the medicolegal community, malpractice insurance carriers and electrosurgical device manufacturers advocate the use of AEM technology. The breadth of endorsements continues to expand with the recognition of active electrode monitoring technology as an AORN Recommended Practice by the Association of periOperative Registered Nurses and with insurance and medicolegal endorsements.
The Company has focused its marketing strategies on expanding the market awareness of the AEM technology and its broad independent endorsements, and has continued efforts to expand the AEM product line. With the broad array of AEM instruments now available from the Company, the surgeon has a wide choice of instrument options and does not have to change surgical technique. This coincides with the continued expansion of independent endorsements for AEM technology. Recommendations from the malpractice insurance and medicolegal communities complement the broad clinical endorsements AEM technology has garnered over the past few years.
Adding further credibility to the benefits of Encisions AEM technology are the Companys supplier agreements with Novation and Premier, two of the largest Group Purchasing Organizations (GPO) in the United States. Together, Novation and Premier represent over 3,000 hospitals and over 50% of all surgery in the U.S. Management believes that these GPO supplier agreements give further indication that AEM technology is gaining broader acceptance in the market. Management believes that having the nations leading medical purchasing groups recognize the value of the Companys technology reflects the potential impact that AEM instruments products can have in the market and in advancing patient safety in surgery nationwide. These agreements do not involve purchase commitments but the Company expects these relationships to expand the market visibility of AEM technology and smooth the procurement and conversion process for new hospital customers.
When a hospital converts to AEM technology it provides recurring revenue to the Company from sales of replacement instruments. There is a strong retention rate of customers who have converted to AEM technology. Management believes this indicates strong customer satisfaction and is further supported by the fact that there is no directly competing technology to supplant AEM products once the hospital has converted. The replacement market of reusable and disposable AEM products in converted hospitals represents
10
over 90% of Encisions revenue over the past three months and this revenue stream is expected to grow as the base of newly converted hospitals continues to grow.
Until fiscal 2003, the Company incurred annual losses since its inception, and has an accumulated deficit of $15,547,210 at June 30, 2004. Operations have been financed primarily through issuance of equity. The Companys liquidity has stabilized after a history of operating losses. On July 30, 2003 the Company issued 333,334 shares of its common stock to the Wasatch Micro Cap Fund and the Wasatch Micro Cap Value Fund, for gross proceeds of $1,000,002. Funds managed by Wasatch Advisors, Inc. held shares of the Companys common stock, constituting less than 5% of the issued and outstanding shares of its common stock, prior to that transaction.
During the three months ended June 30, 2004, the Company generated $8,818 of cash from operations and used $40,178 for investments in equipment (primarily capital equipment owned by the Company at customer locations). As of June 30, 2004, the Company had $1,409,389 in cash and cash equivalents available to fund future operations, an increase of $52,782 from March 31, 2004. The Companys working capital is $2,386,196 at June 30, 2004.
Historical Perspective
The Company was organized in 1991 and spent several years developing the AEM monitoring system and protective sheaths to adapt to conventional electrosurgical instruments. During this period, the Company conducted product trials and applied for patents with the United States Patent Office and with the International patent agencies. Patents were issued in 1994, 1996, 1997, 1998 and 2002.
As the Company evolved, it was clear to the Company that its active electrode monitoring technology needed to be integrated into the standard laparoscopic instrument design. As the development program proceeded, it also became apparent that the merging of electrical and mechanical engineering skills in the instrument development process for the Companys patented, integrated electrosurgical instruments was a complex and difficult task. As a result, instruments with integrated AEM technology were not completed for several years. Prior to offering a full range of laparoscopic electrosurgical instrumentation, it was difficult for hospitals to commit to the AEM solution, as the Company did not have adequate comparable surgical instrument options to match what the surgeon demanded. As of fiscal 2001, a sufficiently broad product line was available to provide hospital operating rooms with AEM Instruments in most of the designs common for laparoscopic surgery.
The launch of an expanded line of AEM Laparoscopic Instruments was accomplished over the past two years. With the broad array of AEM instruments now available, the surgeon has a wide choice of instrument options and does not have to change surgical technique. Because conversion to AEM technology is transparent to the surgeon, hospitals can now universally convert to AEM technology, thus providing their laparoscopic surgery patients a higher level of safety. This coincides with the continued expansion of independent endorsements for AEM technology. Recommendations from the malpractice insurance and medicolegal communities complement the broad clinical endorsements AEM technology has garnered over the past few years.
Outlook
Installed Base of AEM Monitoring Equipment : The Company believes that the installed base of AEM monitors has the potential for increasing as the inherent risks associated with monopolar laparoscopic electrosurgery become more widely acknowledged and as the network of independent sales representatives becomes more adept at selling the AEM products to our customers. The Company expects that the replacement sales of electrosurgical instruments and accessories will increase as additional hospitals are converted to AEM technology. During the quarter ended June 30, 2004, the Company hired three direct territory representatives. The Company believes that the efforts to improve the quality of sales representatives carrying the AEM product line, along with increased marketing efforts and the introduction of new products, may provide the basis for increased revenue and continuing profitable operations. However these measures, or any others that the Company may adopt, may not result in either increased revenue or continuing profitable operations.
Possibility of Continued Operating Losses: Until fiscal 2003, the Company had incurred losses from operations since inception and has an accumulated deficit of $15,547,210 as of June 30, 2004. The Company has made significant strides toward improving its operating results. Approximately $247,000 of cash was used in the Companys activities in fiscal 2004. Due to the ongoing need to develop, optimize and train the independent sales rep network and the need to increase sustained revenues to a level adequate to cover fixed and variable operating costs, the Company may operate at a net loss from time to time. On July 30, 2003 the Company issued a total of 333,334 shares of its common stock to the Wasatch Micro Cap Fund and the Wasatch Micro Cap Value Fund, for gross proceeds of $1,000,002. Funds managed by Wasatch Advisors, Inc. held shares of the Companys common stock, constituting less than 5% of the issued and outstanding shares of its common stock, prior to that transaction.
Revenue Growth : The Company expects to generate increased revenue in the U.S. from sales to new hospital customers as the network of independent sales representatives becomes more proficient and expands the number of hospital conversions to AEM Surgical Instruments. The Company believes that the visibility and credibility of the independent clinical endorsements for AEM technology will contribute to new hospital conversions and increased revenues in fiscal 2005. The Company also expects that supplier agreements with Novation and Premier, which together represent over 3,000 U.S. hospitals, will expose more hospitals to the benefits
11
of AEM technology and may stimulate new hospital conversions and increased revenues. The Company also expects to increase market share gains through promotional programs of placing Company-owned AEM monitors at no charge into hospitals that commit to standardize on AEM instruments. However the Companys efforts to increase market share and grow revenues will depend in part on the Companys ability to expand the efficiency and effective coverage range of its independent sales representative network. During the quarter ended June 30, 2004, the Company hired three direct territory representatives.
Gross Profit and Gross Margins : Gross profit and gross margin can be expected to fluctuate from quarter to quarter, as a result of product sales mix and sales volume. Gross margins on products manufactured or assembled by the Company are expected to improve at higher levels of production and sales.
Sales and Marketing Expenses : The Company continues its efforts to expand domestic and international distribution capability and it believes that sales and marketing expenses will decrease as a percentage of net revenue with increasing sales volume.
Research and Development Expenses : Research and development expenses are expected to increase modestly to support development of additions to our AEM product line, further expanding the instrument options for the surgeon. New additions to the AEM product line are planned for introduction in fiscal year 2005.
Results of Operations
For the three months ended June 30, 2004 compared to the three months ended June 30, 2003.
Net revenue . Revenue for the quarter ended June 30, 2004, was $1,763,264, compared to $1,701,940 for the quarter ended June 30, 2003, an increase of 4%. The increase is attributable to the conversion of new hospitals using our AEM technology. The Company converted seven new hospitals to AEM technology in the three months ended June 30, 2004 versus ten new hospitals that converted to AEM technology in the three months ended June 30, 2003. New hospital prospects remains strong; however, progress has slowed and we have seen a lower rate of new hospital conversions during the past three months. This is due to the Company having encountered a higher turnover in its direct and independent sales representatives and the resulting time needed to train their replacements . While it will take a number of months before new independent sales representatives generate new hospital conversions, the combination of the new representative additions and an expanded sales management team is intended to provide the field focus necessary to achieve market gains.
Gross Profit . The gross profit for the quarter ended June 30, 2004 of $1,015,964 increased by 5% from the quarter ended June 30, 2003 gross profit of $969,933. Gross profit as a percentage of revenue (gross margin) increased from 57% for the quarter ended June 30, 2003 to 58% in the quarter ended June 30, 2004. The increase in gross margin was primarily the result of purchasing efficiencies compared with one year ago. For the three months ended June 30, 2004, the Company provided $13,988 in AEM monitors to customers at no-charge to newly converted hospitals as part of a sales incentive program.
Sales and marketing expenses . Sales and marketing expenses of $760,382 for the quarter ended June 30, 2004 increased by 47% compared to $518,403 for the quarter ended June 30, 2003. The increase was a result of compensation for increased sales employees and resolution of an arbitration dispute. The Company had notified one of its distributors that it was in breach of its Distributor Agreement with the Company in several respects, and that if the distributor did not cure the breaches the Agreement may be terminated. The distributor had informed the Company that it believed the Companys interpretations of the Agreement were incorrect. The distributor disputed the Companys position and asserted that the Company had breached the Agreement. The dispute was proceeding in arbitration pursuant to the terms of the Agreement. On July 23, 2004, the dispute was resolved. During the first quarter ended June 30, 2004, the Company had expensed approximately $201,000.
General and administrative expenses . General and administrative expenses of $352,845 for the quarter ended June 30, 2004 increased by 56% compared to $226,294 for the quarter ended June 30, 2003. The increase is the result of increases in compensation, legal fees and use taxes compared with one year ago.
Research and development expenses . Research and development expenses of $193,857 for the quarter ended June 30, 2004 increased by 3% compared to $188,574 for the quarter ended June 30, 2003. The increase is a result of increases in compensation.
Liquidity and Capital Resources
To date, operating funds have been provided primarily by sales of common stock and warrants to purchase the Companys common stock, which totaled $18,370,133 through June 30, 2004, and, to a lesser degree, funds provided by sales of the Companys products. On July 30, 2003 the Company issued a total of 333,334 shares of its common stock to the Wasatch Micro Cap Fund and the Wasatch Micro Cap Value Fund, for gross proceeds of $1,000,002. Funds managed by Wasatch Advisors, Inc. held shares of the Companys common stock, constituting less than 5% of the issued and outstanding shares of its common stock, prior to that transaction.
The Companys operations generated $8,818 of cash in the three months ended June 30, 2004 on sales of $1,763,264 and used $23,449 of cash in the three months ended June 30, 2003 on sales of $1,701,940. Prior to fiscal 2003, the use of cash in our
12
operations resulted primarily from the funding of the Companys annual net losses. These amounts of cash generated from and used in operations are not indicative of the expected cash to be generated from or used in operations in FY 05. As of June 30, 2004, the Company had $1,409,389 in cash and cash equivalents available to fund future operations. Working capital was $2,386,196 at June 30, 2004 compared to $2,592,882 at March 31, 2004. Current liabilities were $1,144,717 at June 30, 2004, compared to $838,788 at March 31, 2004.
The Company has entered a new lease for its facilities under noncancelable lease agreements through August 14, 2009 at 6797 Winchester Circle, Boulder, Colorado. The minimum future lease payments are as follows:
Year ended March 31, |
|
|
|
|
2011 |
|
|
|
|
2012 |
|
86,826 |
|
|
2013 |
|
154,179 |
|
|
2014 |
|
166,930 |
|
|
2015 |
|
172,685 |
|
|
2016 |
|
65,566 |
|
|
|
|
$ |
646,186 |
|
Capital expenditures in the three months ended June 30, 2004 ($40,178) result primarily from the capitalization of AEM monitors placed in hospitals under various promotional programs. Placing Company-owned AEM monitors into hospitals at no charge to facilitate their use of AEM instruments is an initiative to accelerate new hospital conversions to AEM instruments. Under these promotional programs the Company maintains ownership of the AEM monitor and the cost is capitalized and depreciated as cost of sales over the projected five year life of the asset.
The Companys fiscal year 2005 (FY 05) operating plan is focused on increasing hospital conversions to AEM products, growing revenue, increasing gross profits and conserving cash. The Company can not predict with certainty the expected revenue, gross profit, net income or loss and usage of cash and cash equivalents for FY 05. However, management believes that its cash resources will be sufficient to fund its operations for at least the next twelve months under its current operating plan. If management is unable to manage the Companys business operations in line with budget expectations, it could have a material adverse effect on the Companys business viability, financial position, results of operations and cash flows. Further, if the Company is not successful in sustaining profitability and remaining at least cash flow break-even, additional capital may be required to maintain ongoing operations.
The Company believes the unique performance of the AEM technology and its breadth of independent endorsements provides an opportunity for continued market share growth. The Company believes that the market awareness of the AEM technology and its endorsements is continually improving and that this will benefit the sales efforts in FY 04. The Company believes that the Company entered FY 04 having achieved improvements in the clinical credibility of its technology. The Companys objective in FY 04 is to maintain expense controls while optimizing sales execution in the field, expand market awareness of the AEM technology and maximize the number of additional hospital conversions to AEM instruments.
Income Taxes
As of March 31, 2004, net operating loss carryforwards totaling approximately $15,300,000 are available to reduce taxable income in the future. The net operating loss carryforwards expire, if not previously utilized, at various dates beginning in the year 2006. The Company has not paid income taxes since its inception. The Tax Reform Act of 1986 and other income tax regulations contain provisions which may limit the net operating loss carryforwards available to be used in any given year, if certain events occur, including changes in ownership interests. The Company has established a valuation allowance for the entire amount of its deferred tax asset since inception due to its history of losses. Should the Company achieve sufficient, sustained income in the future, the Company may conclude that some or all of the valuation allowance should be reversed.
Aside from the operating lease commitments, the Company does not have any material contractual commitments requiring settlement in the future.
13
|
|
Operating Leases |
|
|
Year ended March 31, |
|
|
|
|
2005 |
|
38,260 |
|
|
2006 |
|
86,826 |
|
|
2007 |
|
154,179 |
|
|
2008 |
|
166,930 |
|
|
2009 |
|
172,685 |
|
|
2010 |
|
65,566 |
|
|
|
|
$ |
684,446 |
|
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, sales returns, warranty, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, which would increase our expenses during the periods in which any such allowances were made. The amount recorded as a provision for bad debt in each period is based upon our assessment of the likelihood that we will be paid on our outstanding receivables, based on customer-specific as well as general considerations. To the extent that our estimates prove to be too high, and we ultimately collect a receivable previously determined to be impaired, we may record a reversal of the provision in the period of such determination.
We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, we have experienced some costs related to warranty. The warranty accrual is based upon historical experience and is adjusted based on current experience. Should actual warranty experience differ from our estimates, revisions to the estimated warranty liability would be required.
We reduce inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Any write-downs of inventory would reduce our reported net income during the period in which such write-downs were applied. To the extent that our estimates prove to be too high, and we ultimately utilize or sell inventory previously determined to be impaired, we may record a reversal of the provision in the period of such determination.
We recognize deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits which, more likely than not based on current circumstances, are not expected to be realized. Should we achieve sufficient, sustained income in the future, we may conclude that all or some of the valuation allowance should be reversed
We depreciate our property and equipment primarily on a double-declining basis over the estimated useful life of the asset, generally three to five years. The Company-owned, consignment AEM Monitors are depreciated on a double-declining basis for a period of 5 years. Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated useful life of the asset. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized.
We amortize our patent costs over their estimated useful lives, which is typically the remaining statutory life. From time to time, we may be required to adjust these lives based on advances in technology, competitor actions, and the like. We review the recorded amounts of patents at each period end to determine if their carrying amount is still recoverable based on our expectations regarding sales of related products. Such an assessment, in the future, may result in a conclusion that the assets are impaired, with a corresponding charge against earnings.
Factors Which May Affect Future Performance and Financial Condition :
You should carefully consider the risk factors described below. If any of the following risk factors actually occur, the Companys business, prospects, financial condition or results of operations would likely suffer. In such case, the trading price of the Companys common stock could fall resulting in the loss of all or part of your investment. You should look at all these risk factors in total. Some risk factors may stand on their own. Some risk factors may affect (or be affected by) other risk factors. You should not assume the
14
Company has identified these connections. You should not assume that the Company will always update these and future risk factors in a timely manner. The Company is not undertaking any obligation to update these risk factors to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
Among the factors that could cause future results and financial condition to be materially different from expectations are:
1. Our products may not be accepted by the market . The success of our products and our financial condition depends on the acceptance of AEM products by the medical community in commercially viable quantities during fiscal year 2005 and beyond. We cannot predict how quickly or how broadly AEM products will be accepted by the medical community. We need to continually educate the marketplace about the potential hazards involved in the use of conventional electrosurgical products during minimally-invasive surgical procedures and the expected benefits associated with the use of AEM products. If we are unsuccessful in educating the marketplace about our technology and the hazards of conventional instruments, we will not create sufficient demand by hospitals and surgeons for AEM products and our financial condition, results of operations and cash flows could be adversely affected.
2. We need to continually develop and train our network of independent sales representatives and expand our distribution efforts in order to be successful. Our attempts to develop and train a network of independent sales representatives in the U.S. and to expand our international distribution efforts may take longer than expected and may result in considerable amounts of retraining effort as the independent sales reps change their product lines, product focus and personnel. We may not be able to obtain full coverage of the U.S. by independent sales representatives as quickly as anticipated. The independent sales representative network has inherent flaws and inefficiencies, which can include conflicts of interest and competing products. Optimizing the quality of the network and the performance of independent sales representatives in the U.S. is an ongoing challenge. We may also encounter difficulties in developing our international presence due to regulatory issues and our ability to successfully develop international distribution options. Our inability to expand our network of independent sales representatives and optimize their performance could adversely affect our financial results.
3. We may need additional funding to support our operations. We were formed in 1991 and have incurred losses of over $15 million since that date. We have primarily financed research, development, and operational activities with sales of our common stock. At June 30, 2004, we had $1,409,389 in cash available to fund future operations. During FY 2004, we issued a total of 333,334 shares of our common stock to the Wasatch Micro Cap Fund and the Wasatch Micro Cap Value Fund, for gross proceeds of $1,000,002. Funds managed by Wasatch Advisors, Inc. held shares of our common stock, constituting less than 5% of the issued and outstanding shares of common stock, prior to that transaction. We may have profitable operations in FY 2005 but there is no guarantee we will do so. We may find that investment in sales and marketing initiatives, merited by market opportunity, may result in the Company operating at a net loss from quarter to quarter. We may also find ourselves at a competitive disadvantage due to our constrained liquidity.
4. We may not be able to compete successfully against current manufacturers of conventional (unshielded, unmonitored) electrosurgical instruments or against competitors who manufacture products that are based on surgical technologies that are alternatives to monopolar electrosurgery. The electrosurgical products market is intensely competitive. We expect that manufacturers of unshielded, unmonitored electrosurgical instruments will resist any loss of market share that might result from the presence of our shielded and monitored instruments in the marketplace. We also believe that manufacturers of products that are based upon surgical technologies that are alternatives to monopolar electrosurgery are our competitors. These technologies include bipolar electrosurgery, the harmonic scalpel and lasers. The alternative technologies may gain market share and new competitive technologies may be developed and introduced. Most of our competitors and potential competitors have significantly greater financial, technical, product development, marketing and other resources than we do. Most of our competitors also currently have substantial installed customer bases in the medical products market and have significantly greater market recognition. As a result of these factors, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products. It is possible that new competitors or new alliances among competitors may emerge and rapidly acquire significant market share. The competitive pressures we face may materially adversely affect our financial position, results of operations and cash flows, and this may hinder our ability to respond to competitive threats.
5. If we do not continually enhance our products and keep pace with rapid technological changes, we may not be able to attract and retain customers. Our future success and financial performance will depend in part on our ability to meet the increasingly sophisticated needs of customers through the timely development and successful introduction of product upgrades, enhancements and new products. These upgrades, enhancements and new products are subject to significant technical risks. The medical device market is subject to rapid technological change, resulting in frequent new product introductions and enhancements of existing products, as well as the risk of product obsolescence. While we are currently developing new products and enhancing our existing product lines, we may not be successful in completing the development of the new products or enhancements. In addition, we must respond effectively to technological changes by continuing to enhance our existing products to incorporate emerging or evolving standards. We may not be successful in developing and marketing product enhancements or new products that respond to technological changes or evolving industry standards. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of those products, and our new products and product enhancements may not adequately meet the requirements of the marketplace and achieve commercially viable levels of market acceptance. If any potential new products, upgrades, or enhancements are delayed, or if any potential new products, upgrades, or enhancements experience quality problems or do not achieve such market
15
acceptance, or if new products make our existing products obsolete, our financial position, results of operations and cash flows would be materially adversely affected.
6. If government regulations change or if we fail to comply with existing and/or new regulations, we might miss market opportunities and experience increased costs and limited growth. The research, manufacturing, marketing and distribution of our products in the United States and other countries are subject to extensive regulation by numerous governmental authorities including, but not limited to, the U. S. Food and Drug Administration. Under the Federal Food, Drug and Cosmetic Act, medical devices must receive clearance from the U. S. Food and Drug Administration through the Section 510(k) pre-market notification process or through the more lengthy pre-market approval process before they can be sold in the United States. The process of obtaining required regulatory approvals is lengthy and has required the expenditure of substantial resources. There can be no assurance that we will be able to continue to obtain the necessary approvals. As part of our strategy, we also intend to pursue commercialization of our products in international markets. Our products are subject to regulations that vary from country to country. The process of obtaining foreign regulatory approvals in certain countries can be lengthy and require the expenditure of substantial resources. We may not be able to obtain necessary regulatory approvals or clearances on a timely basis or at all, and delays in receipt of or failure to receive such approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on our financial position, results of operations and cash flows.
7. If we fail to comply with the extensive regulatory requirements governing the manufacturing of our products, we could be subject to fines, suspensions or withdrawals of regulatory approvals, product recalls, suspension of manufacturing, operating restrictions and/or criminal prosecution. The manufacturing of our products is subject to extensive regulatory requirements administered by the Food and Drug Administration and other regulatory bodies. Inspection of our manufacturing facilities and processes can be conducted at any time, without prior notice, by the agencies. In addition, future changes in regulations or interpretations made by the Food and Drug Administration or other regulatory bodies, with possible retroactive effect, could adversely affect us. Changes in existing regulations or adoption of new regulations or policies could prevent us from obtaining, or affect the timing of, future regulatory approvals or clearances. We may not be able to obtain necessary regulatory approvals or clearances on a timely basis in the future, or at all. Delays in receipt of, failure to receive such approvals or clearances and/or failure to comply with existing or future regulatory requirements would have a material adverse effect on our financial position, results of operations and cash flows.
8. Our current patents, trade secrets and know-how may not provide a competitive advantage, the pending applications may not result in patents being issued, and our competitors may design around any patents issued to us. Our success will continue to depend in part on our ability to maintain patent protection for our products and processes, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. We have four issued U.S. patents on several technologies embodied in our AEM Monitoring System, AEM Instruments and related accessories and we have applied for additional U.S. patents. In addition, we have four issued foreign patents. The validity and breadth of claims coverage in medical technology patents involve complex legal and factual questions and may be highly uncertain. Also, patents may not protect our proprietary information and know-how or provide adequate remedies for us in the event of unauthorized use or disclosure of such information, and others may be able to develop, independently, such information. There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. Litigation may be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us, to defend us against claimed infringement of the rights of others or to determine the ownership, scope or validity of our proprietary rights or those of others. Any such claims may require us to incur substantial litigation expenses and to divert substantial time and effort of management personnel and could substantially decrease the amount of capital available for our operations. An adverse determination in litigation involving the proprietary rights of others could subject us to significant liabilities to third parties, could require us to seek licenses from third parties, and could prevent us from manufacturing, selling or using our products. The occurrence of any such actual or threatened litigation or the effect on our business of such litigation may materially adversely affect our financial position, results of operations and cash flows. Additionally, our assessment that a patent is no longer of value could result in a significant charge against our earnings.
9. We depend on single source suppliers for certain of the key components and sub-contractors to provide much of our products used in the manufacturing of our products. The loss of a supplier or limitation in supply from existing suppliers could have a material adverse effect on our ability to manufacture our products until a new source of supply is located. Although we believe that there are alternative suppliers, any interruption in the supply of key components could have a material adverse effect on us. A sudden increase in customer demand may create a backorder situation as lead times for some of our critical materials are in excess of 12 weeks. We rely on subcontractors to provide products, either in the form of finished goods or sub-assemblies that we then assemble and test. While these sub-contractors reduce our total cost of manufacturing, they may not be as responsive to increased demand as we would be if we had our manufacturing capacity entirely in-house, which may limit our growth strategy and revenues.
10. The potential fluctuation in future quarterly results may cause our stock price to fluctuate. We expect that our operating results could fluctuate significantly from quarter to quarter in the future and will depend upon a number of factors, many of which are outside our control. These factors include the extent to which our AEM technology and related accessories gain market acceptance; our investments in marketing, sales, research and development and administrative personnel necessary to support growth; our ability to expand our market share; actions of competitors and general economic conditions. The market value of our common stock has
16
dramatically fluctuated in the past and is likely to fluctuate in the future. Any deviation could have an immediate and significant negative impact on the market price of our stock.
11. Our common stock is thinly traded, the prices at which it trades are volatile and the buying or selling actions of a few shareholders may adversely affect our stock price. At March 31, 2004, we had a public float of 2,714,083 shares or 46% of the outstanding common stock. The average number of shares traded in any given day over the past year has been relatively small compared to the public float. Thus, the actions of a few shareholders either buying or selling shares of our common stock may adversely affect the price of the shares. Historically, thinly traded securities such as our common stock have experienced extreme price and volume fluctuations that do not necessarily relate to operating performance.
12. Our insurance coverage for product liability claims is up to $5,000,000. We face an inherent business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in adverse effects to a patient. We maintain a general liability insurance policy up to the amount of $5,000,000 that includes coverage for product liability claims. Liability claims may be excluded from the policy, may exceed the coverage limits of the policy, or the insurance may not continue to be available on commercially reasonable terms or at all. Consequently, a product liability claim or other claim with respect to uninsured liabilities or in excess of insured liabilities could have a material adverse effect on our financial position, results of operations and cash flows.
13. We depend on revenue from some major customers . We depend on revenue that is generated from hospitals ongoing usage of the AEM surgical instruments. In FY 2004, we generated revenue from over 350 hospitals that have converted to AEM products, but no hospital customer contributed more than 2% to the total revenues. We utilize a small number of stocking distributors, which sell AEM products to multiple hospital customers. In FY 2004, we generated revenue of $437,307 (6%) from one of these distributors. While it is infrequent that a hospital customer stops using AEM instruments after they convert, a loss of ongoing revenue from a hospital customer could have a material adverse effect on our revenues and cash flows.
14. We depend on certain key personnel. We are highly dependent on a limited number of key management personnel, particularly our CEO and President, John R. Serino, and our Chairman of the Board and Vice President of Business Development, Roger C. Odell. Our loss of key personnel to death, disability or termination, or our inability to hire and retain qualified personnel, could have a material adverse effect on our financial position, results of operations and cash flow.
17
ITEM 3 - CONTROLS AND PROCEDURES
(a) The Company has carried out an evaluation under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Principal Accounting Officer, of the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14c of the Securities and Exchange Act of 1934 (the Exchange Act)). Based upon that evaluation, the Chief Executive Officer and the Principal Accounting Officer concluded as of June 30, 2004 that the Companys disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company under the Exchange Act was recorded, processed, summarized and reported within the time periods specified under the Exchange Act rules and forms.
(b) There were no significant changes in the Companys internal controls or in other factors that could significantly affect the Companys disclosure controls and procedures subsequent to the date of the evaluation discussed above, nor any significant deficiencies or material weaknesses in such disclosure controls, internal controls and procedures requiring corrective actions. As a result no corrective actions were taken.
18
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company was involved in one legal proceeding (described below). The Company may become involved in litigation in the future in the normal course of business.
The Company had notified one of its distributors that it was in breach of its Distributor Agreement with the Company in several respects, and that if the distributor did not cure the breaches the Agreement may be terminated. The distributor had informed the Company that it believed the Companys interpretations of the Agreement were incorrect. The distributor disputed the Companys position and asserted that the Company had breached the Agreement. The dispute was proceeding in arbitration pursuant to the terms of the Agreement. On July 23, 2004, this dispute was resolved for approximately $201,000, including legal and arbitrator fees. The distributors purchases represented approximately 6% of the Companys revenue in FY2004 and 10% of the Companys revenue in FY2003. During the first quarter ended June 30, 2004, the Company had expensed approximately $201,000, and as of June 30, 2004, the balance in other accrued liabilities was $185,000 (including legal and arbitrator fees) for this dispute.
ITEM 2 Not Applicable
ITEM 3 Not Applicable
ITEM 4 - Not Applicable
ITEM 5 - Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.4 |
|
Lease Agreement Dated June 3, 2004 between Encision Inc. and DaPuzzo Investment Group, LLC |
31.1 |
|
Certification of Chief Executive Officer under Rule 13a-14(a) |
31.2 |
|
Certification of Principal Financial Officer under Rule 13a-14(a) |
32.1 |
|
Certification of Periodic Reports pursuant to Sarbanes-Oxley Act of 2002 |
(b) Reports on Form 8-K
On April 8, 2004, the Company filed a current report on Form 8-K reporting the Companys change of auditors, under Item 4. The Company also filed an amendment on Form 8-K/A on April 27, 2004 to provide the outgoing auditors statement of agreement with the Companys disclosures in the Form 8-K filed on April 8.
On April 13, 2004, the Company furnished a press release under Item 9 of Form 8-K.
On May 19, 2004, the Company furnished a press release under Item 12 of Form 8-K.
19
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Encision has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Name |
|
Title |
|
Date |
|
|
|
|
|
|
|
/s/ Marcia McHaffie |
|
|
Controller |
|
August 12, 2004 |
Marcia McHaffie |
|
|
(Principal Accounting Officer) |
|
|
20
Exhibit 10.4
LEASE AGREEMENT
by and between
DaPuzzo Investment
Group, LLC,
as Landlord
and
Encision, Inc.
as Tenant
6797 Winchester
Circle
Boulder, Colorado
TABLE OF CONTENTS
BASIC LEASE DEFINITIONS, EXHIBITS AND ADDITIONAL DEFINITIONS |
|
|
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
i
|
ii
LEASE AGREEMENT
THIS LEASE AGREEMENT (this Lease) is entered into as of the Date by and between the Landlord and Tenant, identified in Section 1.1 below.
1. BASIC LEASE DEFINITIO NS, EXHIBITS AND ADDITIONAL DEFINITIONS .
1.1 Basic Lease Definitions. In this Lease, the following defined terms have the meanings indicated:
(a) Date means June 3, 2004.
(b) Landlord means DaPuzzo Investment Group, LLC, a Colorado limited liability company.
(c) Tenant means Encision, Inc., a Colorado corporation.
(d) Property means Lot 8, Replat of Gunbarrel Technical Center, County of Boulder, State of Colorado, located at 6797 Winchester Circle, Boulder, Colorado.
(e) Premises means the space in the Building known as Suites A and D and identified on Exhibit A to this Lease. The Rentable Area of the Premises will be approximately 19,846 square feet and will be finally determined by Landlords architect upon completion of Landlords work per the Work Letter attached as Exhibit D .
(f) Building means the building and other related improvements located on the Property. Upon completion of Landlords work pursuant to the Work Letter attached as Exhibit D , the Building will contain approximately 35,870 square feet of Rentable Area and will be finally determined by Landlords architect upon completion of Landlords work.
(g) Permitted Use means primarily research, development, and manufacturing of medical devices, general office uses and for no other use or purpose.
(h) Rentable Area means the rentable area, measured in square feet, of any described space within the Building, as determined pursuant to the Standard Method for Measuring Floor Area in Office Buildings, ANSI/BOMA Z65.1-1996.
(i) Commencement Date, is defined in the Work Letter attached to this Lease as Exhibit D .
(j) Term means the duration of this Lease, which will be approximately 60 months, beginning on the Commencement Date and ending on the Expiration Date, unless terminated earlier as provided in this Lease. If Tenant exercises Tenants renewal option pursuant to Article 4, the Renewal Term shall be deemed part of the Term.
(k) Expiration Date means (1) if the Commencement Date is the first day of a month, the five year anniversary of the day immediately before the Commencement Date; or (2) if the Commencement Date is not the first day of a month, the last day of the 60 th month following the month in which the Commencement Date occurs.
1
(l) Base Rent means the Rent payable in each Lease Year according to Section 3.1, as follows:
Lease Year |
|
Base Rent
|
|
|
|
|
|
1/12 of the following: |
1 |
|
$0.00 multiplied by the Rentable Area of the Premises |
2 |
|
$7.00 multiplied by the Rentable Area of the Premises |
3 |
|
$8.23 multiplied by the Rentable Area of the Premises |
4 |
|
$8.52 multiplied by the Rentable Area of the Premises |
5 |
|
$8.81 multiplied by the Rentable Area of the Premises |
(m) Tenants Share means that percentage obtained by dividing the Rentable Area of the Premises by the Rentable Area of the Building. Initially, Tenants Share is 55.328%. Tenants Share shall be adjusted from time to time as made necessary by changes in the Rentable Area of the Premises or the Building pursuant to Section 1.1(e), 1.1(f), 8.1, 16.2.
(n) Security Deposit means an amount equal to one and one-half months Base Rent for the second Lease Year, which Tenant shall pay to Landlord upon execution of this Lease. The Security Deposit will be credited towards Tenants Base Rent due for the entire first month and part of the second month of the third Lease Year.
(o) Landlords Address means:
DaPuzzo Investment Group
8467 Firethorn Court
Longmont, Colorado 80503
(p) Tenants Address means:
before the Commencement Date:
Encision, Inc.
4828 Sterling Drive
Boulder, Colorado 80301
after the Commencement Date:
Encision, Inc.
6797 Winchester Circle
Boulder, Colorado 80301
(q) Broker means The Colorado Group, Inc., acting as a transaction broker representing both Landlord and Tenant. Landlord will pay Broker a commission in accordance with a separate listing agreement with Broker.
(r) Exhibits means those exhibits listed in Section 30.16 below.
2
1.2 Additional Definitions . In addition to those terms defined in Section 1.1 and other sections of this Lease, the following defined terms when used in this Lease have the meanings indicated:
(a) ADA means the American with Disabilities Act of 1990, as amended from time to time.
(b) Additional Rent means all amounts required to be paid by Tenant pursuant to Section 3.2 of this Lease in addition to Base Rent.
(c) Affiliates means, with respect to any party, any persons or entities that own or control, are owned or controlled by, or are under common ownership or control with, such party and such partys and each of such other persons or entitys respective officers, directors, shareholders, partners, venturers, members, managers, agents and employees. For purposes of this definition, a party is owned by anyone that owns more than 50% of the equity interests in such party and a party is controlled by anyone that owns sufficient voting interests to control the management decisions of such party.
(d) Common Areas means all areas and facilities on the Property and within the Building that are provided and designated from time to time by Landlord for the general, nonexclusive use and convenience of Tenant and other tenants of the Building and their respective employees, invitees, licensees and other visitors, including, without limitation, certain lobbies, hallways, entry ways, loading areas, toilet facilities, elevator facilities, shafts, basements, driveways, parking areas, mechanical and electrical rooms, janitors and storage closets, stairways, lighting facilities, trash facilities, utility lines, sidewalks, covered walkways, terraces, loading areas, underground walkways, plazas, courts, retaining walls, access roads, truck serviceways and landscaped areas.
(e) Encumbrance means any ground lease, first mortgage, or first deed of trust now or later encumbering the Building and all their renewals, modifications, supplements, consolidations, and replacements.
(f) Environmental Laws means the Resource Conservation and Recovery Act, 42 U.S.C. §§ 6901, et seq.; the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §§ 9601, et seq. (including the so-called Superfund amendments thereto); the Clean Water Act, 33 U.S.C. §§ 1251, et seq.; the Hazardous Materials Transportation Authorization Act of 1994, 49 U.S.C. §§ 1501, et seq.; the Toxic Substances Control Act, 15 U.S.C. §§ 2601, et seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. §§ 136, et seq.; the Atomic Energy Act of 1954, 42 U.S.C. §§ 2014, et seq.; and any other applicable Laws governing or pertaining to any hazardous substances, hazardous wastes, chemicals or other materials, including, without limitation, asbestos, polychlorinated biphenyls, radon, petroleum products and any derivative.
(g) Hazardous Substance means any substance, chemical or material declared to be, or regulated as, hazardous or toxic under any Environmental Law or the presence of which may give rise to liability under any Environmental Law.
(h) Laws means any and all present or future federal, state or local laws, statutes, ordinances, rules, regulations or orders of any and all governmental or quasi-governmental authorities having jurisdiction over the Premises, including, without limitation, the ADA and Environmental Laws.
3
(i) Lease Year means the one-year period (unless the Commencement Date is not the first day of a month, in which event the final Lease Year shall be a thirteen-month period) commencing on each anniversary of the first day of the month in which the Commencement Date occurred.
(j) Leasehold Improvements is defined in the Work Letter attached to this Lease as Exhibit D .
(k) Lender means the ground lessor of any ground lease, the mortgagee of any mortgage or the beneficiary of any deed of trust, that constitutes an Encumbrance.
(l) Operating Expenses means, with respect to any given calendar year during the Term, all reasonable costs and expenses (expressed as a total amount and in dollars per square foot of the Rentable Area of the Building) of management, operation and maintenance of the Property and the Building, including the Common Areas, incurred by Landlord, including, without limitation, costs of cleaning, window washing, maintaining window coverings, landscaping, lighting, heating, air conditioning, and repaving parking areas; painting, repairing and replacing the Building or any portion of it to the extent that such painting, repairs, or replacements are considered non-capital expenses under generally accepted accounting principals (except to the extent proceeds of insurance or condemnation awards are actually received); removing snow and ice; trash removal; reasonable management fees (comparable to fees charged for similar buildings in the same general geographic area as the Building), providing seasonal holiday decorations; providing insurance as set forth in Section 13.1; wages, salaries and compensation of employees who are not above the level of building manager; consulting, accounting, legal (limited to legal costs associated with controlling Operating Expenses), janitorial, maintenance, guard, fire protection, fire hydrant and other services; power, water, waste disposal and other utilities; licenses and permit fees; the total amounts paid by Landlord in satisfaction of any assessments made by any owners association for the purpose of providing any services or benefits to the Property, the Premises or the Building generally; depreciation on personal property and equipment used in the operation or maintenance of the Building over the useful life of such personal property and equipment in accordance with the applicable depreciation schedules prescribed under the Internal Revenue Code and rent paid for leasing such equipment; real and personal property taxes and assessments (and any tax levied in whole or in part in lieu of or in addition to such property taxes) on the Building, the Property or Landlords personal property used in the operation or maintenance of the Building and the Property; and any other costs, charges and expenses which are regarded as a normal maintenance and operating expense of Landlord for the Building and the Property under generally accepted accounting principles; plus all reasonable costs (amortized over the useful life of the item) of any capital improvements which are made by Landlord to any portion of the Building and the Property related to the office space contained therein (A) for the purpose of reducing the costs described in this paragraph, to the extent of such reduction, or (B) after the date of this Lease and which are required under any governmental law or regulation that was not applicable to the Property or the Building or the subject portion of it at the time such capital improvements were constructed and which are not a result of the nature of Tenants use of the Premises (whether or not such law or regulation is applicable to the Building as a result of Landlords status under such law or regulation or
4
Landlords use, occupancy or alteration of any portion of the Building). Notwithstanding the foregoing, Operating Expenses will not include the costs of capital improvements which are required to be made to the Premises by Landlord pursuant to Section 2.1 or to any other premises in the Building by the Landlord or the tenant thereof pursuant to the provisions of such tenants lease. In addition, Operating Expenses will not include: (1) depreciation on the Building or any portion of it; (2) costs of improvements made for tenants of the Building, including, without limitation, painting, redecorating and other similar work; (3) finders fees and real estate brokers commissions, including lease concessions and lease take-over obligations; (4) mortgage principal or interest; (5) capital items other than those referred to in clause (A) or (B) above; (6) costs arising out of Landlords provision of services and utilities to Tenant or other tenants of the Building outside regular business hours or in amounts exceeding those required for general office purposes for which Landlord receives direct reimbursement from Tenant or such other tenants; (7) repairs or other work (including rebuilding) occasioned by fire, windstorm or other casualty or by condemnation; (8) any costs that are separately charged to and payable by tenants or any other third parties or for which Landlord is compensated by insurance proceeds or warranties or otherwise reimbursed; (9) interest and penalties for late payment of taxes; (10) costs and expenses of enforcing leases against other tenants in the Building, including legal fees; (11) expenses resulting from any violation by Landlord of the terms of any lease of space in the Building or of any ground or underlying lease or any mortgage; (12) advertising and promotional expenses; and (13) repair and replacement resulting from inferior or deficient workmanship, material, or equipment in the initial construction of the Building; (14) federal, state or local income taxes and franchise taxes imposed on or measured by the income of Landlord from the operation of the Building; (15) costs incurred to repair or replace mechanical equipment or systems used in the Building to the extent such costs are reimbursed by any warranty on such equipment or systems; (16) Hazardous Substance remediation costs (provided such exclusion shall not affect Tenants obligations and liability under Section 7.1(b)); and (17) interest, principal, points and fees on debts or amortization on any Encumbrance. Those portions of the Operating Expenses that vary with occupancy of the Building will be adjusted to equal the amount of such Operating Expenses that Landlord reasonably believes would have been incurred if 100% of the Rentable Area of the Building were occupied; provided that such projections shall be consistently applied.
(m) Prime Rate means the rate of interest announced from time to time by The Chase Manhattan Bank, or any successor to it, as its prime rate. If The Chase Manhattan Bank, or any successor to it, ceases to announce a prime rate, Landlord will designate a reasonably comparable financial institution for purposes of determining the Prime Rate.
(n) Rent means the Base Rent, Additional Rent, and all other amounts required to be paid by Tenant under this Lease.
2. GRANT OF LEASE .
2.1 Demise. Subject to the terms, covenants, conditions and provisions of this Lease, Landlord leases to Tenant and Tenant leases from Landlord the Premises for the Term to be used for the Permitted Use. Landlord will tender the Premises to Tenant in accordance with the Work Letter attached hereto as Exhibit D .
5
2.2 Quiet Enjoyment. Landlord covenants that during the Term Tenant will have quiet and peaceable possession of the Premises, subject to the terms, covenants, conditions and provisions of this Lease, and Landlord will not disturb such possession except as expressly provided in this Lease.
3. RENT .
3.1 Base Rent. Commencing on the Commencement Date and continuing throughout the Term, Tenant will pay Landlord Base Rent according to the following provisions. Base Rent during each Lease Year (or portion of a Lease Year) will be payable in monthly installments in the amount specified for such Lease Year (or portion thereof) in Section 1.1(l), in advance, on or before the first day of each and every month during the Term. If the Term commences on other than the first day of a month or ends on other than the last day of a month, Base Rent for such month will be appropriately prorated based on the number of days in such month. Tenant covenants to pay all Rent when due to Landlords Address, or to such other place of which Landlord notifies Tenant in writing from time to time, and to observe and perform all of the terms, covenants and conditions applicable to Tenant in this Lease. Tenant further agrees that the covenant to pay Rent is an independent covenant, not subject to abatement, offset, or deduction, except as may be provided in this Lease.
3.2 Additional Rent. Commencing on the Commencement Date and continuing for the duration of the Term, Tenant agrees to pay Landlord, as Additional Rent, in the manner provided below, Tenants Share of Operating Expenses.
(a) Estimated Payments . Prior to or within 60 days after the beginning of each calendar year, Landlord will notify Tenant of Landlords estimate of Operating Expenses for such calendar year. On or before the first day of each month during the Term, Tenant will pay to Landlord, in advance, 1/12 of Tenants Share of such estimated Operating Expenses; provided that until such notice is given with respect to the ensuing calendar year, Tenant will continue to pay on the basis of the prior calendar years estimate until the month after the month in which such notice is given. Within thirty (30) days after Tenants receipt of Landlords new estimate, Tenant will pay to Landlord 1/12 of the difference between the new estimate and the prior years estimate for each month which has elapsed since the beginning of the current calendar year. If at any time or times it appears to Landlord that Operating Expenses for the then-current calendar year will vary from Landlords estimate by more than 5%, Landlord may, by notice to Tenant, revise its estimate for such year, and subsequent payments by Tenant for such year will be based upon the revised estimate. If Tenants share of Operating Expenses for any year are expected to be more than 105% of Tenants Share of Operating Expenses for the preceding year, Tenant may require Landlord (at no cost to Tenant) to obtain bids for all Operating Expenses which constitute 5% or more of the aggregate Operating Expenses (other than insurance) for which Landlord may reasonably be expected to be able to obtain bids. Such bids will be from reputable providers of such services. Landlord shall then reasonably select the providers of such services included within Operating Expenses based on the bid amount and the quality and experience of such provider, subject to Tenants right to review the bids with Landlord.
(b) Annual Settlement . As soon as practicable after the close of each calendar year, but in no event more than 90 days after the close of each calendar year, Landlord will deliver to Tenant its statement of actual Operating Expenses incurred for such
6
calendar year. If, on the basis of such statement, Tenant owes an amount that is less than the estimated payments previously made by Tenant for such calendar year, Landlord will either refund such excess amount to Tenant or credit such excess amount against the next Additional Rent payment(s), if any, due from Tenant to Landlord. If, on the basis of such statement, Tenant owes an amount that is more than the estimated payments previously made by Tenant for such calendar year, Tenant will pay the deficiency to Landlord within 30 days after the delivery of such statement. If this Lease commences on a day other than the first day of a calendar year or terminates on a day other than the last day of a calendar year, Operating Expenses applicable to the calendar year in which such commencement or termination occurs will be prorated on the basis of the number of days within such calendar year that are within the Term.
(c) Final Payment . Tenants obligation to pay Tenants Share of Operating Expenses that accrue but are not paid for periods prior to the expiration or early termination of the Term will survive such expiration or early termination. As soon as practicable after the expiration or early termination of the Term, Landlord may submit an invoice to Tenant stating the amount, if any, by which actual Operating Expenses through the date of such expiration or early termination exceeded Tenants estimated payments for the calendar year in which such expiration or termination has occurred. Tenant will pay Tenants Share of the amount of any such excess to Landlord within 30 days after the date of Landlords invoices.
(d) Audit . Tenant shall have the right at its own expense and at a reasonable time (after written notice to Landlord) within 60 days of the date of the statement received by Tenant pursuant to subsection (b) or (c), above (the Statement), to audit Landlords books relevant to Additional Rent due under this Section 3.2. If Tenant does not audit Landlords books and deliver the results thereof to Landlord within said 60-day period, the terms and amounts set forth in the Statement shall be deemed conclusive and final and Tenant shall have no further right to adjustment. If Tenants examination reveals that an error has been made in Landlords determination of Tenants Share of Operating Expenses, and Landlord agrees with such determination, then the amount of such adjustment shall be payable by Landlord or Tenant, to the other party as the case may be. If Tenants examination reveals an error has been made in Landlords determination of Tenants Share of Operating Expenses, and Landlord disagrees with the results thereof, Landlord shall have 60 days to obtain an audit from an accountant of its choice to determine Tenants Share of Operating Expenses. If Landlords accountant and Tenants accountant are unable to reconcile their audits, both accountants shall mutually agree upon a third accountant, whose determination of Tenants Share of Operating Expenses shall be conclusive. If the amount of error is determined to be an overcharge of 10% or more, then the reasonable costs of all of the audits made pursuant to this subsection shall be paid by Landlord.
3.3 Tenants Taxes. As Additional Rent, Tenant will reimburse Landlord upon demand for any and all taxes charged to and payable by Landlord, due to (a) the costs or value of Tenants equipment, furniture, fixtures and other personal property located in the Premises; (b) upon or measured by Rent under this Lease; (c) upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises; and (d) upon this transaction or any document to which Tenant is a party creating or
7
transferring an interest or an estate in the Premises. If it is not lawful for Tenant to reimburse Landlord, the Base Rent payable to Landlord under this Lease will be revised to yield to Landlord the same net rental after the imposition of any such tax upon Landlord as would have been payable to Landlord prior to the imposition of any such tax.
3.4 Late Payments. To compensate Landlord for its additional cost of processing late payments for any payment of Rent which is not received within five days after it is due, Tenant will pay a late charge of 1% of the late payment, but not less than $100 or more than $1,000. In addition, all amounts payable under this Lease by Tenant to Landlord, if not paid when due, will bear interest from the due date until paid at the lesser of the highest interest rate permitted by law or 5% in excess of the then current Prime Rate.
3.5 Right to Accept Payments. No receipt by Landlord of an amount less than Tenants full amount due will be deemed to be other than payment on account, nor will any endorsement or statement on any check or any accompanying letter effect or evidence an accord and satisfaction. Landlord may accept such check or payment without prejudice to Landlords right to recover the balance or pursue any right of Landlord. No payments by Tenant to Landlord after the expiration or other termination of the Term, or after the giving of any notice (other than a demand for payment of money) by Landlord to Tenant, will reinstate, continue or extend the Term or make ineffective any notice given to Tenant prior to such payment. After notice or commencement of a suit, or after final judgment granting Landlord possession of the Premises, Landlord may receive and collect any sums of Rent due under this Lease, and such receipt will not void any notice or in any manner affect any pending suit or any judgment obtained.
4. REIMBURSEMENT OF CERTAIN EXPENSES BY LANDLORD
4.1 Moving Expenses. Landlord will reimburse Tenant upon demand for all reasonable out-of-pocket expenses, up to $40,000, incurred by Tenant for (a) the packing, loading, transporting, unloading, and unpacking (including packing materials) Tenants personal property; and (b) the calibration of equipment, sterilization dose audits (including parts and materials), FDA/UL/ISO Audits required due to the move, facility registration changes and fees, marketing literature, Instruction for Use and Manual changes related to the move (does not include printing expenses) and other expenses related to the relocation of Tenants fixtures, furniture and equipment as commercially required per Tenants Permitted Use, but not including regular maintenance or upkeep that Tenant would have undertaken in any event.
4.2 Reimbursement of Rent Under Previous Lease. Landlord acknowledges that Tenant is obligated to pay monthly base rent payments in the amount of $9,564.93 plus operating expenses pursuant to that certain Lease between Tenant and Sterling Partnership dated as of September 7, 2001 (the Existing Lease) and that such obligation will continue until October 31, 2004. Landlord agrees to reimburse Tenant on a monthly basis in the amount of each such monthly rent payment made by Tenant under the Existing Lease for the period beginning on the Commencement Date and continuing until October 31, 2004. Operating expense charges will be paid on a cumulative basis for the period beginning on the Commencement Date and continuing until October 31, 2004. The operating expense charges will be calculated and billed to Landlord no later than January 31, 2005 and shall be paid to Tenant within thirty (30) days of such billing. Tenant acknowledges that Landlord may attempt to mitigate his reimbursement expenditure pursuant to this Section 4.2 by securing a tenant to occupy the space previously occupied by Tenant under its Existing Lease. Tenant agrees to cooperate fully with, and use commercially
8
reasonably efforts to facilitate, Landlords efforts to sublet the space previously occupied by Tenant. Tenant further acknowledges that any proceeds from the subletting of such space previously occupied by Tenant will be credited against the reimbursement amount Landlord is required to pay Tenant pursuant to this Section 4.2.
5. RENEWAL OPTION .
5.1 Exercise and Base Rent. Subject to the terms and provisions of this Section 5.1, Tenant, at its option, may extend the initial Term of this Lease for one additional 5-year period (the Renewal Term), which Renewal Term will commence as of the end of the initial Term of this Lease. To exercise its option as to such Renewal Term, Tenant must deliver written notice of its intent to exercise such option (the Renewal Notice) to Landlord no sooner than 12 months and no later than six months prior to the expiration of the initial Term of this Lease. If Landlord timely receives a Renewal Notice from Tenant, then Tenant and Landlord shall be irrevocably committed to the Renewal Term, with the Base Rent for the Renewal Term being determined as follows below. Within ten days after Landlord receives Tenants Renewal Notice, Landlord will deliver to Tenant in writing a statement as to the Base Rent for the Renewal Term (a Renewal Rent Statement) as determined by Landlord based on the Market Rental Rate defined in Section 5.2 below. Tenant will have a period of 10-business days following its receipt of a Renewal Rent Statement to notify Landlord in writing whether Tenant agrees to the Base Rent stated in such Renewal Rent Statement. If Tenant does not respond to Landlords Renewal Rent Statement within such 10-business day period or Tenant notifies Landlord in writing within such 10-business day period that Tenant does not agree with the Base Rent stated in such Renewal Rent Statement, Tenant and Landlord will have 20 days from the earlier of the expiration of the 10-business day period or Landlords receipt of Tenants notice of disagreement to negotiate and agree upon the Base Rent for the Renewal Term based on the Market Rental Rate for the Premises. If no agreement can be reached as to the Base Rent for the Renewal Term within such 20-day period, then such Base Rent shall be determined pursuant to Section 5.2 below.
5.2 Base Rent Determination. Within 10 days after the expiration of the 20-day negotiation period described in Section 5.1, Landlord and Tenant shall mutually appoint a commercial real estate broker (on an agreed fee basis) having at least 10 years of experience in office leasing in the Boulder area (the Appointed Broker). If within such 10-day period, Landlord and Tenant have been unable to agree upon a mutually acceptable Appointed Broker, they will each appoint a commercial real estate broker having at least 10 years of experience in office leasing in the Boulder area and will instruct such brokers to jointly select the Appointed Broker. Within five days after appointment of the Appointed Broker, Landlord and Tenant each shall deliver to the Appointed Broker their respective determinations of the Base Rent for the Renewal Term based on the Market Rental Rate (respectively, Landlords Rent Determination and Tenants Rent Determination). Within 10 days after receiving Landlords Rent Determination and Tenants Rent Determination, the Appointed Broker shall prepare an estimate of the Base Rent for the Renewal Term based on the Market Rental Rate and immediately notify Landlord and Tenant of such estimate (the Independent Appraisal). The Base Rent determined by the Appointed Broker shall be added to whichever of Landlords Rent Determination or Tenants Rent Determination is closest in amount to the Independent Appraisal, the sum of such amount shall be divided by two and the resulting quotient shall be the Base Rent applicable for the Renewal Term. In the event that the difference between the Independent Appraisal and
9
Landlords Rent Determination is equal to the difference between the Independent Appraisal and Tenants Rent Determination, then the Independent Appraisal shall be the Base Rent for the Renewal Term. Landlord and Tenant shall share equally the fee of the Appointed Broker. The term Market Rental Rate means the prevailing rental rate (taking into account tenant improvement allowances and rent concessions) that a landlord and a tenant at arms length would determine as the rental rate, per square foot of Rentable Area, based on the rental rates for comparable premises and comparable term lengths in other comparable buildings in Boulder County recently entered into at the time the Market Rental Rate is being determined.
5.3 Applicability of Lease Terms. During the Renewal Term, all of the terms and provisions of this Lease will apply, except that: (a) Base Rent will be the amount determined pursuant to Section 5.1 above; (b) the Work Letter attached as Exhibit D will be of no further force or effect except to the extent that it defines the Commencement Date; and (c) upon the expiration or earlier termination of the Renewal Term, Tenant will have no further rights to renew or extend the Term of this Lease.
5.4 Limitations. Notwithstanding anything above to the contrary, Tenant will have no right to extend the Term of this Lease and the Renewal Notice will be ineffective if a Default exists at the time the Renewal Notice is given or at the commencement of the Renewal Term beyond any applicable notice and cure period. Any termination of this Lease prior to the Expiration Date will serve to immediately and automatically terminate all of Tenants rights under this Section 5. Any assignment by Tenant of the Lease or subletting of the entire Premises will automatically terminate the option to extend the Term set forth in this Section 5, unless Landlord consents to the contrary in writing at the time of such subletting or assignment or such subletting or assignment is made pursuant to Section 17.6 or Section 17.7 below.
During the Term of this Lease, Tenant will have the right to be offered by Landlord the opportunity to add to the Premises any RFO Space (as defined below) that becomes available for lease during the Term. The RFO Space means any vacant space in the Building that is contiguous to Premises. Any space in the Building shall not be deemed available for lease (and therefore will not be considered RFO Space) to the extent that it is subject to, or becomes subject to, any expansion or renewal option in favor of another tenant. If at any time during the Term any of the RFO Space becomes available or is becoming available for lease, before offering such space to any other party, Landlord shall notify Tenant in writing that such RFO Space is available for lease or is becoming available during the Term and such notice will provide the terms at which Landlord is proposing in good faith to offer the space, including the base rent, additional rent, any applicable tenant improvement allowance and any other terms relevant to the leasing of the RFO Space (the RFO Offer Notice). The RFO Offer Notice shall notify Tenant of the day on which the RFO Space will become available for delivery to Tenant. Tenant shall have 25 days after receipt of the RFO Offer Notice (the Consideration Period) to either accept Landlords offer for the leasing of the RFO Space or negotiate with Landlord to reach agreement on terms that are acceptable to Landlord and Tenant. If Tenant elects to negotiate with Landlord during the Consideration Period, then Landlord and Tenant shall negotiate in good faith to reach agreement on the terms for Tenants leasing of the RFO Space. If Tenant timely accepts Landlords RFO Space offer or Tenant and Landlord otherwise reach agreement on the terms of Tenants leasing of the RFO Space during the Consideration Period, the parties shall enter into a lease for such space substantially in the form of this Lease, but containing the terms and
10
provisions with respect to the rent payable for such space, the tenant improvement work, if any, free rent periods, if any, tenant improvement allowances, if any, and such other terms and conditions as are unique to the RFO Space, as agreed on by Landlord and Tenant. If Tenant fails to accept Landlords RFO Space offer or Landlord and Tenant, after negotiating in good faith, do not reach agreement on terms for Tenants leasing of the RFO Space within the Consideration Period, Tenant shall be deemed to have rejected an RFO Offer Notice. If Tenant rejects or is deemed to have rejected an RFO Offer Notice, Landlord shall thereafter be free to lease any or all of the RFO Space that is the subject of the RFO Offer Notice to any prospective tenant upon such terms to which Landlord and such tenant agree, and Tenant will not have any right to lease the applicable RFO Space until after it has been rented by Landlord and again becomes available for lease. Tenant will not have the right to accept any RFO Offer Notice if a Default (beyond any applicable cure period) exists at the time of Tenants attempted acceptance. In addition, Tenants rights under this Section 6 will automatically terminate upon any early termination of this Lease. Tenants right of first offer pursuant to this Section 6 may only be assigned by Tenant to an assignee permitted pursuant to Article 17.
7. PERMITTED USE AND OCCUPANCY .
7.1 Permitted Use. Tenant agrees to use and occupy the Premises only for the Permitted Use and for no other purpose without the prior written consent of Landlord, not to be unreasonably withheld, condition or delayed.
(a) Use . Tenant agrees to use the Premises in a safe, careful and proper manner, and to comply, at Tenants expense, with all Laws applicable to Tenants use, occupancy or alteration of the Premises and with any Laws that require any alterations to the Premises due to Tenants status under such Laws, including, without limitation, the ADA; provided, however, that Landlord shall, at Landlords cost and expense, make any changes or alterations required by Laws, including the ADA, as a result of conditions existing prior to the Commencement Date in the Premises, and not resulting from Tenants particular use of the Premises. If, due to the nature or manner of any use or occupancy of the Premises by Tenant, any improvements or alterations to the Building or the Premises are determined to be required to comply with any Laws, then Tenant will pay all costs of the required improvements, alterations or changes in services. Tenant will not keep anything on the Premises for any purpose which increases the insurance premium cost or invalidates any insurance policy carried on the Premises by Landlord. Tenant will pay, as Rent and upon demand of Landlord, any such increased premium cost due to Tenants use or occupation of the Premises. Tenant will not cause, maintain or permit any nuisance or waste in or about the Building or the Premises. In addition, except as expressly provided otherwise in the Lease, Tenant will keep the Premises free of debris, and anything of a dangerous, noxious or toxic nature, which could create a fire hazard or undue vibration, heat, noise, fumes, vapors or odors. If any item of equipment, building material or other property brought into the Building or the Premises by Tenant or on Tenants request causes a dangerous, noxious or toxic effect (including an environmental effect) and in Landlords reasonable opinion such effect will not be permanent but will only be temporary and is able to be eliminated, then Tenant will not be required to remove such item, provided that Tenant promptly and diligently causes such effect to be eliminated, pays for all costs of elimination and indemnifies Landlord against all liabilities arising from such effect.
11
(b) Hazardous Materials . To Landlords knowledge without investigation, the Premises and the Building are concurrently in compliance with all applicable Environmental Laws, and no Hazardous Materials (other than cleaning agents used in the course of regular janitorial services) exist on, about, or under, the Premises or the Building. Landlord and Tenant agree that, during the Term, each will comply with all Laws, including, without limitation, all Environmental Laws, governing, and all procedures established by Landlord for the use, abatement, removal, storage, disposal or transport of any Hazardous Substances and any required or permitted alteration, repair, maintenance, restoration, removal or other work in or about the Building or the Premises that involves or affects any Hazardous Substances. Except for the lawful use of cleaning agents used in the course of regular janitorial service and laser printer toner cartridges that are disposed of in compliance with applicable Environmental Laws, and such materials of the type and quality consistent with Tenants Permitted Use, no Hazardous Substances will be stored, used, released, produced, processed or disposed of in, on or about, or transported to or from, the Building or the Premises by Tenant or any of Tenants agents, employees or contractors, without first obtaining Landlords express written consent (any Hazardous Substances which are stored, used, released, produced, processed or disposed in, on or about, or transported to or from, the Building or the Premises by any of such persons or entities upon such express written consent are called Tenants Hazardous Substances). Any such use, storage, disposal or production of the Hazardous Substances permitted by this Section 7.1(b) shall be done in compliance with all Environmental Laws and so as not to result in the Premises being in violation of any Environmental Laws. Upon the Expiration Date or earlier termination of this Lease Tenant, at its expense, will take all action necessary to restore the Building and the Premises to the condition existing prior to the introduction of Tenants Hazardous Substances, whether such action is required by any governmental authority in order to comply with applicable Laws or reasonably required by Landlord in order for Landlord to make the same economic use of the Building and the Premises as Landlord could have made prior to the introduction of Tenants Hazardous Substances. Such action may include, without limitation, the investigation of the environmental condition of the Building or the Premises, the preparation of remediation plans or feasibility studies and the performance of cleanup, remedial, removal or restoration work. Tenant will obtain Landlords written approval before undertaking any action required by this Section 7.1(b), which approval will not be unreasonably withheld so long as the proposed actions will not have an avoidable material and adverse effect on the Building or the Premises. Each party will indemnify and hold the other and the others Affiliates harmless from and against any and all claims, costs and liabilities (including reasonable attorneys fees) arising out of or in connection with any breach by such party of its covenants under this Section 7.1(b). The parties obligations under this Section 7.1(b) will survive the expiration or early termination of the Term.
7.2 Signs and Displays. Tenant shall be entitled to use 50% of the Buildings monument sign, subject to Landlords prior approval of such display or sign, which approval shall not be unreasonably withheld, conditioned or delayed. Landlord shall install such display or sign on the Buildings monument sign at Tenants expense. Tenant will not place, cause or permit to be placed and maintained on the exterior of the Premises any other sign, awning,
12
lettering or other advertising matter, unless previously approved by Landlord in Landlords reasonable discretion.
8.1 Right of Use. Landlord grants Tenant, its employees, invitees, customers, licensees and other visitors a nonexclusive and, during the Term, irrevocable license for the Term to use the Common Areas, subject to the terms and conditions of this Lease. Provided that there is no unreasonable material adverse effect on Tenants use or occupancy of the Premises, without advance notice to Tenant (except with respect to matters covered by subsection (a) below) and without any liability to Tenant in any respect, Landlord will have the right to:
(a) establish and enforce reasonable non-discriminatory rules and regulations, in addition to those on Exhibit C , concerning the maintenance, management, use and operation of the Common Areas;
(b) close off any of the Common Areas to whatever extent required in the reasonable opinion of Landlord and its counsel to prevent a dedication of any of the Common Areas or the accrual of any rights by any person or the public to the Common Areas, provided such closure does not deprive Tenant of the substantial benefit and enjoyment of or access to the Premises;
(c) temporarily close any of the Common Areas for maintenance, alteration or improvement purposes, provided such closure does not deprive Tenant of the substantial benefit and enjoyment of or access to the Premises;
(d) change the size, use, shape or nature of any such Common Areas, or change the arrangement and/or location of or regulate or eliminate the use of any concourse, or any elevators, stairs, toilets or other public conveniences in the Common Areas, provided such changes do not materially adversely affect Tenants beneficial use of or access to the Premises; and
(e) expand the Building or convert any portion of the Building (excluding the Premises) to Common Areas. In the event of any such changes in the Building, Landlord may make an appropriate adjustment in Tenants Share; provided, however, that Landlord shall not increase Tenants Share as a result of any changes in the size of the Building, except as set forth in Section 16.2(d).
8.2 Landlords Compliance with Laws. Landlord will maintain the Common Areas in compliance with all applicable Laws.
9. UTILITI ES, HVAC AND SECURITY.
9.1 Operation of Building and Premises.
(a) During the Term, Landlord shall operate and maintain the Building in accordance with all applicable laws and regulations and shall provide the services set out in subsections (b) and (c) of this Section 9.1.
(b) Landlord shall provide or cause to be provided in the Premises:
(1) heat, ventilation and cooling as required for the comfortable use and occupancy of the Premises during business hours;
13
(2) electric power, gas service and domestic running water service as supplied by the local utility companies for normal lighting and office usage; and
(3) maintenance, repair and replacement as set out in Section 10.1.
(c) Landlord shall provide or cause to be provided in the Common Areas:
(1) domestic running water and necessary supplies in washrooms sufficient for the normal use thereof by occupants in the Building;
(2) janitorial services in the Common Areas (but not the Premises), including exterior window washing;
(3) access to and egress from the Premises;
(4) heat, ventilation, cooling, lighting, electric power and domestic running water in the Common Area during normal business hours; and
(5) maintenance, repair and replacement as set forth in Section 10.1.
(d) If from time to time requested in writing by Tenant, and to the extent that it is reasonably able to do so, Landlord shall provide in the Premises services in addition to those set out in subsection (b), above, such as, by way of example but not in limitation, heat, ventilation and cooling systems during times other than normal business hours, provided that Tenant shall within 10 days of receipt of an invoice for any such additional service pay Landlord therefor at rates as Landlord may from time to time reasonably establish.
9.2 Utilities. Subject to Tenants waiver of claims under Section 15.2, unless caused by the negligence or intentional misconduct of Landlord, its agents, contractors or employees, neither Landlord nor its agents or employees will be liable to Tenant or any of Tenants employees, agents or anyone claiming through or under Tenant, for any damages, injuries, losses, expenses, claims, or causes of action, because of any interruption, curtailment or discontinuance of any utility service nor shall any such interruption, curtailment or discontinuance be deemed an eviction or disturbance of Tenants use or possession of the Premises or any part thereof, nor relieve Tenant from full performance of Tenants obligations under this Lease; provided, however, that if any utility service to the Premises shall become unavailable for a period in excess of seventy-two (72) consecutive hours and such unavailability is directly and proximately caused by the negligence or intentional misconduct of Landlord, its agents, contractors or employees, all Base Rent shall abate until utility service to the Premises is restored.
9.3 Security. The Building is equipped with a Building-wide security system installed by a previous tenant. Tenant shall have the right to use such system, at its expense, for the Premises if Tenant undertakes all programming and installations necessary to retrofit such system for use in the Premises. In undertaking such work, Tenant shall not change the system in a manner that would prevent it from also being used for any adjoining premises in the Building, provided that the work necessary to allow the system actually to be used in an adjoining premises is performed at no expense to Tenant. In no event will Landlord be liable to Tenant, and Tenant hereby waives any claim against Landlord and Landlords Affiliates, for (a) any entry of third parties onto the Premises or into the Building; (b) any damage or injury to persons or property; or (c) any loss of property in or about the Premises or the Building, occurring as a result of any unauthorized or criminal acts of third parties, regardless of any action, inaction, failure,
14
breakdown, malfunction or insufficiency of any security services provided by Landlord, unless such damage to the Premises was the result of Landlords negligence or intentional misconduct. Tenant shall be responsible for the administration of the security system described in this Section 9.3 for so long as Tenant is the sole tenant in the Building. When a party in addition to Tenant occupies space in the Building, the security system described in this Section 9.3 shall be administered by a third-party retained by Landlord, and such administration costs shall become part of Operating Expenses of which Tenant shall pay its share pursuant to this Lease.
10. REPAIRS .
10.1 Landlord Maintenance and Repairs. Landlord will keep the exterior supporting walls, foundations, roof and down spouting on the Building, and the Common Areas within the Building in reasonable condition and in good repair, provided that the costs of such maintenance and repairs will be included as Operating Expenses as provided in this Lease.
10.2 Tenants Maintenance and Repairs. Subject to the terms of Articles 7, 14, and 16, and Section 9.1, Tenant will, at Tenants own expense and at all times during the Term, maintain the Premises, and Tenants furnishings, equipment, personal property, and trade fixtures in the Premises, in good working order, clean condition, and repair and in a condition that complies with all applicable Laws, at Tenants expense. Tenant will also be responsible, at Tenants expense, for all janitorial services in the Premises. All work done by Tenant or its contractors (which contractors will be subject to Landlords reasonable prior written approval) is subject to Landlords approval and must be done in a first-class workmanlike manner using only grades of materials at least equal in quality to the materials being replaced and will comply with all insurance requirements and all applicable Laws. Tenant will not overload the electrical wiring and ventilation or utilities serving the Building and will install at Tenants sole expense, after first obtaining Landlords written approval, any additional electrical wiring that may be required in connection with Tenants apparatus, equipment or fixtures. In the event that any warranties exist from time to time during the Term that cover and/or apply to any of the items required to be maintained and/or repaired by Tenant hereunder, Landlord shall, upon the prior written notice from Tenant, use reasonable efforts to assist Tenant in pursing warranty claims for such items; provided, however, that Landlord shall not be obligated to expend any cost or expense in pursing such warranty claims.
10.3 Failure to Maintain Premises. If Tenant fails to perform any of its obligations under Section 10.2, then Landlord may perform such obligations and Tenant will pay as Rent to Landlord the cost of such performance, including an amount sufficient to reimburse Landlord for overhead and supervision, within 10 days after the date of Landlords invoice therefor. For purposes of performing such obligations, or to inspect the Premises, Landlord may enter the Premises upon not less than 12 hours prior notice to Tenant (except in cases of actual or suspected emergency, in which case no prior notice will be required) without liability to Tenant for any loss or damage incurred as a result of such entry unless due to the negligence or intentional misconduct of Landlord (but subject to Tenants waiver of claims pursuant to Section 15.2); provided that Landlord will take reasonable steps in connection with such entry to minimize any disruption to Tenants business or Tenants use of the Premises.
10.4 Notice of Damage. Tenant will notify Landlord promptly after Tenant learns of (a) any fire or other casualty on the Premises; (b) any damage to or defect in the Premises, including any fixtures or equipment in or serving the same, which was caused by Tenant or its agents, employees, contractors or invitees, or for the repair of which Landlord might be
15
responsible; and (c) any damage to or defect in any parts or appurtenances of the equipment located in the Premises.
11. ALTERATION AND IMPROVEMENTS . Tenant may, from time to time, at its own expense make non-structural changes, additions, and improvements to the Premises to better adapt the same to its business, provided that any such change, addition, or improvement exceeding $10,000.00 in total value shall be subject to the prior reasonable approval of Landlord. All changes, additions and improvements to the Premises (but excluding Tenants trade fixtures), whether temporary or permanent in character, made or paid for by Landlord or Tenant will, without compensation to Tenant, become Landlords property upon installation. If at the time Landlord consents to their installation, Landlord requests or approves the removal by Tenant of any such changes, additions or improvements upon termination of this Lease, Tenant will remove the same upon termination of this Lease as provided in Section 19.1. All other changes, additions and improvements will remain Landlords property upon termination of this Lease and will be relinquished to Landlord in good condition, ordinary wear and tear excepted.
12. LIENS . Tenant agrees to pay before delinquency all costs for work, services or materials furnished to Tenant for the Premises, the nonpayment of which could result in any lien against the Building (including the Premises). Tenant will keep title to the Building (including the Premises) free and clear of any such lien. Tenant will immediately notify Landlord of the filing of any such lien or any pending claims or proceedings relating to any such lien and will indemnify and hold Landlord harmless from and against all loss, damages and expenses (including reasonable attorneys fees) suffered or incurred by Landlord as a result of such lien, claims and proceedings. In case any such lien attaches, Tenant agrees to cause it to be released and removed of record within 30 days thereafter (failing which Landlord may do so at Tenants sole expense), unless Tenant has a good faith dispute as to such lien in which case Tenant may contest such lien by appropriate proceedings so long as Tenant deposits with the court or Landlord, which ever is required by applicable Laws, a bond or other security in an amount reasonably acceptable to Landlord and any Lender which may be used by Landlord to release such lien if Tenants contest is abandoned or is unsuccessful. If Landlord incurs any legal costs in causing the removal of such lien, Tenant will pay all legal costs incurred by Landlord, including, without limitation, Landlords reasonable attorneys fees. Upon final determination of any permitted contest, Tenant will immediately pay any judgment rendered in favor of the lien claimant and cause the lien to be released.
13. INSURANCE .
13.1 Landlords Insurance .
(a) During the Term as part of Operating Expenses, Landlord will provide and keep in force the following insurance for its benefit and the benefit of any Lender:
(1) all-risk or fire insurance (including standard extended coverage endorsement perils, leakage from fire protective devices and other water damage) for the Building and the Leasehold Improvements for the full replacement value thereof (excluding depreciation of the Building and Tenants furniture, trade fixtures, equipment, documents, files, work products and other personal property);
(2) loss of rental income insurance or loss of insurable gross profits; and
16
(3) such other insurance (including boiler, machinery, earthquake, and flood insurance) as Landlord reasonably elects to obtain or any Lender requires.
(b) Except as otherwise specifically provided in this Lease, insurance maintained by Landlord under this Section 13.1 will be in amounts that Landlord from time to time reasonably determines sufficient or any Lender requires; will be subject to such deductibles and exclusions as Landlord reasonably determines; will, in the case of insurance under Section 13.1(a)(1), permit the release of Tenant from certain liability under Section 15.1; and will otherwise be on such terms and conditions as Landlord from time to time reasonably determines sufficient.
13.2 Tenants Insurance. During the Term, Tenant will provide and keep in force the following insurance:
(a) commercial general liability insurance relating to Tenants business (carried on, in or from the Premises and including Tenants use of any Hazardous Materials) and Tenants use and occupancy of the Premises, for personal and bodily injury and death, and damage to others property, with limits of not less than $2,000,000 for any one accident or occurrence;
(b) all-risk or fire insurance (including standard extended coverage endorsement perils, leakage from fire protective devices and other water damage) relating to Tenants furniture, equipment, inventory, trade fixtures, documents, files, work product and other personal property on a full replacement cost basis in amounts sufficient to prevent Tenant from becoming a coinsurer and subject only to such deductibles and exclusions as Landlord may reasonably approve;
(c) If any boiler or machinery is operated in the Premises by Tenant, boiler and machinery insurance;
(d) If Tenant operates owned, hired or non-owned vehicles, automobile liability insurance with limits of not less than $1,000,000 combined bodily injury and property damage; and
(e) workers compensation and employers liability insurance in any amounts required to comply with applicable Laws.
Landlord, Landlords property manager (if any), and any Lender will be named as additional insureds in the policy described in Section 13.2(a), as their interests appear, which will include cross liability and severability of interests clauses and will be on an occurrence (and not a claims made) form. The policies described in Section 13.2(b) will permit the release of Landlord from certain liability under Section 15.2. Tenants insurance policies will be written by insurers that are rated A-VII or better by Bests Rating Guide and licensed in the State of Colorado, will be written as primary policies, not contributing with and not supplemental to the coverage that Landlord may carry, and will otherwise be upon such terms and conditions as Landlord from time to time reasonably requires, including reasonable limits on Tenants deductibles. Tenant will file with Landlord, on or before the Commencement Date and at least 10 days before the expiration date of expiring policies, such copies of either current policies or certificates, or other proofs, as may be reasonably required to establish Tenants insurance coverage in effect from time to time and payment of premiums. Tenants insurers will agree to give Landlord and all other additional insureds at least 30 days prior notice of any non-renewal, and at least 10 days prior notice of any cancellation, of any insurance coverage required by this
17
Section 13.2. If Tenant fails to insure or pay premiums, or to file satisfactory proof as required, Landlord may, upon a minimum of ten business days notice, effect such insurance and Tenant will pay to Landlord, on demand, the cost of any premiums paid by Landlord. Tenant shall be entitled to maintain an umbrella policy covering all of Tenants assets.
14. DAMAGE OR DESTRUCTION .
14.1 Termination Options. If the Building is damaged by fire or other casualty Landlord will, promptly after learning of such damage, notify Tenant in writing of the time necessary to repair or restore such damage, as estimated by Landlords architect, engineer or contractor (the Repair Notice). If the damage renders the Premises or a material part of the Building untenantable and such Repair Notice states that repair or restoration of all of such damage that was caused to the Building or the Premises cannot be completed within 180 days from the date of such damage (or within 90 days from the date of such damage if such damage occurs within the last 12 months of the Term), then Tenant will have the option to terminate this Lease; provided, however, that if such damage is the result of Tenants or its subtenants, licensees, or any of their agents, employees or invitees negligent acts or omissions or willful misconduct, then Tenant shall not have the right to terminate the Lease pursuant to this Section 14.1 or Section 14.2. If such Repair Notice states that repair or restoration of all of such damage that was caused to the Building or the Premises cannot be completed within 180 days from the date of such damage, or if such damage occurred within the last 12 months of the Term and such Repair Notice states that repair or restoration of all such damage that was caused to the Building or the Premises cannot be completed within 90 days from the date of such damage, or if such damage renders more than 50% of the Rentable Area of the Building or the Premises untenantable, or if such damage is not insured against by the insurance policies required to be maintained by Landlord according to Section 13.1, then Landlord will have the option to terminate this Lease. Any option to terminate granted above must be exercised by written notice to the other party given within 10 days after Landlord delivers to Tenant the Repair Notice. If either party exercises its option to terminate this Lease, the Term will expire and this Lease will terminate 10 days after notice of termination is delivered; provided, however, that Rent for the period commencing on the date of such damage until the date this Lease terminates will be reduced to the reasonable value of any use or occupation of the Building by Tenant during such period.
14.2 Repair Obligations. If the Building or the Premises are damaged by fire or other casualty and neither party terminates this Lease according to Section 14.1, then Landlord will repair and restore such damage with reasonable promptness to the condition existing prior to the damage or better, subject to delays for insurance adjustments and delays caused by force majeure (as described in Section 29 below). However, Landlord will not be required to spend more for such repair and restoration than the insurance proceeds available to Landlord as a result of the fire or other casualty. To the extent Tenant is responsible for insuring Tenants furniture and equipment, Tenant agrees, promptly upon notice from Landlord that Landlord is repairing the Premises, to file such claims necessary to reopen Tenants business within 20 days after the completion of Landlords repairs. Landlord will have no liability to Tenant and Tenant will not be entitled to terminate this Lease if Landlords repairs and restoration are not in fact completed within the estimated time period, provided that Landlord promptly commences and diligently pursues such repairs and restoration to completion. In no event will Landlord be obligated to repair, restore or replace any of the property required to be insured by Tenant according to
18
Section 13.2. If Landlord fails to complete repairs to the Premises within 180 days of the date of the damage (or within 90 days from the date of such damage if such damage occurs within the last 12 months of the Term), subject to force majeure delays, then Tenant shall have the right to terminate this Lease upon written notice delivered to Landlord at any time after such 180-day or 90-day (as applicable) period and prior to Landlords substantial completion of such repairs.
14.3 Rent Abatement. If any fire or casualty damage renders the Premises untenantable and if this Lease is not terminated according to Section 14.1, then Rent will abate beginning on the date of such damage on a per diem basis. Such abatement will end on the earlier of 30 days after the date Landlord has substantially completed the repairs and restoration Landlord is required to perform according to Section 14.2 or the date Tenant accepts the Premises for occupancy. Except as provided in Section 15.3, in no event will Landlord be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from damage caused by fire or other casualty or the repair of such damage, provided however that, to the extent Tenant remains in possession of a portion of the Premises, Landlord will take all reasonable steps to minimize the disruption to Tenants business and use of such portion of the Premises during the period of repair.
15. WAIVERS AND INDEMNITIES .
15.1 Landlords Waivers. Tenant and its Affiliates will not be liable or in any way responsible to Landlord for, and Landlord waives all claims against Tenant and its Affiliates for, any loss, injury or damage that is insured or required to be insured by Landlord under Section 13.1(a)(1), or arises from any deductible, or losses under workers compensation laws, so long as such loss, injury or damage results from or in connection with this Lease or Tenants use and occupancy of the Premises. Landlord shall use reasonable efforts to cause its insurance carrier to endorse all applicable policies waiving the carriers rights of recovery under subrogation or otherwise against Tenant.
15.2 Tenants Waivers. Except to the extent caused by the willful or negligent act or omission or breach of this Lease by Landlord or its agents or employees, Landlord and its Affiliates will not be liable or in any way responsible for, and Tenant waives all claims against Landlord and its Affiliates for, any loss, injury or damage suffered by Tenant or others relating to (a) loss or theft of, or damage to, property of Tenant or others; (b) injury or damage to persons or property resulting from fire, explosion, falling plaster, escaping steam or gas, electricity, water, rain or snow, or leaks from any part of the Building or from any pipes, appliances or plumbing, or from dampness; or (c) damage caused by the public or by construction of any private or public work. In addition, Landlord and its Affiliates will not be liable or in any way responsible to Tenant for, and Tenant waives all claims against Landlord and its Affiliates for, any loss, injury or damage that is insured or required to be insured by Tenant under Sections 13.2(b), or arises from any deductible, or losses under workers compensation laws, so long as such loss, injury or damage results from or in connection with this Lease. Tenant shall use reasonable efforts to cause its insurance carrier to endorse all applicable policies waiving the carriers rights of recovery under subrogation or otherwise against Landlord.
15.3 Landlords Indemnity. Subject to Section 15.2 and except to the extent caused by the willful or negligent act or omission or breach of this Lease by Tenant, its subtenants or licensees, or any of their respective agents, employees or invitees, Landlord will indemnify and hold Tenant harmless from and against any and all liability, loss, claims, demands, damages or expenses (including reasonable attorneys fees) due to or arising out of any willful or negligent
19
act or omission or breach of this Lease by Landlord or its agents or employees. Landlords obligations under this Section 15.3 will survive the expiration or early termination of the Term.
15.4 Tenants Indemnity. Subject to Section 15.1 and except to the extent caused by the willful or negligent act or omission or breach of this Lease by Landlord or its agents or employees, Tenant will indemnify and hold Landlord harmless from and against any and all liability, loss, claims, demands, damages or expenses (including reasonable attorneys fees) due to or arising out of any willful or negligent act or omission of or breach of this Lease by Tenant, its subtenants or licensees, or any of their respective agents, employees or invitees. Tenants obligations under this Section 15.4 will survive the expiration or early termination of the Term.
16. CONDEMNATION.
16.1 Full Taking. If all or substantially all of the Building or the Premises are taken for any public or quasi-public use under any applicable Laws or by right of eminent domain, or are sold to the condemning authority in lieu of condemnation, then this Lease will terminate as of the date when the condemning authority takes physical possession of the Building or the Premises.
16.2 Partial Taking.
(a) Landlords Termination of Lease . If only part of the Building or the Premises is thus taken or sold, and if after such partial taking, in Landlords reasonable judgment, alteration or reconstruction of any affected improvements necessary for Tenants use and enjoyment of the Premises is not economically justified, then Landlord (whether or not the Premises are affected) may terminate this Lease by giving written notice to Tenant within 45 days after the taking.
(b) Tenants Termination of Lease . If any part of the Premises or if over 20% of the Building is thus taken or sold, Tenant may terminate this Lease if in Tenants reasonable judgment the Premises cannot be operated by Tenant in an economically viable fashion because of such partial taking. Such termination by Tenant must be exercised by written notice to Landlord given not later than 45 days after Tenant is notified of the taking of the Building.
(c) Effective Date of Termination . Termination by Landlord or Tenant will be effective as of the date when physical possession of the applicable portion of the Building or the Premises are taken by the condemning authority.
(d) Election to Continue Lease . If neither Landlord nor Tenant elects to terminate this Lease upon a partial taking of a portion of the Building or the Premises, the Rent payable under this Lease will be diminished by an amount allocable to the portion of the Building or Premises which was so taken or sold. If this Lease is not terminated upon a partial taking of the Building or the Premises, Landlord will, at Landlords sole expense, promptly restore and reconstruct the Building and the Premises to substantially their former condition to the extent the same is feasible. However, Landlord will not be required to spend for such restoration or reconstruction an amount in excess of the net amount received by Landlord as compensation or damages for the part of the Building or the Premises so taken.
16.3 Awards. As between the parties to this Lease, Landlord will be entitled to receive, and Tenant assigns to Landlord, all of the compensation awarded upon taking of any
20
part or all of the Building or the Premises, including any award for the value of the unexpired Term. However, Tenant may assert a claim in a separate proceeding against the condemning authority for any damages resulting from the taking of Tenants trade fixtures or personal property, or for moving expenses, business relocation expenses or damages to Tenants business incurred as a result of such condemnation.
17. ASSIGNMENT AND SUBLETTING .
17.1 Limitation. Except as permitted in Sections 17.6 and 17.7, without Landlords prior written consent (which consent will not be unreasonably withheld or delayed), Tenant will not assign all or any of its interest under this Lease, sublet all or any part of the Premises or permit the Premises to be used by any parties other than Tenant and its agents, contractors, invitees, or employees.
17.2 Notice of Proposed Transfer; Landlords Options. If Tenant desires to enter into any assignment of this Lease or a sublease of all or any part of the Premises, Tenant will first give Landlord written notice, at least 30 days prior to the effective date of the proposed assignment or sublease, of the proposed assignment or sublease, which notice will contain (a) the name and address of the proposed transferee, (b) the proposed use of the Premises if other than the Permitted Use, (c) statements reflecting the proposed transferees current financial condition and income and expenses for the past two years, and (d) the principal terms of the proposed assignment or sublease. Tenant shall not permit the proposed transferee to occupy the Premises, or a portion thereof, without Landlords written consent (which consent will not be unreasonably withheld or delayed). Except in the case of any transfer permitted under Sections 17.6 and 17.7, Landlord will have the option, which must be exercised, if at all, by notice given to Tenant within 15 days after Landlords receipt of Tenants notice of the proposed transfer, either (a) if Tenants notice relates to a subletting, to sublet from Tenant such space as is described in the notice for such portion of the Term as is described in the notice, upon the same terms and conditions and for the same Rent (apportioned, as appropriate, to the amount of such space) as provided in this Lease; or (b) if such notice relates to an assignment, to become Tenants assignee.
17.3 Consent Not to be Unreasonably Withheld. If Landlord does not exercise its applicable option under Section 17.2, then Landlord will not unreasonably withhold or delay its consent to the proposed assignment or subletting if each of the following conditions is satisfied:
(a) the proposed transferee, in Landlords reasonable opinion, has sufficient financial capacity and business experience to perform Tenants obligations under this Lease;
(b) the proposed transferee will make use of the Premises which in Landlords reasonable opinion (1) is lawful; (2) is consistent with the Permitted Use of the Premises under this Lease; (3) is consistent with the general character of uses conducted by the other occupants of the Gunbarrel Technical Center; (4) will not increase the likelihood of damage or destruction to the Building or the Premises; and (5) will not cause an increase in insurance premiums for insurance policies applicable to the Building;
(c) if the proposed transfer is a sublease, the rent which the proposed transferee will be required to pay will be equal to at least 90% of the then-current market rent for the portion of the Premises being sublet; provided that this Section 17.3(c) shall only apply if Landlord is currently offering space on Winchester Circle in Boulder,
21
Colorado comparable in size and available rental term to the portion of the Premises being offered for sublease by Tenant;
(d) the proposed transferee, at the time of the proposed transfer, is neither a tenant in any building owned or managed by Landlord or any Affiliate of Landlord in the same county in which the Building is located, nor a party with whom Landlord is then negotiating for the lease of space in the Gunbarrel Technical Center;
(e) at the time of the proposed transfer no Default (as defined in Section 23.1) exists under this Lease beyond any applicable notice and cure period; and
(f) the proposed transferee or Tenant will pay Landlords reasonable costs associated with Landlords review and approval of the proposed transfer, including, without limitation, attorneys fees and costs.
17.4 Form of Transfer. If Landlord consents to a proposed assignment or sublease, Landlords consent will not be effective unless and until Tenant delivers to Landlord an original duly executed assignment or sublease, as the case may be, that provides, in the case of a sublease, that the subtenant will comply with all applicable terms and conditions of this Lease and, in the case of an assignment, an assumption by the assignee of all of the terms, covenants and conditions which this Lease requires Tenant to perform.
17.5 Payments to Landlord. If Landlord does not exercise its applicable option under Section 17.2 and Tenant effects an assignment or sublease, then Landlord will be entitled to receive and collect, either from Tenant or directly from the transferee, 50% of the amount by which the consideration required to be paid by the transferee for the use and enjoyment of Tenants rights under this Lease (after deducting from such consideration Tenants reasonable costs incurred in effecting the assignment or sublease, including, but not limited to, attorney fees, brokerage commissions, tenant improvements and free rent) exceeds the Rent payable by Tenant to Landlord allocable to the transferred space. Such percentage of such amount will be payable to Landlord at the time(s) Tenant receives the same from its transferee (whether in monthly installments, a lump sum, or otherwise). Landlord hereby agrees that Tenant shall be entitled to retain the remaining 50% of the amount by which the consideration required to be paid by the transferee for the use and enjoyment of Tenants rights under this Lease exceeds the Rent payable by Tenant to Landlord allocable to the transferred space.
17.6 Change of Ownership. Tenant may assign this Lease without the prior consent of Landlord to (i) any entity which assumes the obligations of Tenant under this Lease and has acquired all or substantially all of Tenants assets or (ii) any entity which is a successor of Tenant by operation of law or merger or consolidation of or with Tenant.
17.7 Permitted Transfers. Tenant may, upon notice to Landlord but without obtaining Landlords consent, assign this Lease or sublease all or any part of the Premises to an Affiliate of Tenant.
17.8 Effect of Transfers. Other than an assignment permitted under Section 17.6, no subletting or assignment will release Tenant from any of its obligations under this Lease unless Landlord agrees to the contrary in writing. Acceptance of Rent by Landlord from any person other than Tenant will not be deemed a waiver by Landlord of any provision of this Section 17.8. Consent to one assignment or subletting will not be deemed a consent to any subsequent assignment or subletting. In the event of any default by any assignee or subtenant or any successor of Tenant in the performance of any Lease obligation, Landlord may proceed directly
22
against Tenant without exhausting remedies against such assignee, subtenant or successor. The voluntary or other surrender of this Lease by Tenant or the cancellation of this Lease by mutual agreement of Tenant and Landlord will not work a merger and will, at Landlords option, terminate all or any subleases or operate as an assignment to Landlord of all or any subleases; such option will be exercised by notice to Tenant and all known subtenants in the Premises.
18. PERSONAL PROPERTY . Tenant may install in the Premises its personal property (including Tenants usual trade fixtures) in a proper manner, provided that no such installation will interfere with or damage the mechanical, plumbing or electrical systems or the structure of Building, and provided further that if such installation would require any change, addition or improvement to the Building, such installation will be subject to Article 8. If no Default then exists, any such personal property installed in the Premises by Tenant (a) may be removed from the Premises from time to time in the ordinary course of Tenants business or in the course of making any changes, additions or improvements to the Premises permitted under Article 11, and (b) will be removed by Tenant at the end of the Term according to Section 19.1. Tenant will promptly repair at its expense any damage to the Building and the Premises resulting from such installation or removal. Tenant will be solely responsible for any and all taxes relating to its personal property on the Premises, and shall reimburse Landlord pursuant to Section 3.2(d) if Landlord is charged for any such taxes.
19. END OF TERM .
19.1 Surrender. Upon the expiration or other termination of the Term, Tenant will immediately vacate and surrender possession of the Premises to Landlord in good order, repair and condition, except for ordinary wear and tear. Upon the expiration or other termination of the Term, Tenant agrees to remove (a) all changes, additions and improvements to the Premises the removal of which Landlord requested or approved according to Article 8 at the time Landlord consented to their installation, and (b) all of Tenants trade fixtures, furnishings, equipment and other personal property. Tenant will pay Landlord on demand the reasonable cost of repairing any damage to the Building or Premises caused by the installation or removal of any such items. Any of Tenants property remaining on the Premises after the expiration or other termination of the Term will be conclusively deemed to have been abandoned by Tenant and may be appropriated, stored, sold, destroyed or otherwise disposed of by Landlord without notice or obligation to account to or compensate Tenant, and Tenant will pay Landlord on demand all costs incurred by Landlord relating to such abandoned property.
19.2 Holding Over. Tenant understands that it does not have the right to hold over at any time and Landlord may exercise any and all remedies at law or in equity to recover possession of the Premises, as well as any damages incurred by Landlord, due to Tenants failure to vacate the Premises and deliver possession to Landlord as required by this Lease. If Tenant holds over after the Expiration Date, Tenant will be deemed a tenant from month to month, at a monthly Base Rent, payable in advance, equal to 150% of the monthly Base Rent payable during the last year of the Term, and Tenant will be bound by all of the other terms, covenants and agreements of this Lease as the same may apply to a tenancy at sufferance.
20. ESTOPPEL CERTIFICATES . Promptly upon Landlords request after Tenant has occupied the Premises, Tenant will execute and deliver to Landlord an Occupancy Estoppel Certificate in the form of Exhibit B . In addition, Tenant agrees that at any time and from time to time during the Term (but on not less than 15 business days prior request by Landlord), Tenant will execute, acknowledge and deliver to Landlord a certificate indicating any or all of the
23
following: (a) the Commencement Date and Expiration Date; (b) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating the date and nature of each modification); (c) the date, if any, through which Base Rent, Additional Rent and any other Rent payable have been paid; (d) that Tenant is not aware of any default by Landlord or Tenant which has not been cured, except for defaults stated in such certificate; (e) that Tenant is not aware of any existing defenses or setoffs to enforcement of this Lease, except as specifically stated in such certificate; (f) provided such events have occurred, that Tenant has accepted the Premises and that all improvements required to be made to the Premises by Landlord have been completed according to this Lease; (g) that, except as specifically stated in such certificate, Tenant, and only Tenant, currently occupies the Premises; and (h) such other matters as may be reasonably requested by Landlord. Any such certificate may be relied upon by Landlord and any prospective purchaser or present or prospective mortgagee, deed of trust beneficiary or ground lessor of all or a portion of the Premises.
21. TRANSFERS OF LANDLORDS INTEREST .
21.1 Sale, Conveyance and Assignment. Subject only to Tenants rights under this Lease, nothing in this Lease will restrict Landlords right to sell, convey, assign or otherwise deal with the Building (including the Premises) or Landlords interest under this Lease.
21.2 Effect of Sale, Conveyance or Assignment. Provided that Landlords transferee assumes Landlords obligations under this Lease, a sale, conveyance or assignment of the Building will automatically release Landlord from liability under this Lease from and after the effective date of the transfer, except for any liability relating to the period prior to such effective date; and Tenant will look solely to Landlords transferee for performance of Landlords obligations relating to the period after such effective date. This Lease will not be affected by any such sale, conveyance or assignment and Tenant will attorn to Landlords transferee.
21.3 Subordination and Nondisturbance. This Lease is and will be subject and subordinate in all respects to any Encumbrance. With respect to any Encumbrance encumbering the Premises as of and subsequent to the Date of this Lease, Landlord will use its best efforts to cause the Lender to agree (either in the Encumbrance or in a separate agreement with Tenant) that so long as Tenant is not in default of its obligations under this Lease, this Lease will not be terminated and Tenants possession of the Premises will not be disturbed by the termination or foreclosure, or proceedings for enforcement, of such Encumbrance. While such subordination will occur automatically, Tenant agrees, upon request by and without cost to Landlord or any successor in interest, to promptly execute and deliver to Landlord or any Lender such instrument(s) as may be reasonably required to evidence such subordination, provided such subordination instrument provides that so long as Tenant is not in default of its obligations under this Lease, this Lease will not be terminated and Tenants possession of the Premises will not be disturbed by Lender. In the alternative, however, any Lender may unilaterally elect to subordinate its Encumbrance to this Lease.
21.4 Attornment. If the interest of Landlord is transferred to any person (a Transferee) by reason of the termination or foreclosure, or proceedings for enforcement, of an Encumbrance, or by delivery of a deed in lieu of such foreclosure or proceedings, Tenant will immediately and automatically attorn to the Transferee. Upon attornment this Lease will continue in full force and effect as a direct lease between the Transferee and Tenant, upon all of the same terms, conditions and covenants as stated in this Lease, except that the Transferee will
24
not be: (a) liable for any act or omission of any prior landlord, including Landlord (but such exemption will not excuse the Transferee from the performance of any obligations of the landlord under this Lease required to be performed subsequent to the transfer to the Transferee); (b) subject to any offsets or defenses which Tenant might have against any prior landlord, including Landlord (excluding any express right of abatement granted under this Lease, provided that the Lender who held the Encumbrance the enforcement of which resulted in the transfer to the Transferee (the Foreclosing Lender) was afforded any notice and cure rights to which it was entitled under Section 24.1 with respect to the matter that gave rise to such express right of abatement); (c) bound by any Rent or advance Rent not actually received by the Transferee which Tenant might have paid for more than the current month or the next succeeding month to any prior landlord, including Landlord, and all such Rent will remain due and owing, regardless of such advance payment; (d) obligated for repayment to Tenant of the Security Deposit or any other security or advance rental deposit made by Tenant, except to the extent the same is paid over to the Transferee; or (e) bound by any termination, amendment or modification of this Lease (other than one expressly contemplated by the terms of this Lease and effected according to such express terms, such as termination by Landlord due to a Default by Tenant) made while any action or proceedings for the termination, foreclosure, or enforcement of an Encumbrance of which Tenant had notice was pending without the written consent of the Foreclosing Lender. Tenant agrees, upon request by and without cost to the Transferee, to promptly execute and deliver to the Transferee such instrument(s) as may be reasonably required to evidence such attornment.
22. RULES AND REGULATIONS. Tenant agrees to faithfully observe and comply with the Rules and Regulations set forth on Exhibit C and with all reasonable modifications and additions to such Rules and Regulations (which will be applicable to all Building tenants) from time to time adopted by Landlord and of which Tenant is notified in writing. No such modification or addition will contradict or abrogate any right expressly granted to Tenant under this Lease.
23. TENANTS DEFAULT AND LANDLORDS REMEDIES .
23.1 Default. Each of the following events will constitute a material breach by Tenant and a Default under this Lease:
(a) Failure to Pay Rent . Tenant fails to pay Base Rent, Additional Rent or any other Rent payable by Tenant under the terms of this Lease when due, and such failure continues for five days after written notice from Landlord to Tenant of such failure; provided that with respect to Base Rent and Operating Expenses, Tenant will be entitled to only two notices of such failure during any Lease Year and if, after two such notices are given in any Lease Year, Tenant fails, during such Lease Year, to pay any such amounts when due, such failure will constitute a Default without further notice by Landlord or additional cure period.
(b) Failure to Perform Other Obligations . Except as otherwise specifically provided in this Lease, Tenant breaches or fails to comply with any other provision of this Lease applicable to Tenant, and such breach or noncompliance continues for a period of 30 days after notice by Landlord to Tenant; or, if such breach or noncompliance cannot be reasonably cured within such 30-day period, Tenant does not in good faith commence to cure such breach or noncompliance within such 30-day period or does not diligently complete such cure within 90 days after such notice from Landlord. However, if such
25
breach or noncompliance causes or results in (1) a dangerous condition on the Building or Premises, or (2) any insurance coverage carried by Landlord or Tenant with respect to the Building or Premises being jeopardized, then a Default will exist if such breach or noncompliance is not cured as soon as reasonably possible after notice by Landlord to Tenant, and in any event is not cured within 30 days after such notice. For purposes of this Section 23.1(b), financial inability will not be deemed a reasonable ground for failure to cure any breach of this Lease within the applicable cure period, or failure to comply with the provisions of this Lease.
(c) Transfer of Interest Without Consent . Tenants interest under this Lease or in the Premises is transferred or passes to, or devolves upon, any other party in violation of Section 17.
(d) Execution and Attachment Against Tenant . Tenants interest under this Lease or in the Premises is taken upon execution or by other process of law directed against Tenant, or is subject to any attachment by any creditor or claimant against Tenant and such attachment is not discharged or disposed of within 60 days after levy.
(e) Bankruptcy or Related Proceedings . Tenant files a petition in bankruptcy or insolvency, or for reorganization or arrangement under any bankruptcy or insolvency Laws, or voluntarily takes advantage of any such Laws by answer or otherwise, or dissolves or makes an assignment for the benefit of creditors, or involuntary proceedings under any such Laws or for the dissolution of Tenant are instituted against Tenant, or a receiver or trustee is appointed for the Premises or for all or substantially all of Tenants property, and such proceedings are not dismissed or such receivership or trusteeship vacated within 45 days after such institution or appointment.
23.2 Remedies. Time is of the essence in the performance of this Lease. If any Default occurs, Landlord will have the right, at Landlords election, then or at any later time prior to the cure of such Default, to exercise any one or more of the remedies described below, such remedies to be exercised in accordance with applicable Laws. Exercise of any of such remedies will not prevent the concurrent or subsequent exercise of any other remedy provided for in this Lease or otherwise available to Landlord at law or in equity.
(a) Cure by Landlord . Landlord may, at Landlords option but without obligation to do so, and without releasing Tenant from any obligations under this Lease, make any payment or take any action as Landlord deems necessary or desirable to cure any Default in such manner and to such extent as Landlord deems necessary or desirable. Landlord may do so without additional demand on, or additional written notice to, Tenant and without giving Tenant an additional opportunity to cure such Default. Tenant covenants and agrees to pay Landlord, upon demand, all advances, costs and expenses of Landlord in connection with making any such payment or taking any such action, including reasonable attorneys fees, together with interest at the rate described in Section 3.4, from the date of payment of any such advances, costs and expenses by Landlord.
(b) Termination of Lease and Damages . Landlord may terminate this Lease, effective at such time as may be specified by written notice to Tenant, and demand (and, if such demand is refused, recover) possession of the Premises from Tenant. Tenant will remain liable to Landlord for damages in an amount equal to the Base Rent, Operating
26
Expenses and other Rent which would have been owing by Tenant for the balance of the Term had this Lease not been terminated, less the net proceeds, if any, of any reletting of the Premises by Landlord subsequent to such termination, after deducting all Landlords expenses in connection with such recovery of possession or reletting. Landlord will be entitled to collect and receive such damages from Tenant on the days on which such Rent would have been payable if this Lease had not been terminated. Alternatively, at Landlords option, Landlord will be entitled to recover from Tenant, as damages for loss of the bargain and not as a penalty, an aggregate sum equal to (1) all unpaid Base Rent, Operating Expenses and other Rent for any period prior to the termination date of this Lease (including interest from the due date to the date of the award at the rate described in Section 3.4), plus any other sum of money and damages owed by Tenant to Landlord for events or actions occurring prior to the termination date; plus (2) the present value at the time of termination (calculated at the rate commonly called the discount rate in effect at the Federal Reserve Bank of New York on the termination date) of the amount, if any, by which (A) the aggregate of such Rent payable by Tenant under this Lease that would have accrued for the balance of the Term after termination (with respect to Operating Expenses, such aggregate will be calculated by assuming that Operating Expenses for the calendar year in which termination occurs and for each subsequent calendar year remaining in the Term if this Lease had not been terminated will increase by 3% per year over the amount of Operating Expenses for the prior calendar year), exceeds (B) the amount of such Rent which Landlord will receive for the remainder of the Term from any reletting of the Premises occurring prior to the date of the award, or if the Premises have not been relet prior to the date of the award, the amount, if any, of such Rent which could reasonably be recovered by reletting the Premises for the remainder of the Term at the then-current fair rental value, in either case taking into consideration loss of rent while finding a new tenant, tenant improvements and rent abatements necessary to secure a new tenant, leasing brokers commissions and other costs which Landlord has incurred or might incur in leasing the Premises to a new tenant; plus (3) interest on the amount described in (2) above from the termination date to the date of the award at the rate described in Section 3.4. Landlord hereby acknowledges, however, that Landlord shall attempt to mitigate its damages to the extent required by applicable Laws.
(c) Repossession and Reletting . Landlord may reenter and take possession of all or any part of the Premises, without additional demand or notice, and repossess the same and expel Tenant and any party claiming by, through or under Tenant, and remove the effects of both using such force for such purposes as may be necessary, without being liable for prosecution for such action or being deemed guilty of any manner of trespass, and without prejudice to any remedies for arrears of Rent or right to bring any proceeding for breach of covenants or conditions. No such reentry or taking possession of the Premises by Landlord will be construed as an election by Landlord to terminate this Lease unless a written notice of such intention is given to Tenant. No notice from Landlord or notice given under a forcible entry and detainer statute or similar Laws will constitute an election by Landlord to terminate this Lease unless such notice specifically so states. Landlord reserves the right, following any reentry or reletting, to exercise its right to terminate this Lease by giving Tenant such written notice, in which event the Lease will terminate as specified in such notice. After recovering possession of the Premises, Landlord may, from time to time, but will not be obligated to, relet all or any
27
part of the Premises for Tenants account, for such term or terms and on such conditions and other terms as Landlord, in its discretion, determines. Landlord hereby acknowledges, however, that Landlord shall mitigate its damages to the extent required by applicable Laws. Landlord may make such repairs, alterations or improvements as Landlord considers appropriate to accomplish such reletting, and Tenant will reimburse Landlord upon demand for all costs and expenses, including attorneys fees, which Landlord may incur in connection with such reletting. Landlord may collect and receive the rents for such reletting but Landlord will in no way be responsible or liable for any failure to relet the Premises or for any inability to collect any rent due upon such reletting. Regardless of Landlords recovery of possession of the Premises, Tenant will continue to pay on the dates specified in this Lease, the Rent which would be payable if such repossession had not occurred, less a credit for the net amounts, if any, actually received by Landlord through any reletting of the Premises. Alternatively, at Landlords option, Landlord will be entitled to recover from Tenant, as damages for loss of the bargain and not as a penalty, an aggregate sum equal to (1) all unpaid Base Rent and Operating Expenses and other Rent for any period prior to the repossession date (including interest from the due date to the date of the award at the rate described in Section 3.4), plus any other sum of money and damages owed by Tenant to Landlord for events or actions occurring prior to the repossession date; plus (2) the present value at the time of repossession (calculated at the rate commonly called the discount rate in effect at the Federal Reserve Bank of New York on the repossession date) of the amount, if any, by which (A) the aggregate of such Rent payable by Tenant under this Lease that would have accrued for the balance of the Term after repossession (with respect to Operating Expenses, such aggregate will be calculated by assuming that Operating Expenses for the calendar year in which repossession occurs and for each subsequent calendar year remaining in the Term if Landlord had not repossessed the Premises will increase by 3% per year over the amount of Operating Expenses for the prior calendar year), exceeds (B) the amount of such Rent which Landlord will receive for the remainder of the Term from any reletting of the Premises occurring prior to the date of the award, or if the Premises have not been relet prior to the date of the award, the amount, if any, of such Rent which could reasonably be recovered by reletting the Premises for the remainder of the Term at the then-current fair rental value, in either case taking into consideration loss of rent while finding a new tenant, tenant improvements and rent abatements necessary to secure a new tenant, leasing brokers commissions and other costs which Landlord has incurred or might incur in leasing the Premises to a new tenant; plus (3) interest on the amount described in (2) above from the repossession date to the date of the award at the rate described in Section 3.4. In no event will Landlord be required to pay Tenant any excess amounts if Landlord successfully relets the Premises.
(d) Bankruptcy Relief . Nothing contained in this Lease will limit or prejudice Landlords right to prove and obtain as liquidated damages in any bankruptcy, insolvency, receivership, reorganization or dissolution proceeding, an amount equal to the maximum allowable by any Laws governing such proceeding in effect at the time when such damages are to be proved, whether or not such amount be greater, equal or less than the amounts recoverable, either as damages or Rent, under this Lease.
28
24. LANDLORDS DEFAULT AND TENANTS REMEDIES.
24.1 Default. If Tenant believes that Landlord has breached or failed to comply with any provision of this Lease applicable to Landlord, Tenant will give written notice to Landlord describing the alleged breach or noncompliance. Landlord will not be deemed in default under this Lease if Landlord cures the breach or noncompliance within 20 days after receipt of Tenants notice or, if the same cannot reasonably be cured within such 20-day period, if Landlord in good faith commences to cure such breach or noncompliance within such period and then diligently and continuously pursues the cure to completion. Tenant will also send a copy of such notice to any Lender of whom Tenant has been notified in writing, and such Lender will also have the concurrent right to cure the breach or noncompliance within the period of time described above.
24.2 Remedies. If Landlord breaches or fails to comply with any provision of this Lease applicable to Landlord, and such breach or noncompliance is not cured within the period of time described in Section 24.1, then Tenant may exercise any right or remedy available to Tenant at law or in equity, except to the extent expressly waived or limited by the terms of this Lease.
25. SECURITY DEPOSIT .
25.1 Deposit. Upon execution of this Lease, Tenant will deposit the Security Deposit with Landlord. The Security Deposit will be used solely as security for Tenants faithful and diligent performance of all of Tenants obligations under this Lease, including payment of Rent. The Security Deposit will remain in Landlords possession until credited against Tenants Base Rent obligation pursuant to Section 25.4, and Landlord will not be required to segregate it from Landlords general funds, unless required by Law. Tenant will not be entitled to any interest on the Security Deposit, unless required by Law.
25.2 Use and Restoration. If Tenant fails to perform any of its obligations under this Lease, Landlord may, at its option, use, apply or retain all or any part of the Security Deposit for the payment of (a) any Rent in arrears; (b) any expenses Landlord may incur as a direct or indirect result of Tenants failure to perform; and (c) any other losses or damages Landlord may suffer as a direct or indirect result of Tenants failure to perform. If Landlord so uses or applies all or any portion of the Security Deposit, Landlord will notify Tenant of such use or application and Tenant will, within 10 days after the date of Landlords notice, deposit with Landlord a sum sufficient to restore the Security Deposit to the amount held by Landlord immediately prior to such use or application. Tenants failure to so restore the Security Deposit will constitute a Default.
25.3 Transfers. Tenant will not assign or encumber the Security Deposit without Landlords express written consent. Neither Landlord nor its successors or assigns will be bound by any assignment or encumbrance of the Security Deposit unless Landlord has given its consent. Landlord will have the right, at any time and from time to time, to transfer the Security Deposit to any purchaser or lessee of the Building. Upon any such transfer, Tenant agrees to look solely to the new owner or lessee for the return of the Security Deposit.
25.4 Security Deposit as Base Rent Payment. Landlord and Tenant agree that the Security Deposit will be credited against Tenants Base Rent obligation for the entire first month and part of the second month of the third Lease Year. Pursuant to this Section 25.4, after the
29
second month of the third Lease Year, no Security Deposit shall exist, and Tenant shall have no claim or interest in such funds.
26. BROKERS . Landlord and Tenant represent and warrant that no broker or agent negotiated or was instrumental in negotiating or consummating this Lease except the Brokers. Neither party knows of any other real estate broker or agent who is or might be entitled to a commission or compensation in connection with this Lease. Landlord will pay all fees, commissions or other compensation payable to the Brokers pursuant to separate agreement. Tenant and Landlord will indemnify and hold each other harmless from all damages paid or incurred by the other resulting from any claims asserted against either party by brokers or agents claiming through the other party other than the Brokers.
27. LIMITATIONS ON LANDLORDS LIABILITY . Any liability for damages, breach, or nonperformance by Landlord or arising out of the subject matter of, or the relationship created by, this Lease will be collectible only out of Landlords interest in the Building and the Property and no personal liability is assumed by, or will at any time be asserted against, Landlord, its Affiliates, shareholders, partners, managers, owners or members, Landlords property manager or asset manager, or any of its or their successors or assigns; all such liability, if any, being expressly waived and released by Tenant.
28. NOTICES . All notices required or permitted under this Lease must be in writing and will only be deemed properly given and received (a) when actually given and received, if delivered in person to a party who acknowledges receipt in writing; or (b) one business day after deposit with a private courier or overnight delivery service or overnight delivery, if such courier or service obtains a written acknowledgment of receipt; or (c) two business days after deposit in the United States mails, certified mail with return receipt requested and postage prepaid. All such notices must be transmitted by one of the methods described above to the party to receive the notice at, in the case of notices to Landlord, Landlords Address, and in the case of notices to Tenant, Tenants Address, or, in either case, at such other address(es) as either party may notify the other of according to this Section 28.
29. FORCE MAJEURE .
29.1 Other than for Tenants obligations under this Lease that can be performed by the payment of money (e.g., payment of Rent and maintenance of insurance), whenever a period of time is herein prescribed for action to be taken by either party hereto, such party shall not be liable or responsible for, and there shall be excluded from the computation of any such period of time, 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 such party.
30. MISCELLANEOUS .
30.1 Parking. During the Term, Landlord shall make available to Tenant, at no charge to Tenant during the entire Term, 64 unreserved parking spaces in the parking lot for the Building.
30.2 Binding Effect. Each of the provisions of this Lease will extend to bind or inure to the benefit of, as the case may be, Landlord and Tenant, and their respective heirs, successors and assigns, provided this clause will not permit any transfer by Tenant contrary to the provisions of Article 17.
30
30.3 Complete Agreement; Modification. All of the representations and obligations of the parties are contained in this Lease and no modification, waiver or amendment of this Lease or of any of its conditions or provisions will be binding upon a party unless in writing signed by such party.
30.4 Delivery for Examination. Submission of the form of the Lease for examination will not bind Landlord in any manner, and no obligations will arise under this Lease until it is signed by both Landlord and Tenant and delivery is made to each.
30.5 No Air Rights. This Lease does not grant any easements or rights for light, air, or view. Any diminution or blockage of light, air, or view by any structure or condition now or later erected will not affect this Lease or impose any liability on Landlord.
30.6 Enforcement Expenses. Each party agrees to pay, upon demand, all of the other partys costs, charges and expenses, including the fees and out-of-pocket expenses of counsel, agents, and others retained, incurred in successfully enforcing the other partys obligations under this Lease.
30.7 No Waiver. No waiver of any provision of this Lease will be implied by any failure of either party to enforce any remedy upon the violation of such provision, even if such violation is continued or repeated subsequently. No express waiver will affect any provision other than the one specified in such waiver, and that only for the time and in the manner specifically stated.
30.8 Recording; Confidentiality. Tenant will not record this Lease, or a short form memorandum, without Landlords written consent and any such recording without Landlords written consent will be a Default. Tenant agrees to keep the Lease terms, provisions and conditions confidential and will not disclose them to any other person without Landlords prior written consent. However, Tenant may disclose Lease terms, provisions and conditions to Tenants brokers, accountants, attorneys, managing employees and others in privity with Tenant, the Internal Revenue Service, or as required in Tenants SEC filings, as reasonably necessary for Tenants business purposes or necessary in connection with the enforcement of its rights hereunder, without such prior consent.
30.9 Captions. The captions of sections are for convenience only and will not be deemed to limit, construe, affect or alter the meaning of such sections.
30.10 Invoices. All bills or invoices to be given by Landlord to Tenant will be sent to Tenants Address. Tenant may change Tenants Address by notice to Landlord given according to Section 28. If Tenant fails to give Landlord written notice of its objections within 90 days after receipt of any bill or invoice from Landlord, such bill or invoice will be deemed true and correct and Tenant may not later question the validity of such bill or invoice or the underlying information or computations used to determine the amount stated.
30.11 Severability. If any provision of this Lease is declared void or unenforceable by a final judicial or administrative order, this Lease will continue in full force and effect, except that the void or unenforceable provision will be deemed deleted and replaced with a provision as similar in terms to such void or unenforceable provision as may be possible and be valid and enforceable.
30.12 Jury Trial. LANDLORD AND TENANT WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY LANDLORD OR TENANT
31
AGAINST THE OTHER WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS LEASE, TENANTS USE AND OCCUPANCY OF THE PREMISES OR THE COMMON AREA, OR THE RELATIONSHIP OF LANDLORD AND TENANT. HOWEVER, SUCH WAIVER OF JURY TRIAL WILL NOT APPLY TO ANY CLAIMS FOR PERSONAL INJURY.
30.13 Authority to Bind. The individuals signing this Lease on behalf of Landlord and Tenant represent and warrant that they are empowered and duly authorized to bind Landlord or Tenant, as the case may be, to this Lease according to its terms.
30.14 Only Landlord/Tenant Relationship. Landlord and Tenant agree that neither any provision of this Lease nor any act of the parties will be deemed to create any relationship between Landlord and Tenant other than the relationship of landlord and tenant. Tenant has only a leasehold not subject to levy and sale and not assignable by Tenant except as set forth in this Lease.
30.15 Governing Law. This Lease will be governed by and construed according to the laws of the State of Colorado.
30.16 Exhibits. The following exhibits are attached to and made a part of this Lease by this reference:
Exhibit A - Depiction of Premises
Exhibit B - Occupancy Estoppel Certificate
Exhibit C - Rules and Regulations
Exhibit D - Work Letter
IN WITNESS WHEREOF, this Lease is executed as of the date set forth above.
|
LANDLORD: |
||
|
|
||
|
DaPuzzo
Investment Group LLC, a Colorado
|
||
|
|
||
|
|
||
|
By: |
|
|
|
|
Douglas C. DaPuzzo |
|
|
|
Manager |
|
|
|
||
|
|
||
|
TENANT: |
||
|
|
||
|
Encision, Inc., a Colorado corporation |
||
|
|
||
|
|
||
|
By: |
|
|
|
Name: James A. Bowman |
||
|
Title: President and CEO |
32
STATE OF |
) |
|
) ss: |
COUNTY OF |
) |
The foregoing instrument was acknowledged before me this day of , 2004, by James A. Bowman, as President and CEO of Encision, Inc. a Colorado corporation.
Witness my hand and official seal.
My commission expires: .
|
|
|
|
Notary Public |
33
STATE OF COLORADO |
) |
|
) ss: |
COUNTY OF BOULDER |
) |
The foregoing instrument was acknowledged before me this day of , 2004, by Douglas C. DaPuzzo, as Manager of DaPuzzo Investment Group, LLC, a Colorado limited liability company.
Witness my hand and official seal.
My commission expires: .
|
|
|
|
Notary Public |
34
Exhibit A
DEPICTION OF PREMISES
A-1
Exhibit B
OCCUPANCY ESTOPPEL CERTIFICATE
THIS OCCUPANCY ESTOPPEL CERTIFICATE (this Certificate) is made upon this day of , 2004, by ENCISION, INC., a Colorado corporation (the Tenant), with respect to and forming a part of that certain Lease Agreement (the Lease) dated , 2004, between DaPuzzo Investment Group, LLC, a Colorado limited liability company (the Landlord) and Tenant for the space known as Suites A and B (the Premises) within the building located at 6797 Winchester Circle, Boulder, Colorado (the Building).
In consideration of the mutual covenants and agreements stated in the Lease, and intending that this Certificate may be relied upon by Landlord and any prospective purchaser or present or prospective mortgagee, deed of trust beneficiary, or ground lessor of all or a portion of the Building, Tenant certifies as follows:
1. Except for those terms expressly defined in this Certificate, all initially capitalized terms will have the meanings stated for such terms in the Lease.
2. The Commencement Date occurred on and the Expiration Date will occur on .
3. Tenants obligation to make monthly payments of Base Rent under the Lease began (or will begin) on and is paid current through the date of this Certificate.
4. Tenants obligation to make monthly estimated payments of Additional Rent under the Lease began (or will begin) on and is paid current through the date of this Certificate.
5. Tenant has accepted the Premises, and all leasehold improvements and other work required to be performed by Landlord under the Lease (excluding latent defects and punch list items) have been satisfactorily completed.
6. Tenant has no existing offset, credit, or defense to the payment of any Rent.
IN WITNESS WHEREOF, Tenant has executed this Certificate as of the day and year first written above.
|
TENANT: |
|||
|
|
|||
|
ENCISION,
INC., a Colorado
|
|||
|
|
|||
|
|
|||
|
By: |
|
||
|
Name: |
|
||
|
Title: |
|
||
B-1
Exhibit C
RULES AND REGULATIONS
Tenant covenants and agrees to comply with the following rules and regulations as they may be modified or amended during the Term. Landlord will not be responsible to Tenant for the nonperformance of such rules and regulations by any other tenant or occupant of the Building.
1. No awning or other projections shall be attached to the outside walls of the Building without, in each instance, the prior written consent of Landlord, which consent shall not be unreasonably withheld.
2. No aerial, dish, antenna or telecommunications tower shall be erected by Tenant on the roof or exterior walls of the Building, or on the grounds of the Building without, in each instance, the prior written consent of Landlord, which shall not be unreasonably withheld. Any such item so installed without such written consent shall be subject to removal without notice at any time.
3. No loud speakers, television sets, phonographs, radios, musical instruments or other devices shall be used by Tenant in a manner so as to be heard or seen off the Building without the prior written consent of Landlord.
4. Tenant shall not make or permit any noise, odor or gases which Landlord deems objectionable to emanate from the Premises. Tenant shall not suffer, allow, or permit any vibration, light, or other effect to emanate from the Premises, or from any machine or other installation therein, or otherwise suffer, allow, or permit the same to constitute a nuisance or otherwise interfere with the safety, comfort, or convenience of Landlord or any of the other occupants of the Gunbarrel Technical Center. Upon notice by Landlord to Tenant that any of the aforesaid is occurring, Tenant agrees to forthwith remove or control the same.
5. During the last six months of this Lease, or any renewal or extension thereof, or at any time that Tenant may be in Default hereunder, Landlord shall have the right, upon reasonable advance notice, to enter the Premises at all reasonable times during usual business hours for the purpose of showing the same to prospective tenants. Landlord may also place signs on the exterior of the Building which are visible from the exterior off the Building, for the purpose of advertising the availability of the Premises for lease.
6. Tenant shall not permit its employees, licensees or invitees, to smoke any tobacco products in the vicinity of any entrance to the Building. Landlord may establish an outdoor smoking area in the rear of the Building and Tenant shall take all actions necessary to ensure that its employees, licensees and invitees limit smoking to such designated area.
C-1
Exhibit 31.1
CERTIFICATIONS
I, John R. Serino, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Encision Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this quarterly report;
4. The small business issuer other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the small business issuer disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the small business issuers internal control over financial reporting that occurred during the small business issuers most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the small business issuers internal control over financial reporting;
5. The small business issuers other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuers auditors and the audit committee of small business issuers board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuers ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuers internal control over financial reporting.
Dated: August 12, 2004. |
|
|
|
|
|
|
/s/ John R. Serino |
|
|
|
|
|
John R. Serino |
|
|
President and Chief Executive Officer |
1
Exhibit 31.2
CERTIFICATIONS
I, Marcia McHaffie, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Encision Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this quarterly report;
4. The small business issuer other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the small business issuer disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;; and
c) disclosed in this report any change in the small business issuers internal control over financial reporting that occurred during the small business issuers most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the small business issuers internal control over financial reporting;
5. The small business issuers other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuers auditors and the audit committee of small business issuers board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuers internal control over financial reporting.
Dated: August 12, 2004. |
|
|
|
|
|
|
/s/ Marcia McHaffie |
|
|
|
|
|
Marcia McHaffie |
|
|
Controller and Principal Accounting Officer |
1
Exhibit 32.1
I, John R. Serino, President and Chief Executive Officer of Encision Inc. (the Company), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to the best of my knowledge:
the Quarterly Report on Form 10-QSB of the Company for the quarterly period ended June 30, 2004 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: August 12, 2004 |
|
|
|
|
|
|
/s/ John R. Serino |
|
|
|
|
|
John R. Serino |
|
|
President and Chief Executive Officer |
I, Marcia McHaffie, Controller and Principal Accounting Officer of Encision Inc. (the Company), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to the best of my knowledge:
the Quarterly Report on Form 10-QSB of the Company for the quarterly period ended June 30, 2004 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: August 12, 2004 |
|
|
|
|
|
|
/s/ Marcia McHaffie |
|
|
|
|
|
Marcia McHaffie |
|
|
Controller and Principal Accounting Officer |
1