U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended __June 30, 1998__.
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File Number: 001-11773
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PACIFIC RESEARCH & ENGINEERING CORPORATION
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(Exact name of small business issuer as specified in its charter)
California 95-2638420
--------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) identification No.)
2070 Las Palmas Drive, Carlsbad, California, 92009
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(Address of principal executive offices and zip code)
(760) 438-3911
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
_____2,305,500 shares of Common Stock, No Par Value as of June 30, 1998_____
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Pacific Research & Engineering Corporation
Form 10-QSB/A
Table of Contents
Page
Part I: Financial Information
Item 1: Financial Statements
Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997..................................3
Statements of Income for the Three months and
Six months Ended June 30, 1998 and 1997 (unaudited)....4
Statements of Cash Flows for the Six months
Ended June 30, 1998 and 1997 (unaudited)...............5
Notes to Condensed Financial Statements (unaudited)......6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations....................7
Part II: Other Information
Item 1: Legal Proceedings.......................................14
Item 2: Changes in Securities...................................14
Item 3: Defaults Upon Senior Securities.........................14
Item 4: Submissions of Matters to a Vote of Security Holders....14
Item 5: Other Information.......................................14
Item 6: Exhibits and Reports on Form 8-K........................14
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
PACIFIC RESEARCH & ENGINEERING CORPORATION
CONDENSED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
June 30, 1998 December 31,1997
------------- ----------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 500 $ -
Investments in securities - 185,251
Accounts receivable, net 1,882,332 844,048
Contracts in progress 410,525 456,139
Inventories, net (Note 1) 3,159,910 3,014,183
Deferred taxes 129,550 128,000
Prepaid expenses 510,764 402,225
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TOTAL CURRENT ASSETS 6,093,581 5,029,846
PROPERTY AND EQUIPMENT, net 1,503,548 1,352,857
OTHER ASSETS 2,158,505 2,287,149
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$ 9,755,634 $ 8,669,852
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Overdraft $ 195,057 $ 144,701
Accounts payable 1,442,571 882,155
Accrued expenses 243,789 328,724
Customer advances 415,931 860,593
Line of credit 1,424,342 1,300,000
Note payable-current portion 250,000 -
Capital lease obligations - current portion 10,250 30,534
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TOTAL CURRENT LIABILITIES 3,981,940 3,546,707
DEFERRED TAX LIABILITY - 56,000
LONG TERM DEBT, net of current portion 437,202 -
CAPITAL LEASE OBLIGATIONS, net of
current portion 18,967 18,968
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TOTAL LIABILITIES 4,438,109 3,621,675
SHAREHOLDERS' EQUITY
Common stock, no par value, 25,000,000
shares authorized;
2,305,500 shares issued and outstanding 4,126,392 4,126,392
Additional paid-in capital 50,000 50,000
Net unrealized gain on investment
in securities - 18,438
Retained earnings 1,141,133 853,347
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TOTAL SHAREHOLDERS' EQUITY 5,317,525 5,048,177
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$ 9,755,634 $ 8,669,852
============= =============
The accompanying notes are integral part of these financial statements
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PACIFIC RESEARCH & ENGINEERING CORPORATION
CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTHS AND
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
NET SALES $4,253,033 $3,312,316 $8,651,339 $5,603,520
COST OF SALES 2,752,509 1,827,688 5,484,170 3,123,626
----------- ----------- ----------- -----------
Gross profit 1,500,524 1,484,628 3,167,169 2,479,894
OPERATING EXPENSES
General and administrative 488,593 418,640 880,630 813,705
Selling and marketing 577,849 432,326 1,159,970 795,891
Research, development
and engineering 303,766 367,080 584,354 549,500
Depreciation and amortization 119,486 62,211 238,892 121,600
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,489,694 1,280,257 2,863,846 2,280,696
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 10,830 204,371 303,323 199,198
OTHER INCOME (EXPENSES)
Interest, net (43,263) 18,996 (72,437) 12,025
Gain on sale of assets 17,971 - 34,333 -
Other 1,455 1,010 23,366 174
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (23,837) 20,006 (14,738) 12,199
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES (13,007) 224,377 288,585 211,397
Income tax benefit (expense) 64,601 (65,212) (800) (66,012)
----------- ----------- ----------- -----------
NET INCOME $ 51,594 $ 159,165 $ 287,785 $ 145,385
=========== =========== =========== ===========
Earnings per average
common share $ 0.02 $ 0.07 $ 0.12 $ 0.06
=========== =========== =========== ===========
Fully diluted earnings per
average common share $ 0.02 $ 0.07 $ 0.12 $ 0.06
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
(Exhibit 11.1-EPS) 2,343,818 2,305,500 2,343,818 2,305,500
=========== =========== =========== ===========
The accompanying notes are integral part of these financial statements
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PACIFIC RESEARCH & ENGINEERING CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
June 30,
1998 1997
----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 287,785 $ 145,385
Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities:
Depreciation and amortization 238,892 121,600
Gain on investment in securities (18,438) -
Changes in operating assets and liabilities:
Accounts receivable (1,038,284) (303,664)
Inventory (145,727) (1,062,185)
Prepaid expenses and other assets (209,435) (797,761)
Contracts in progress 45,614 -
Accounts payable 560,416 846,666
Deferred income taxes (57,550) 43,750
Accrued expenses (84,935) 3,312
Customer advances (444,662) 597,104
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (866,323) (405,793)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (284,583) (271,868)
Purchases of software development costs 124,540 -
Proceeds from sales of investments 185,251 (37,507)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 25,208 (309,375)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments on) notes payable
and lines of credit 811,544 193,000
Overdraft 50,356 -
Payments under capital lease obligations (20,285) (17,608)
Distributions to shareholders - (36,047)
Deferred offering costs, netted against
offering proceeds - (34,513)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 841,615 104,832
----------- -----------
NET INCREASE (DECREASE) IN CASH 500 (610,336)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 610,857
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 500 $ 521
=========== ===========
The accompanying notes are integral part of these financial statements
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PACIFIC RESEARCH & ENGINEERING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Inventories
Inventories at June 30, 1998 and at December 31, 1997 are summarized as
follows:
June 30, 1998 December 31, 1997
----------- -----------
(unaudited)
Raw materials $1,694,756 $1,666,885
Work-in-process 463,797 676,630
Finished goods 1,026,357 695,668
----------- -----------
3,184,910 3,039,183
Less reserve for obsolescence (25,000) (25,000)
----------- -----------
Inventories, net $3,159,910 $3,014,183
=========== ===========
The accompanying notes are integral part of these financial statements
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Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.
FORWARD-LOOKING INFORMATION - GENERAL
THIS REPORT ON FORM 10-QSB CONTAINS A NUMBER OF FORWARD-LOOKING
STATEMENTS, WHICH REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE
EVENTS AND FINANCIAL PERFORMANCE INCLUDING STATEMENTS REGARDING THE COMPANY'S
STRATEGY, PRODUCTS UNDER DEVELOPMENT AND PLANS FOR EXPANSION. THESE FORWARD-
LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE
ANTICIPATED. IN THIS REPORT, THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS,"
"INTENDS," "FUTURE," "PLANS," "CONTINUE," "WILL," AND SIMILAR EXPRESSIONS
IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS
OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE
THESE FORWARD-LOOKING STATEMENTS, TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY
ARISE AFTER THE DATE HEREOF.
ADDITIONALLY, THESE STATEMENTS ARE BASED ON CERTAIN ASSUMPTIONS THAT MAY PROVE
TO BE ERRONEOUS AND ARE SUBJECT TO CERTAIN RISKS, INCLUDING BUT NOT LIMITED TO,
THE COMPANY'S ABILITY TO INTRODUCE NEW PRODUCTS, THE CONCENTRATION OF THE
COMPANY'S CURRENT PRODUCTS IN A RELATIVELY NARROW SEGMENT OF THE PROFESSIONAL
AUDIO MARKET, TECHNOLOGICAL CHANGE AND INCREASED COMPETITION IN THE INDUSTRY.
THE COMPANY'S ABILITY TO MANAGE ITS RAPID GROWTH, ITS LIMITED PROTECTION OF
TECHNOLOGY AND TRADEMARKS, THE COMPANY'S DEPENDENCE ON LIMITED SUPPLIERS,
REPRESENTATIVES, DISTRIBUTORS, AND ITS DEPENDENCE ON CERTAIN KEY PERSONNEL
WITHIN THE COMPANY. ACCORDINGLY, ACTUAL RESULTS MAY DIFFER, POSSIBLY
MATERIALLY, FROM THE PREDICTIONS CONTAINED HEREIN.
OVERVIEW
THE COMPANY
Since its incorporation in 1969, Pacific Research & Engineering Corporation
("PR&E" or the "Company") has been the market-proven technology leader in the
field of premium-quality audio products and studio design services for radio
and television broadcasters. These products and services include on-air
consoles for radio and television stations, radio production consoles and
workstations, and peripheral products as well as technical furniture and
studio design/integration services for turnkey systems. Having become the
brand-name of choice for U.S. major-market broadcasters, the Company has begun
leveraging its high-quality image and brand superiority into international
marketplaces as well.
STRATEGY
* MARKETING CHANNEL DEVELOPMENT. The Company's products and services are
being aggressively marketed worldwide through an expanding group of select
international distributors, and has increased staff and promotional activities
designed to increase international business. Concurrently, the Company has
increased its advertising activities and broadened its domestic sales force in
an effort to more effectively reach a larger target market. The Company is also
focusing sales and marketing efforts specifically on the nation's largest
broadcast groups to better serve these important corporate clients.
* HORIZONTAL EXPANSION FOR TOP-MARKET BROADCASTERS. The Company's vision for
the future of radio and television broadcasting includes new technology products
capitalizing on increasing marketplace demands for digital technology, such as
computer controlled air and production consoles and digital audio processing and
interfacing devices. The first product in this category, the Integrity TM
Digital Broadcast Console (introduced during the Audio Engineering Society
("AES") trade-show in Munich, Germany in 1997) now leads its field as the U.S.'s
best-selling digital audio console for radio, selling more units in its first
twelve months of production than any other brand. Company management believes
that attaining leadership in this emerging market segment, while maintaining
dominance in its existing market segment, is vital to future success in other
markets.
* MIDDLE MARKET PRODUCTS AND SERVICES. The Company is currently developing
products and services to leverage its brand within market segments the Company
has not historically targeted. The Company's
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recently expanded direct sales force and select international dealers will sell
products for this market segment, such as AirWave TM, a low cost on-air
broadcast console which began shipping during March 1997. The Company intends
to further augment its offerings with other low-cost products, as well as design
and integration services aimed at serving the needs of smaller market
broadcasters.
PRODUCTS AND SERVICES
The Company's mission is to be the preeminent service/solution provider for the
domestic and international broadcasting industries. Currently, the Company's
products and services are divided into three categories: Audio Control
Consoles, Manufactured Peripheral Equipment and Systems Products and Services.
The Company finds its equipment and services to be consistently ranked among the
highest in the industry in quality, reliability, ease of use, maintenance, and
customer service.
1. Audio Control Consoles are equipment essential to the broadcast
environment. They are the single point for final control of the "on-air"
product in nearly all radio stations, and perform fundamental audio mixing,
routing and monitoring duties. The Company manufactures a variety of consoles,
covering a wide range of applications designed to meet the needs of virtually
all major, middle and small market radio and television broadcasters.
2. Manufactured Peripheral Equipment includes distribution amplifiers,
audio switchers, digital audio workstations, studio turrets and control panels.
All of which are integral parts of the broadcast environment and are often in
use on a 24-hour-per-day, seven-days-per-week basis. The Company sells these
products both independently and as part of system design and integration.
3. System Products and Services include design, engineering and fabrication
services, which range from providing a single studio to a complete broadcasting
facility. As part of the system integration business, the Company is a
distributor for third-party manufacturers of supporting peripheral equipment.
However, the Company is not materially dependent on any third-party
manufacturer for which it distributes peripheral equipment.
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RESULTS OF OPERATIONS
The following table sets forth the percentage of revenue represented by certain
items in the Company's Statements of Operations for the periods indicated:
Six Months Ended Three Months Ended
June 30 June 30
------------------------- -----------------------
1998 1997 Percent 1998 1997 Percent
(unaudited) Incr.(Decr.) (unaudited) Incr.(Decr.)
------------- ----------- ------------ ----------
Net sales 100.0% 100.0% 54.4% 100.0% 100.0% 28.4%
Cost of sales 63.4% 55.7% 75.5% 64.7% 55.2% 50.6%
------ ------ ----- ------ ------ -----
Gross profit 36.6% 44.3% 27.7% 35.3% 44.8% 1.1%
Expenses:
General and administrative 10.2% 14.5% 8.2% 11.5% 12.6% 16.7%
Selling and marketing 13.4% 14.2% 45.7% 13.6% 13.1% 33.7%
Research and engineering 6.8% 9.8% 6.3% 7.1% 11.1% (17.2%)
Depreciation and amortization 2.8% 2.2% 96.4% 2.8% 1.9% 92.1%
----- ----- ----- ----- ----- -----
Total operating expenses 33.1% 40.7% 25.6% 35.0% 38.7% 16.4%
Income loss from operations 3.5% 3.5% 52.2% 0.3% 6.2% 94.6%
---- ---- ----- ----- ----- -----
Other income (expenses):
Interest income (expense) (0.8%) 0.2% N/A (1.0%) 0.5% N/A
Gain on sale of asset 0.4% 0.0% N/A 0.4% 0.0% N/A
Other 0.3% 0.0% N/A 0.0% 0.0% N/A
---- ---- ----- ----- ----- -----
Total other income (expense) (0.1%) 0.2% N/A (0.6%) 0.5% N/A
Income before income taxes 3.3% 3.8% 36.5% (0.3%) 6.8% (105.8%)
Provision for income taxes 0.0% 1.2% N/A 1.5% (2.0%) N/A
---- ---- ----- ----- ----- -----
Net income 3.3% 2.6% 97.9% 1.2% 4.8% 67.6%
NA = NOT MEANINGFUL AND/OR IN EXCESS OF 100%
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997.
Sales increased $3,047,000 or 54.4%, from $5,604,000 for the six months ended
June 30, 1997 to $8,651,000 for the six months ended June 30, 1998. The
Company believes the sales increase to be a sign of the continuing growth of
the domestic and international broadcasting markets, and the Company's
increasing share of those markets. There can be no assurance, however, that the
Company's revenues will continue to increase or will be maintained at current
levels.
Cost of sales increased $2,360,000 or 75.5% from $3,124,000 to $5,484,000,
reflecting increased sales, and increased as a percentage of revenues from 55.7%
to 63.4% for the six months ended June 30, 1998 compared to the same period in
1997. The increase in cost as a percentage of revenues is a result of the
sales mix experienced in the six months ended June 30, 1998, consisting of
larger than usual sales of lower margin distributor products.
Gross profit increased $687,000 (from $2,480,000 to $3,167,000) or 27.7%
primarily due to the increase in sales, and decreased as a percentage of revenue
from 44.3% to 36.6% for the six months ended June 30, 1997 compared to
the six months ended June 30, 1998.
General and administrative expenses increased approximately $67,000 or 8.2% for
the comparable periods ($881,000 in 1998, compared to $814,000 in 1997). The
increase reflects the Company's sensitivity to the growing organization
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needed to support the market requirements. As a percentage of revenue, general
and administrative expenses decreased 4.3%, from 14.5% in 1997 to 10.2% in 1998.
Selling and marketing expenses increased $364,000 or 45.7% from $796,000 in
1997 to $1,160,000 in 1998, primarily due to the expansion of sales and
marketing support staff to better address new market trends and dynamics.
Selling and marketing expenses as a percentage of revenue decreased 0.8% from
14.2% in the comparable period in 1997 to 13.4% during the six months ended
June 30, 1998.
Research and engineering expenses increased $35,000 or 6.3% from $549,000 for
the six months ended June 30, 1997 to $584,000 for the six months ended June
30, 1998. Research and engineering expenses decreased as a percentage of
revenue, from 9.8% for the six months ended June 30, 1997 to 6.8% for the six
months ended June 30, 1998. The Company believes that continuing research and
development of new products is essential to maintaining leadership in core
markets.
Capitalized research and engineering costs, pursuant to SFAS 86, for the six
months ended June 30, 1998 are approximately $270,000. The Company capitalized
such costs in the amount of $612,000 for the comparable period in 1997.
Income from operations increased $104,000, from $199,000 for the six months
ended June 30, 1997 to $303,000 for the six months ended June 30, 1998
reflecting the 27.7% increase in gross margin offset by the 25.6% increase in
operating expenses for the comparable period. Operating income, as a
percentage of revenue, remained at 3.5% for the six months ended June 30,
1997 and 1998.
Net interest expense increased $84,000 from the comparable period, reflecting
an increase in borrowings on the line of credit and the establishment of long
term debt. The Company has liquidated its entire investment portfolio as of
June 30, 1998 and recognized a gain of approximately $16,000 for the six months
ended June 30, 1998.
The combined results, as discussed above, yielded net income before taxes of
$289,000 for the six months ended June 30, 1998 compared to $211,000 for the
six months ended June 30, 1997.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998.
Sales increased $941,000 or 28.4%, from $3,312,000 for the three months ended
June 30, 1997 to $4,253,000 for the three months ended June 30, 1998. The
Company believes the sales increase to be the result of continued opportunities
in all aspects of the domestic and international broadcasting industries.
Cost of sales increased $925,000 or 50.6% from $1,828,000 to $2,753,000 due to
the sales increase, and increased as a percent of revenues by 9.5% for the
three months ended June 30, 1998 compared to the same period in 1997. The
increase in cost as a percentage of revenues is a result of the sales mix
experienced in the first half ended June 30, 1998, consisting of larger than
usual sales of distributor-type products.
Gross profit increased slightly from $1,485,000 as of June 30, 1997 to
$1,501,000 for the same period ended 1998 or 1.1% due primarily to the increase
in sales, and decreased as a percentage of revenue from 44.8% to 35.3%, for the
three months ended June 30, 1997 compared to the three months ended June 30,
1998 due to the higher cost of sales as described above.
General and administrative expenses increased approximately $70,000, or 16.7%
for the comparable periods ($419,000 in 1997, compared to $489,000 in 1998),
necessitated by the Company's increased pursuit of the widening range of
opportunities within the industry. As a percentage of revenue, however, general
and administrative expenses decreased 1.1%, from 12.6% in 1997 to 11.5% in 1998.
Selling and marketing expenses increased $146,000 or 33.7% from $432,000 in
1997 to $578,000 in 1998 due, primarily, to additional sales professionals and
advertising costs. The Company expects to take advantage of the growing radio
market, and will continue to invest prudently in this area to maximize market
penetration. Selling and marketing expenses as a percentage of revenue
increased 0.5% from 13.1% in 1997 to 13.6% during the three months ended June 30
1998.
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Research and engineering expenses decreased $63,000 or 17.2% from $367,000
for the three months ended June 30, 1997 to $304,000 for the three months
ended June 30, 1998. The primary reason for the decrease is that,
during the three months ended June 30, 1998, the Company refocused the
engineering on end-support. The Company believes this categorization of costs
more accurately reflects the actual department in which they are incurred.
Capitalized research and engineering costs, pursuant to Statement of Financial
Accounting Standards No. 86, for the three months ended June 30, 1998 are
approximately $135,000. The Company capitalized such costs in the amount of
$297,000 for the comparable period in 1997. Research and engineering expenses
decreased, as a percentage of revenue, from 11.1% for the three months ended
June 30, 1997 to 7.1% for the three months ended June 30, 1998 due to the
decrease in development activities discussed above.
Income from operations decreased $193,000 or 94.6% from $204,000 for the three
months ended June 30, 1997 to $11,000 for the three months ended June 30,
1998 reflecting the 9.5% increase in cost of sales, due primarily to the volume
increase, and 16.4% increase in operating expenses for the comparable periods.
Operating income, as a percent of revenue, decreased by 5.9% from 6.2% for the
three months ended June 30, 1997 to 0.3% for the three months ended June 30,
1998.
Net interest expense increased $63,000 or 331.6% over the comparable period,
reflecting an increase in borrowings pursuant to debt obligations and the line
of credit, and a decrease in interest bearing investments.
The combined results, as discussed above, yielded a net loss before taxes of
($13,000) for the three months ended June 30, 1998 compared to a net income
before taxes of $224,000 for the three months ended June 30, 1997. This
decrease is directly attributable to changes in the mix of products sold during
this period.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its cash requirements through cash flows
from operations, bank borrowings, and an equity financing. Under the terms of
some project contracts, the Company requires deposits upon project acceptance,
then invoices the customer based upon the completion of specified conditions and
/or milestones. Depending upon the stage of completion and the size of the
contract, it may be necessary for the Company, from time to time, to finance a
portion of its working capital needs until the realization of income from
milestones has been achieved. Additionally, developing and launching new
products has exerted additional pressure on the working capital requirements of
the Company.
The Company completed its initial public offering May 28, 1996 and realized net
proceeds of approximately $4.1 million after underwriting discounts and
offering expenses. As of June 30, 1998 the Company had no cash or cash
equivalents and had incurred an overdraft of approximately $195,000.
The Company's current ratio at June 30, 1998 was 1.5 compared to 1.4 at
December 31, 1997. The increase was primarily attributable to an increase in
accounts receivable and current portion of a new note payable, offset by
increases in accounts payable and overdrafts as well as a decrease in customer
advances. For the same reasons, the Company experienced an increase in working
capital of approximately $629,000 from $1,483,000 at December 31, 1997 to
$2,112,000 at June 30, 1998.
The Company's operating activities consumed cash of $866,000 for the six months
ended June 30, 1998, primarily due to increases in: accounts receivable
($1,038,000), prepaid expenses and other assets ($209,000), and decreases in:
customer advances ($445,000). These were offset by an increase in accounts
payable ($560,000).
Cash provided by investing activities for the six months ended June 30, 1998
totaled $25,000. Such investing activities included purchases of property and
equipment of ($284,000), offset by software development costs of $124,000 and
proceeds from the sale of investments of $185,000
Cash provided by financing activities was $842,000 for the six months ended
June 30, 1998. This consisted primarily of the proceeds from borrowings on the
Company's line of credit and long term debt of $750,000.
As of December 31, 1997 the Company had withdrawn a significant portion of its
revolving line of credit in the amount of $1,500,000. Also, the Company was in
violation with respect to certain related loan convenants. The Company's loan
convenants as of December 31, 1997 were as follows: a tangible net worth
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in excess of $3,750,000 as of the end of each fiscal quarter and $4,000,000 as
of the end of the fiscal year; a quick ratio of 1.25 to 1.00; a minimum balance
of cash and marketable securities of $1,000,000; and total liabilities to
tangible net worth of not greater than .60 to 1.00. The Company, as of December
31, 1997, was in violation with respect to two of the four covenants. The
Company's lending institution agreed to waive, in all respects, the convenant
violations, and the Company renegotiated and modified its credit facility and
loan covenants as follows: on March 11, 1998 the Company secured a fully
amortizing term loan in the principal amount of $750,000. The term loan is for
a duration of 36 months and carries an interest rate of LIBOR plus three
percent. The revolving line remains at $1,500,000, with a one-year renewal
option and interest at LIBOR plus two percent. The convenants have been
modified as follows: minimum tangible net worth of $3,500,000; a current ratio
of 1.50 to 1.00; cash flow to debt service ratio of 1.50 to 1.00; and total
liabilities to tangible net worth not greater than 1.25 to 1.00. The above
loans are secured by substantially all of the assets of the Company.
Although the Company cannot accurately anticipate the effects of inflation, the
Company does not believe inflation has had or is likely to have a material
effect on its results of operations or liquidity.
Assuming no material changes in the Company's operating plans, the Company
believes that cash generated from operations and cash available under its
current credit line will be sufficient to meet the Company's working capital and
capital expenditure requirements for at least the next twelve months.
Nevertheless, the Company may seek additional debt or equity financing to meet
these requirements. In addition, in the event that the Company elects to
acquire complementary businesses, products or technologies, the Company may
require additional funding prior to that time. There can be no assurance that
the Company will be able to obtain such financing at favorable terms or at all.
NEWLY ISSUED FINANCIAL REPORTING PRONOUNCEMENTS
In February 1997, the FASB issued Statement of Financial Accounting Standards
128, "Earnings per Share" (SFAS 128). The new standard revises the disclosure
requirements of earnings per share, simplifies the computation of earnings per
share and increases the comparability of earnings per share on an international
basis. SFAS 128 will be effective for the Company for the year ending December
31, 1997. The Company has determined that the impact in adopting SFAS 128 is
not material to its financial statements.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income". SFAS
130, which is effective for fiscal years beginning after December 15, 1997 and
requires restatement of earlier periods presented, establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income is defined as
the change in equity of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. The implementation of
SFAS 130 for the fiscal quarter ended June 30, 1998, did not have a material
effect on the Company's results of operations for the current or prior periods.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131, which is effective for fiscal
years beginning after December 15, 1997 and requires restatement of earlier
periods presented, establishes standards for the way that a public enterprise
reports information about key revenue-producing segments in the annual
financial statements and selected information in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. The implementation of SFAS 131 for the
fiscal quarter ended June 30, 1998, did not have a material effect on the
Company's reporting disclosures for the current or prior periods.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 establishes the
accounting guidance for the capitalization of certain internal-use software
costs once certain criteria are met. This accounting standard will be
effective for the Company beginning January 1, 1999. The adoption of SOP 98-1
is not expected to have a material impact on the Company.
In April 1998, the American Institute of Certified Public Accountants issued
("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5
guidance on the financial reporting of start-up activities and
organization costs to be expensed as incurred. This statement will be effective
for the Company's financial statements for the year ended December 31, 1999.
The Company is currently evaluating SOP 98-5, but does not expect it to have a
material impact on its financial statements.
<Page 12>
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FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company's expense levels have increased since its initial public offering in
May of 1996, as it added personnel and infrastructure in anticipation of
revenue growth. The Company anticipates this growth will come from new product
offerings and increased demand overall, created by the continuing mergers and
acquisition activities in the radio broadcast industry. The customer base has
decreased in numbers, but increased in relative size. The Company has
benefited in nearly every instance of one customer merging with another. This
can be attributed both to the Company's leadership role within the industry and
successful history with nearly all major customers. In addition, the timing of
revenue is influenced by a number of other factors, including the timing of
individual orders and shipments, industry trade-shows, changes in product
development and sales and marketing expenditures, production limitations and
sales activity. The Company's operating expenses are based on anticipated
revenue levels and a high percentage of the Company's expenses are relatively
fixed. Therefore, variations in the timing of revenue recognition could
possibly cause fluctuations in operating results from quarter to quarter and
could result in unanticipated quarterly earnings shortfalls or losses.
Changing technologies and new product introductions characterize the markets
for the Company's products, services and systems. The Company's future success
will depend in part upon its continued ability to react to, and anticipate
changing requirements and preferences within its target markets. In addition,
there can be no assurance that products or technologies developed by others will
not render the Company's products or technologies obsolete and therefore non-
competitive.
To date, the Company's primary market success has been in the radio industry
segment of the professional audio market. In order for the Company to grow,
the Company believes that it must continue to widen both its share of historic
markets, and within markets driven by emerging methods of content distribution.
There can be no assurance that the Company will be able to compete favorably in
any other market segments. The Company's inability to compete favorably could
have an adverse effect on its business and results of operations. The markets
for the Company's products are intensely competitive and characterized by
significant price competition. The Company believes that its ability to compete
depends upon elements both within and outside its control, including the success
and timing of new product development and introduction by the Company and its
competitors, product performance and price, distribution, availability of leases
or other financing alternatives and customer support.
The Company generally relies on a combination of trade secret, copyright law
and trademark law, contracts and technical measures to establish and protect
its proprietary rights in its products and technologies. However, the Company
believes that such measures provide only limited protection of its proprietary
information, and there is no assurance that such measures will be adequate to
prevent misappropriation. In addition, significant and protracted litigation
may be necessary to protect the Company's intellectual property rights, to
determine the scope of the proprietary rights of others or to defend against
claims of infringement. There can be no assurance that third-party claims
alleging infringement will not be asserted against the Company in the future.
Any such claims could have an adverse effect on the Company's business and
results of operations.
As a result of these and other factors, the Company has experienced, from time
to time, quarterly fluctuations in operating results. The Company anticipates
that these fluctuations could reoccur in future periods. There can be no
assurance that the Company will be successful in maintaining or improving its
profitability or avoiding losses in any future period. Further, it is likely
that in some future period the Company's net revenues or operating results will
be below the expectations of public market securities analysts and investors.
In such event, the price of the Company's Common Stock would likely be
adversely affected.
Following are steps management has taken to improve operations for the next
twelve months: (1) Focusing its sales and marketing efforts on expanding its
domestic and international opportunities. (2) Introducing new solutions to
respond to new trends and customer demands. (3) Enhance the core competencies
already
<Page 13>
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within the Company's manufacturing operations, while taking advantage of
skills in place at key suppliers, thus forming key partner relationships. (4)
Restructuring the Company to exhibit a market/customer driven operation, thus
targeting new business and service needs in the expanding international and
domestic marketplaces, and (5) refocusing the Company's organization to
positively impact overhead and operating expenses. There can be no assurance
the Company can continue to attain increasing profitable operations in the
future.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
(a) Schedule Form 14(a) Proxy Statement, dated April 30, 1998
Annual Shareholders Meeting, June 25, 1998
(b) Proposal to Amend 1996 Omnibus Stock Plan to increase the
shares reserved for issuance by 200,000 was passed as
follows: Votes for: 1,336,933 Votes against: 56,080
Votes withheld: 0 Abstentions: 12,089
Broker non-votes: 0
(c) To ratify the appointment of Harlan & Boettger, LLP as the
independent accountants for the Company passed as follows:
Votes for: 1,988,818 Votes against: 3,180
Votes withheld: 0 Abstentions: 12,089
Broker non-votes: 0
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The exhibits listed on the accompanying index immediately
following the signature page are filed as part of this
report.
(b) Reports on Form 8-K.
None.
<Page 14>
- ------------------------------------------------------------------------------
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC RESEARCH & ENGINEERING CORP.
By _______/S/ Jack Williams_______
Jack Williams
Chairman and Chief Executive Officer
<Page 15>
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EXHIBIT INDEX
Exhibit
Number Exhibit Title
11.1 Calculation of Earnings Per Share
EXHIBIT 11.1 Statement re: Computation of Per Share Earnings (Loss)
Six months Ended
June 30,
1998 1997
----------- -----------
PRIMARY
Weighted average common shares outstanding 2,305,500 2,305,500
Common equivalent shares attributable to convertible
preferred stock - -
Common equivalent shares attributable to the net
effect of dilutive stock options based on the
treasury stock method using average market price 38,318 -
----------- -----------
Number of shares used in computing per share amounts 2,343,818 2,305,500
----------- -----------
Net income $ 287,785 $ 145,385
Net income per share $ 0.12 $ 0.06
FULLY DILUTED
Weighted average common shares outstanding 2,305,500 2,305,500
Common equivalent shares attributable to convertible
preferred stock - -
Common equivalent shares attributable to the net
effect of dilutive stock options based on the
treasury stock method using quarter end (period-end)
price, if higher than average market price 46,508 2,954
----------- -----------
Number of shares used in computing per share amounts 2,352,008 2,308,454
----------- -----------
Net income $ 287,785 $ 145,385
Net income per share $ 0.12 $ 0.06
<Page 16>
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Exhibit Index
3.1 Articles of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
4.1 Warrant Agreement (1)
4.2 Warrant Certificate (1)
4.3 Stock Certificate (1)
4.4 Unit Certificate (1)
10.1 Lease Agreement dated May 9, 1995 (1)
10.2 Sublease Agreement dated May 9, 1995 by and between the Registrant
and Pacific Metal Fabricators (1)
10.3 Employment Contract by and between the Registrant and
Jack Williams (1)
10.4 Employment Contract by and between the Registrant and
Michael Dosch (1)
10.5 Employment Contract by and between the Registrant and
Larry Eyler (1)
10.6 Employment Contract by and between the Registrant and
David Pollard (1)
10.7 1996 Omnibus Stock Plan and form of Stock Option Agreement
thereunder (1)
10.8 Asset Purchase Agreement between the Registrant and
Pacific Metal Fabricators, Inc. (1)
10.9 Employment Contract by and between the Registrant and
Susan Dingethal (1)
10.10 Employment Contract by and between the Registrant and Donald Naab
10.11 Lease Agreement dated December 19, 1997
10.12 Line of Credit Facility by and between the Registrant and Union
Bank of California
11.1 Calculation of Earnings Per Share
27.1 Financial Data Schedule
(1) Previously filed as an exhibit to the Company's Form SB-2,
file no. 333-858-LA, and incorporated herein by reference.
<Page 17>
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998
<CASH> 500 500
<SECURITIES> 0 0
<RECEIVABLES> 1,543,936 1,882,332
<ALLOWANCES> 15,000 15,000
<INVENTORY> 3,182,411 3,159,910
<CURRENT-ASSETS> 5,608,938 6,093,581
<PP&E> 3,428,390 3,602,307
<DEPRECIATION> 2,032,782 2,098,759
<TOTAL-ASSETS> 9,571,632 9,755,634
<CURRENT-LIABILITIES> 3,715,574 3,981,940
<BONDS> 0 0
0 0
0 0
<COMMON> 4,126,392 4,126,392
<OTHER-SE> 1,139,538 1,191,133
<TOTAL-LIABILITY-AND-EQUITY> 9,571,632 9,755,634
<SALES> 4,398,306 8,651,339
<TOTAL-REVENUES> 4,398,306 8,651,339
<CGS> 2,731,661 5,484,170
<TOTAL-COSTS> 1,374,152 2,863,846
<OTHER-EXPENSES> 9,098 (14,738)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (29,175) (72,437)
<INCOME-PRETAX> 301,591 288,585
<INCOME-TAX> (65,400) (800)
<INCOME-CONTINUING> 236,191 287,785
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 236,191 287,785
<EPS-PRIMARY> .10 .12
<EPS-DILUTED> .10 .12
</TABLE>
EXHIBIT 10.10 Statement re: Employment Contract by and between
the Registrant and Donald Naab
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made effective as of
June 29, 1998, by and between Pacific Research and Engineering Corporation
("PR&E") and Donald C. Naab ("Naab").
NOW, THEREFORE, the parties agree as follows:
1. EMPLOYMENT. PR&E hereby engages Naab, and Naab hereby accepts such
engagement, upon the terms and conditions set forth herein.
2. DUTIES.
2.1 POSITION. Naab is engaged in the position of President,
reporting to the CEO of PR&E ("CEO") and shall have the
duties and responsibilities mutually agreed on by Naab and
CEO. Naab shall perform faithfully and diligently such
duties, as well as such other duties as the Board of
Directors of PR&E ("Board") shall reasonably assign from
time to time. Board reserves the right to modify Naab's
position and duties at any time, in its sole and absolute
discretion.
2.2 BEST EFFORTS/FULL-TIME. Naab will expend his best efforts
on behalf of PR&E, and will abide by all policies and
decisions made by Board, as well as all applicable federal,
state and local laws, regulations or ordinances. Naab will
act in the best interest of PR&E at all times. Naab shall
devote Naab's full business time and efforts to the
performance of his assigned duties, unless Naab notifies
PR&E in advance of his intent to engage in other paid work
and receives PR&E's express written consent to do so. Naab
must not engage in any work that creates an actual or
potential conflict of interest with PR&E and, if Board
believes a conflict exists, Board may ask Naab to choose
whether to discontinue the other work or resign employment
with PR&E.
3. COMPENSATION.
3.1 BASE SALARY. As compensation for the proper and
satisfactory performance of all duties to be performed by
Naab hereunder, PR&E shall pay to Naab a base salary of
$204,360 per year, payable in accordance with the normal
payroll practices of PR&E, less required deductions for
state and federal withholding tax, social security and all
other employment taxes and payroll deductions. In the
event Naab's employment under this Agreement is terminated
by either party, for any reason whatsoever, before the last
day of any employment year, Naab will be entitled to
receive for such year only the base salary prorated to the
date of termination.
3.2 INCENTIVE COMPENSATION.
3.2.1 1998 BONUS. Naab will be eligible to earn a one-
time $15,000 bonus for calendar year 1998
provided Naab is employed by PR&E on
December 31, 1998. Naab shall not be entitled to
any other performance bonus or incentive
compensation for 1998.
3.2.2 1999 BONUS. Naab will be eligible to earn a
bonus for calendar year 1999 in accordance with
the terms and conditions established by the
Compensation Committee of Board, provided Naab
completes and submits to Board a written business
and strategic plan for PR&E within 120 days of
the Start Date specified in paragraph 6.1 below.
3.3 STOCK OPTIONS. Naab will receive 75,000 stock options in
accordance with the terms and conditions of PR&E's Stock
Option Plan.
3.4 ASSISTANCE WITH SALE OF HOME. PR&E agrees to pay Naab the
real estate agent's commission on the sale of Naab's
Minnesota home, or $57,109.00, payable in thirty-nine equal
bi-weekly installments during the Initial Term of this
Agreement, provided Naab remains continuously employed
during such Term. In the event Naab's employment under
<Page 01>
- ------------------------------------------------------------------------------
this Agreement is terminated by either party, for any
reason whatsoever, before the last day of the Initial Term,
Naab will be entitled to receive only those installment
payments due and owing as of the date of termination.
3.5 PERFORMANCE REVIEW. Board will periodically review Naab's
performance on no less than annual basis. Adjustments to
salary or other compensation, if any, will be made in the
sole and absolute discretion of Board.
4. FRINGE BENEFITS.
4.1 CUSTOMARY FRINGE BENEFITS. Naab will be eligible for all
customary and usual fringe benefits generally available to
employees of PR&E. PR&E reserves the right to change or
terminate the fringe benefits on a prospective basis, at
any time, effective upon notice to Naab.
4.2 CAR ALLOWANCE. PR&E will pay Naab PR&E's standard
executive car allowance of $250 per month.
5. BUSINESS EXPENSES. Naab will be reimbursed for all reasonable,
out-of-pocket business expenses incurred in the performance of his
duties on behalf of PR&E. To obtain reimbursement, expenses must
be submitted promptly with appropriate supporting documentation and
must be approved by the Chief Financial Officer of PR&E.
6. TERM.
6.1 INITIAL TERM. The employment relationship pursuant to this
Agreement shall be for an Initial Term commencing on
June 29, 1998 ("Start Date") and continuing until
December 31, 1999 ("Initial Term"), unless sooner
terminated in accordance with paragraph 7.1 or 7.2 below.
6.2 RENEWAL. On completion of the Initial Term specified in
paragraph 6.1 above, PR&E may, at its election, renew this
Agreement for a future unspecified term. It is expressly
understood and agreed that, after the expiration of the
Initial Term, the employment relationship between Naab and
PR&E is "at will" and the parties have not agreed to any
further specified terms or to continued employment for so
long as Naab performs satisfactorily. After the Initial
Term, the employment relationship may be terminated by
either Naab or PR&E at any time, with or without cause,
upon 30 days advance notice.
7. TERMINATION.
7.1 TERMINATION FOR CAUSE BY PR&E. Although PR&E anticipates a
mutually rewarding employment relationship with Naab, upon
written notice to Naab, PR&E may terminate the employment
relationship immediately in the event of any good cause,
including but not limited to default, dishonesty, neglect
of duties, failure to perform, conviction of a felony or
crime of moral turpitude or death of Naab. In the event
Naab's employment is terminated for cause in accordance
with this paragraph during calendar year 1998, Naab will
not be entitled to receive the 1998 Bonus, or any part
thereof, as described in paragraph 3.2.1 above.
7.2 VOLUNTARY RESIGNATION WITHOUT CAUSE BY NAAB. Naab may
voluntarily resign his position with PR&E with or without
cause at any time on thirty (30) days written notice. In
the event of such resignation during calendar year 1998,
Naab will not be entitled to receive the 1998 Bonus, or any
part thereof, as described in paragraph 3.2.1 above.
8. COMPETITIVE EMPLOYMENT. During the term of Naab's employment with
PR&E, and during any period in which Naab is receiving payments
from PR&E, Naab agrees that he will not directly or indirectly
compete with PR&E in any way, and will not act as an officer,
director, employee, consultant, shareholder, volunteer, lender, or
agent of any business enterprise of the same nature as, or which is
in direct competition with, the business in which PR&E is now
<Page 02>
- ------------------------------------------------------------------------------
engaged or in which PR&E becomes engaged during the term of Naab's
employment with PR&E, as may be determined by PR&E in its sole
discretion. Further, Naab agrees not to refer any client or
potential client to competitors of PR&E without PR&E's written
consent during the term of Naab's employment with PR&E or during
the period in which Naab is receiving payments from PR&E.
9. CONFIDENTIALITY AND PROPRIETARY RIGHTS. As a condition of
employment, Naab agrees to read, sign and abide by PR&E's
Confidentiality and Proprietary Rights Agreement attached as
Exhibit A to this Agreement.
10. NO VIOLATION OF RIGHTS OF THIRD PARTIES. Naab warrants that the
performance of all the terms of this Agreement and as an employee
of PR&E does not and will not breach any agreement to keep in
confidence proprietary information, knowledge or data acquired by
Naab prior to Naab's employment with PR&E. Naab agrees not to
disclose to PR&E, or induce PR&E to use, any confidential or
proprietary information or material belonging to any previous
employer or others. Naab warrants that he is not a party to any
other agreement that will interfere with Naab's full compliance
with this Agreement. Naab further agrees not to enter into any
agreement, whether written or oral, in conflict with the provisions
of this Agreement.
11. NONSOLICITATION. During the term of this Agreement and for a
period of one year thereafter, irrespective of the manner of
termination of employment, Naab agrees not to, directly or
indirectly, separately or in association with others:
11.1 Interfere with, impair, disrupt or damage PR&E's
relationship with any of its clients or prospective clients
by soliciting or encouraging or causing others to solicit
or encourage, any of them for the purpose of diverting or
taking away the business such clients have with PR&E; or
11.2 Interfere with, impair, disrupt or damage PR&E's business
by soliciting, encouraging or causing others to solicit or
encourage any of PR&E's employees to discontinue their
employment with PR&E.
12. GENERAL PROVISIONS.
12.1 SUCCESSORS AND ASSIGNS. The rights and obligations of PR&E
under this Agreement shall inure to the benefit of and
shall be binding upon the successors and assigns of PR&E.
Naab shall not be entitled to assign any of Naab's rights
or obligations under this Agreement.
12.2 WAIVER. Either party's failure to enforce any provision of
this Agreement shall not in any way be construed as a
waiver of any such provision, or prevent that party
thereafter from enforcing each and every other provision of
this Agreement.
12.3 SEVERABILITY. In the event any provision of this Agreement
is found to be unenforceable by a court of competent
jurisdiction, such provision shall be deemed modified to
the extent necessary to allow enforceability of the
provision as so limited, it being intended that PR&E shall
received the benefit contemplated herein to the fullest
extent permitted by law. If a deemed modification is not
satisfactory in the judgment of such arbitrator or court,
the unenforceable provision shall be deemed deleted, and
the validity and enforceability of the remaining provisions
shall not be affected thereby.
12.4 INTERPRETATION; CONSTRUCTION. The headings set forth in
this Agreement are for convenience only and shall not be
used in interpreting this Agreement. This Agreement has
been drafted by legal counsel representing PR&E, but Naab
has participated in the negotiation of its terms.
Furthermore, Naab acknowledges that he has had an
opportunity to review and revise the Agreement and have it
reviewed by legal counsel, if desired, and, therefore, the
normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this
Agreement.
<Page 03>
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12.5 GOVERNING LAW. This Agreement will be governed by and
construed in accordance with the laws of the United States
and the State of California.
12.6 NOTICES. Any notice required or permitted by this
Agreement shall be in writing and shall be delivered as
follows with notice deemed given as indicated: (a) by
personal delivery when delivered personally, (b) by
overnight courier upon written verification of receipt,
(c) by telecopy or facsimile transmission upon
acknowledgment of receipt of electronic transmission, or
(d) by certified or registered mail, return receipt
requested, upon verification of receipt. Notice shall be
sent to the addresses set forth below, or such other
address as either party may specify in writing.
12.7 SURVIVAL. This Agreement shall survive Naab's employment
by PR&E.
13. ENTIRE AGREEMENT. This Agreement, including Exhibit A appended
hereto and the PR&E Stock Option Plan referenced herein,
constitutes the entire agreement between the parties relating to
this subject matter and supersedes all prior or simultaneous
representations, discussions, negotiations, and agreements, whether
written or oral. This Agreement may be amended or modified only
with the written consent of Naab and the CEO of PR&E. No oral
waiver, amendment or modification will be effective under any
circumstances whatsoever.
THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY
UNDERSTAND EACH AND EVERY PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES
HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.
DATED: ___June 19, 1998___ _________/S/ Donald C. Naab_________
___________6826 Lillian Lane________
________Eden Prairie, MN 55346______
DATED: ___June 19, 1998___ ________/S/ Jack K. Williams________
__________Jack Williams, CEO________
__PACIFIC RESEARCH AND ENGINEERING__
________2070 Las Palmas Drive_______
_________Carlsbad, CA 92121________
<Page 04>
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EXHIBIT 10.11 Statement re: Long Term Lease between the Registrant
and Mitsui Fudosan (USA), Inc., a California Corporation
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD
INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(Do not use this form for Multi-Tenant Property)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
__DECEMBER 19, 1997__, is made by and between __MITSUI FUDOSAN (USA). INC., A
CALIFORNIA CORPORATION__ ("Lessor") and __PACIFIC RESEARCH & ENGINEERING
CORPORATION, A CALIFORNIA CORPORATION__ ("Lessee"), (collectively the
"Parties," or individually a "Party") __LOT 18, (5.692 ACRES) OAK RIDGE
BUSINESS CENTER III, 395 ASPEN WAY, VISTA, CALIFORNIA 92083__.
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of __395 ASPEN WAY, VISTA, CALIFORNIA 92083__,
located in the County of __SAN DIEGO__, State of __CALIFORNIA__, and generally
described as (describe briefly the nature of the property) __APN 219-541-09
ASPEN WAY. VISTA , CALIFORNIA 92083 (SEE EXHIBIT "A") PROPOSED PREMISES IS
APPROXIMATELY 79,648 SQUARE FEET ON THE FIRST (1ST) FLOOR, WITH APPROXIMATELY
214 PARKING SPACES. (THE PREMISES WILL BE MEASURED TO THE EXTERIOR DIMENSIONS
OF THE BUILDING INCLUDING DRIP LINE.) SEE ADDENDUM FOR PARAGRAPH 1.2
(CONTINUED)__. ("Premises"). (See Paragraph 2 for further provisions.)
1.3 Term: __TEN (10)__ years and __ZERO (0)__ months ("Original
Term") commencing __SEE ADDENDUM FOR PARAGRAPH 1.3(CONT.)__ ("Commencement
Date") and ending __TEN YEARS AFTER THE COMMENCEMENT DATE__ ("Expiration
Date"). (See Paragraph 3 for further provisions.)
1.4 Early Possession: __NOT APPLICABLE__ ("Early Possession Date").
(See Paragraphs 3.2 and 3.3 for further provisions.)
1.5 Base Rent: __$ 47,719.03__ per month ("Base Rent"), payable on
the __FIRST (1ST)__ day of each month commencing __SEE ADDENDUM FOR PARAGRAPH
1.5 (CONTINUED).__ (See Paragraph 4 for further provisions.)
[ ] If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 Base Rent Paid Upon Execution: __$47,719.03__as Base Rent for
the period __THE FIRST (1ST) MONTH OF THE LEASE TERM.__
1.7 Security Deposit: __$ 47,719.03__ ("Security Deposit"). (See
Paragraph 5 for further provisions.)**
1.8 Permitted Use: __ADMINISTRATIVE OFFICES, MANUFACTURING,
ENGINEERING AND DISTRIBUTION OF ELECTRONIC EQUIPMENT AND RELATED USES.__
(See Paragraph 6 for further provisions.)
1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise
stated herein. (See Paragraph 8 for further provisions.)
1.10 Real Estate Brokers: The following real estate brokers
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
__COLLIERS ILIFF THORN__ represents
[ ] Lessor exclusively ("Lessor's Broker"); [X] both Lessor and Lessee, and
________________________ represents
[ ] Lessor exclusively ("Lessee's Broker"); [ ] both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.11 Guarantor. The obligations of the Lessee under this Lease are to
be guaranteed by __NONE__ ("Guarantor"). (See Paragraph 37 for further
provisions.)
1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of
Paragraphs __1.2__ through __49__ and Exhibits __A, B, C HAZARDOUS WASTES OR
SUBSTANCES ADDENDUM, NOTICE TO OWNERS, BUYERS AND TENANTS REGARDING HAZARDOUS
WASTES OR SUBSTANCES AND UNDERGROUND STORAGE TANK AND AMERICANS WITH
DISABILITIES ACT (ADA), ATTACHMENTS A, B, AND C.__ all of which constitute a
part of this Lease.
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less. __SEE
ADDENDUM FOR PARAGRAPH 2.1 (CONTINUED).__
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the
existing plumbing, tire sprinkler system, lighting, air conditioning, heating,
and loading doors, if any, in the Premises, other than those constructed by
Lessee, shall be in good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commencement Date, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within
__SIXTY (60)__ days after the Commencement Date, correction of that non-
compliance shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or
to be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
six (6) months following the Commencement Date, correction of that non-
compliance shall be the obligation of Lessee at Lessee's sole cost and expense.
__SEE ADDENDUM FOR PARAGRAPH 2.3 (CONTINUED).__
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it
has been advised by the Brokers to satisfy itself with respect to the condition
of the Premises (Including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the
Premises for Lessee's intended use, (b) that Lessee has made such investigation
as it deems necessary with reference to such matters and assumes all
responsibility therefor as the same relate to Lessee's occupancy of the
Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties
with respect to the said matters other than as set forth In this Lease.
2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior to the
date set forth in Paragraph 1.1 Lessee was the owner or occupant of the
Premises. In such event, Lessee shall, at Lessee's sole cost and expense,
correct any non-compliance of the Premises with said warranties.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
Lease, however, (including but not limited to the obligations to pay Real
Property Taxes and Insurance premiums and to maintain the Premises) shall be in
effect during such period. Any such early possession shall not affect nor
advance the Expiration Date of the Original Term.
**SEE ADDENDUM FOR PARAGRAPH 1,7 (CONTINUED).
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3.3 Delay In Possession. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is
specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease,
or the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to
pay rent or perform any other obligation of Lessee under the terms of this
Lease until Lessor delivers possession of the Premises to Lessee. If
possession of the Premises is not delivered to Lessee within sixty (60) days
after the __DATE THAT IS EIGHT (8) MONTHS FROM THE DATE LESSOR AND LESSEE
MUTUALLY AGREE UPON THE PROPOSED PLANS__, Lessee may, at its option, by notice
in writing to Lessor within ten (10) days thereafter, cancel this Lease, in
which event the Parties shall be discharged from all obligations hereunder;
provided, however, that if such written notice by Lessee is not received by
Lessor within said ten (10) day period, Lessee's right to cancel this Lease
shall terminate and be of no further force or effect. Except as may be
otherwise provided, and regardless of when the term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee
does not terminate this Lease, as aforesaid, the period free of the obligation
to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run
from the date of delivery of possession and continue for a period equal to what
Lessee would otherwise have enjoyed under the terms hereof, but minus any days
of delay caused by the acts, changes or omissions of Lessee.
4. Rent.
4.1 Base Rent. Lessee shall cause payment of Base Rent and other
rent or charges, as the same may be adjusted from time to time, to be received
by Lessor in lawful money of the United States, without offset or deduction, on
or before the day on which it is due under the terms of this Lease. Base Rent
and all other rent and charges for any period during the term hereof which is
for less than one (1) full calendar month shall be prorated based upon the
actual number of days of the calendar month involved. Payment of Base Rent and
other charges shall be made to Lessor at its address stated herein or to such
other persons or at such other addresses as Lessor may from time to time
designate in writing to Lessee.
5. Security Deposit. Lessee shall deposit with Lessor upon execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or
retain all or any portion of said Security Deposit for the payment of any
amount due Lessor or to reimburse or compensate Lessor for any liability, cost,
expense, loss or damage (including attorneys' fees) which Lessor may suffer or
incur by reason thereof. If Lessor uses or applies all or any portion of said
Security Deposit, Lessee shall within ten (10) days after written request
therefor deposit moneys with Lessor sufficient to restore said Security Deposit
to the full amount required by this Lease. Any time the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional moneys with Lessor sufficient to maintain the same ratio
between the Security Deposit and the Base Rent as those amounts are specified
in the Basic Provisions. Lessor shall not be required to keep all or any part
of the Security Deposit separate from its general accounts. Lessor shall, at
the expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed in
writing by Lessor, no part of the Security Deposit shall be considered to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the
purposes set forth in Paragraph 1.8, or any other use which is comparable
thereto, and for no other purpose. Lessee shall not use or permit the use of
the Premises in a manner that creates waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to, neighboring premises or
properties. Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessees assignees or subtenants,
and by prospective assignees and subtenants of the Lessee, its assignees and
subtenants, for a modification of said permitted purpose for which the
premises may be used or occupied, so long as the same will not impair the
structural integrity of the improvements on the Premises, the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises and the improvements thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall
within five (5) business days give a written notification of same, which notice
shall include an explanation of Lessor's reasonable objections to the change
in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term Hazardous Substance
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or welfare,
the environment or the Premises, (ii) regulated or monitored by any
governmental authority, or (iii) a basis for liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or
fractions thereof. Lessee shall not engage in any activity in, on or about the
Premises which constitutes a Reportable Use (as hereinafter defined) of
Hazardous Substances without the express prior written consent of Lessor and
compliance in a timely manner (at Lessee's sole cost and expense) with all
Applicable Law (as defined in Paragraph 6.3). "Reportable Use" shall mean
(i) the installation or use of any above or below ground storage tank,
(ii) the generation, possession, storage, use, transportation, or disposal of
a Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with,
any governmental authority. Reportable Use shall also include Lessee's being
responsible for the presence in, on or about the Premises of a Hazardous
Substance with respect to which any Applicable Law requires that a notice be
given to persons entering or occupying the Premises or neighboring properties.
Notwithstanding the foregoing, Lessee may, without Lessors prior consent, but
in compliance with all Applicable Law, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of Lessee's
business permitted on the Premises, so long as such use is not a Reportable Use
and does not expose the Premises or neighboring properties to any meaningful
risk of contamination or damage or expose Lessor to any liability therefor.
In addition, Lessor may (but without any obligation to do so) condition its
consent to the use or presence of any Hazardous Substance, activity or storage
tank by Lessee upon Lessee's giving Lessor such additional assurances as
Lessor, in its reasonable discretion, deems necessary to protect itself, the
public, the Premises and the environment against damage, contamination or
injury and/or liability therefrom or therefor, including, but not limited to,
the installation (and removal on or before Lease expiration or earlier
termination) of reasonably necessary protective modifications to the Premises
(such as concrete encasements) and/or the deposit of an additional Security
Deposit under Paragraph 5 hereof.
(b) Duty to inform Lessor. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance, or a condition involving or
resulting from same, has come to be located in, on, under or about the
Premises, other than as previously consented to by Lessor, Lessee shall
immediately give written notice of such fact to Lessor. Lessee shall also
immediately give Lessor a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action or proceeding given
to, or received from, any governmental authority or private party, or persons
entering or occupying the Premises, concerning the presence, spill, release,
discharge of, or exposure to, any Hazardous Substance or contamination in, on,
or about the Premises, including but not limited to all such documents as may
be involved in any Reportable Uses involving the Premises.
(c) Indemnification. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, If any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include,
but not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's fees and testing),
removal, remediation, restoration and/or abatement thereof, or of any
contamination therein involved, and shall survive the expiration or earlier
termination of this Lease. No termination, cancellation or release agreement
entered into by Lessor and Lessee shall release Lessee from its obligations
under this Lease with respect to Hazardous Substances or storage tanks, unless
specifically so agreed by Lessor in writing at the time of such agreement.
6.3 Lessee's Compliance with Law. Except as otherwise provided in
this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently
and in a timely manner, comply with all "Applicable Law," which term is used in
this Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any
manner to the Premises (including but not limited to matters pertaining to
(i) industrial hygiene, (ii) environmental conditions on, in, under or about
the Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or
not reflecting a change in policy from any previously existing policy Lessee
shall, within five (5) days after receipt of Lessor's written request, provide
Lessor with copies of all documents and information, including, but not limited
to, permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or
the Premises to comply with any Applicable Law.
6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined
in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in
the case of an emergency, and otherwise at reasonable times, with twenty-four
(24) hour notice, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable Laws
(as defined in Paragraph 6.3), and to employ experts and/or consultants in
connection therewith and/or to advise Lessor with respect to Lessee's
activities, including but not limited to the installation, operation, use,
monitoring, maintenance, or removal of any Hazardous Substance or storage tank
on or from the Premises. The costs and expenses of any such inspections shall
be paid by the party requesting same, unless a Default or Breach of this Lease,
violation of Applicable Law, or a contamination, caused or materially
contributed to by Lessee is found to exist or be imminent, or unless the
inspection is requested or ordered by a governmental authority as the result of
any such existing or imminent violation or contamination. In any such case,
Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may
be, for the costs and expenses of such inspections
7. Maintenance; Repairs; Utility Installations; Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty
as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc),
<PAGE 02>
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7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14
(condemnation), Lessee shall, at Lessee's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair __INCLUDING__ non-structural (whether or not such portion of the
Premises requiring repairs, or the means of repairing the same, are reasonably
or readily accessible to Lessee, and whether or not the need for such repairs
occurs as a result of Lessee's use, any prior use, the elements or the age of
such portion of the Premises), including, without limiting the generality of
the foregoing, all equipment or facilities serving the Premises, such as
plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or
standpipe and hose or other automatic fire extinguishing system, including
fire alarm and/or smoke detection systems and equipment, fire hydrants,
fixtures, walls (interior), ceilings, roofs, floors, windows, doors, plate
glass, skylights landscaping, driveways, parking lots, fences, retaining walls,
signs, sidewalks and parkways located in, on, about, or adjacent to the
Premises. Lessee shall not cause or permit any Hazardous Substance to be
spilled or released in, on, under or about the Premises (including through the
plumbing or sanitary sewer system) and shall promptly, at Lessee's expense;
take all Investigatory and/or remedial action reasonably recommended, whether
or not formally ordered or required, for the cleanup of any contamination of,
and for the maintenance, security and/or monitoring of the Premises, the
elements surrounding same, or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any
Hazardous Substance and/or storage tank brought onto the Premises by or for
Lessee or under its control. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof
in good order, condition and state of repair if Lessee occupies the Premises
for seven (7) years or more, Lessor may require Lessee to repaint the exterior
of the buildings on the Premises as reasonably required, but not more
frequently than once every seven (7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance
for, and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any.
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
Including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance.
7.2 Lessor's Obligations. Except for the warranties and agreements of
Lessor contained in Paragraphs 2.2 (relating to condition of the Premises),
2.3 (relating to compliance with covenants, restrictions and building code),
9 (relating to destruction of the Premises) and 14 (relating to condemnation of
the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises,
__EXCEPT FOR STRUCTURAL PORTIONS OF THE ROOF, FOUNDATION AND,.EXTERIOR WALLS,__
the improvements located thereon, or the equipment therein, all of which
obligations are intended to be that of the Lessee under Paragraph 7.1 hereof.
It is the intention of the Parties that the terms of this Lease govern the
respective obligations of the Parties as to maintenance and repair of the
Premises. Lessee and Lessor expressly waive the benefit of any statute now or
hereafter in effect to the extent it is inconsistent with the terms of this
Lease with respect to, or which affords Lessee the right to make repairs at the
expense of Lessor or to terminate this Lease by reason of any needed repairs.
7.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility
Installations" is used in this Lease to refer to all carpeting, window
coverings, air lines, power panels, electrical distribution, security, fire
protection systems, communication systems, lighting fixtures, heating,
ventilating, and air conditioning equipment, plumbing, and fencing in, on or
about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery
and equipment that can be removed without doing material damage to the
Premises. The term "Alterations" shall mean any modification of the
improvements on the Premises from that which are provided by Lessor under the
terms of this Lease, other than Utility Installations or Trade Fixtures,
whether by addition or deletion. "Lessee Owned Alterations and/or Utility
Installations" are defined as Alterations and/or Utility Installations made by
lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee
shall not make any Alterations or Utility installations in, on, under or about
the Premises without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the interior of the Premises (excluding
the roof), as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during the term of this Lease as extended does not
exceed $25,000.
(b) Consent. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent
specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all
applicable permits required by governmental authorities, (ii) the furnishing of
copies of such permits together with a copy of the plans and specifications for
the Alteration or Utility Installation to Lessor prior to commencement of the
work thereon, and (iii) the compliance by Lessee with all conditions of said
permits in a prompt and expeditious manner. Any Alterations or Utility
Installations by Lessee during the term of this Lease shall be done in a good
and workmanlike manner, with good and sufficient materials, and in compliance
with all Applicable Law. Lessee shall promptly upon completion thereof furnish
Lessor with as-built plans and specifications therefor Lessor may (but without
obligation to do so) condition its consent to any requested Alteration or
Utility Installation that costs $10,000 or more upon Lessee's providing Lessor
with a lien and completion bond in an amount equal to one and one-half times
the estimated cost of such Alteration or Utility Installation and/or upon
Lessee's posting an additional Security Deposit with Lessor under Paragraph 36
hereof.
(c) Indemnification. Lessee shall pay, when due, all claims
for labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by any
mechanics' or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have
the right to post notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises. If Lessor shall
require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in
an amount equal to one and one-half times the amount of such contested lien
claim or demand, indemnifying Lessor against liability for the same, as
required by law for the holding of the Premises free from the effect of such
lien or claim. In addition, Lessor may require Lessee to pay Lessor's
attorney's fees and costs in participating in such action if Lessor shall
decide it is to its best interest to do so.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal
or become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain
upon and be surrendered by Lessee with the Premises.
(b) Removal. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
their installation may have been consented to by Lessor. Lessor may require
the removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
SEE ADDENDUM FOR PARAGRAPH 7.4(B) (CONTINUED)
(c) Surrender/Restoration. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date, with
all of the improvements, parts and surfaces thereof clean and free of debris
and in good operating order, condition and state of repair, ordinary wear and
tear excepted. "Ordinary wear and tear" shall not include any damage or
deterioration that would have been prevented by good maintenance practice or by
Lessee performing all of its obligations under this Lease. Except as otherwise
agreed or specified in writing by Lessor, the Premises, as surrendered, shall
include the Utility Installations. The obligation of Lessee shall include the
repair of any damage occasioned by the installation, maintenance or removal of
Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as welt as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good service practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation to
repair and restore the Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee
is the insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums
for policy periods commencing prior to or extending beyond the Lease term shall
be prorated to correspond to the Lease term. Payment shall be made by Lessee
to Lessor within ten (10) days following receipt of an invoice for any amount
due.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of
insurance protecting Lessee and Lessor (as an additional insured) against
claims for bodily injury, personal injury and property damage based upon,
involving or arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be on an
occurrence basis providing single limit coverage in an amount not less than
$1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of
Premises" Endorsement and contain the "Amendment of the Pollution Exclusion"
for damage caused by heat, smoke or fumes from a hostile fire. The policy
shall not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this
Lease as an "insured contract" for the performance of Lessee's indemnity
obligations under this Lease. The limits of said insurance required by this
Lease or as carried by Lessee shall not, however, limit the liability of Lessee
nor relieve Lessee of any obligation hereunder. All insurance to be carried by
Lessee shall be primary to and not contributory with any similar insurance
carried by Lessor, whose insurance shall be considered excess insurance only.
(b) Carried By Lessor. In the event Lessor is the Insuring Party,
Lessor shall also maintain liability insurance described In Paragraph 8.2(a),
above, in addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be named as an additional insured
therein.
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8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain
and keep in force during the term of this Lease a policy or policies in the
name of Lessor, with loss payable to Lessor and to the holders of any
mortgages, deeds of trust or ground leases on the Premises ("Lender(s)"),
insuring loss or damage to the Premises. The amount of such insurance shall be
equal to the full replacement cost of the Premises, as the same shall exist
from time to time, or the amount required by Lenders, but in no event more than
the commercially reasonable and available insurable value thereof if, by reason
of the unique nature or age of the improvements involved, such latter amount is
less than full replacement cost. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility installations shall be insured by Lessee
under Paragraph 8.4 rather than by Lessor. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood and/or
earthquake unless required by a Lender), including coverage for any additional
costs resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or
replacement of any undamaged sections of the Premises required to be demolished
or removed by reason of the enforcement of any building, zoning, safety or land
use laws as the result of a covered cause of loss. Said policy or policies
shall also contain an agreed valuation provision in lieu of any coinsurance
clause, waiver of subrogation, and inflation guard protection causing an
increase in the annual property insurance coverage amount by a factor of not
less than the adjusted U.S. Department of Labor Consumer Price Index for All
Urban Consumers for the city nearest to where the Premises are located. If
such insurance coverage has a deductible clause, the deductible amount shall
not exceed $1,000 per occurrence, and Lessee shall be liable for such
deductible amount in the event of an Insured Loss, as defined in Paragraph
9.1(c).
(b) Rental Value. The insuring Party shall, in addition, obtain
and keep in force during the term of this Lease a policy or policies in the
name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of
the full rental and other charges payable by Lessee to Lessor under this Lease
for one (1) year (including all real estate taxes, insurance costs, and any
scheduled rental increases). Said insurance shall provide that in the event
the Lease is terminated by reason of an insured loss, the period of indemnity
for such coverage shall be extended beyond the date of the completion of
repairs or replacement of the Premises, to provide for one full year's loss of
rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation provision in lieu of any coinsurance clause, and the amount
of coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be
liable for any deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part of a larger
building, or if the Premises are part of a group of buildings owned by Lessor
which are adjacent to the Premises, the Lessee shall pay for any increase in
the premiums for the property insurance of such building or buildings if said
increase is caused by Lessee's acts, omissions, use or occupancy of the
Premises.
(d) Tenant's Improvements. If the Lessor is the Insuring Party,
the Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease. If Lessee is the Insuring Party, the policy
carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned
Alterations and Utility installations.
8.4 Lessee's Property Insurance. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Lessee Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. Such insurance shall be
full replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property or the restoration of Lessee Owned
Alterations and Utility Installations. Lessee shall be the Insuring Party with
respect to the insurance required by this Paragraph 8.4 and shall provide
Lessor with written evidence that such insurance is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, or such other rating as may be required by a Lender
having a lien on the Premises, as set forth in the most current issue of
"Best's Insurance Guide." Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies referred to in this Paragraph 8.
If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of such insurance with the insureds and loss payable
clauses as required by this Lease. No such policy shall be cancellable or
subject to modification except after thirty (30) days prior written notice to
Lessor. Lessee shall at least thirty (30) days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand. If the Insuring Party shall fail to procure and maintain the insurance
required to be carried by the Insuring Party under this Paragraph 8, the other
Party may, but shall not be required to, procure and maintain the same, but at
Lessee's expense.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured
against under Paragraph 8. The effect of such releases and waivers of the
right to recover damages shall not be limited by the amount of insurance
carried or required, or by any deductibles applicable thereto.
8.7 Indemnity. Except for Lessor's negligence and/or breach of
express warranties, Lessee shall indemnify, protect, defend and hold harmless
the Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or damages,
, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely
manner of any obligation on Lessee's part to be performed under this Lease.
The foregoing shall include, but not be limited to, the defense or pursuit of
any claim or any action or proceeding involved therein, and whether or not (in
the case of claims made against Lessor) litigated and/or reduced to judgment,
and whether well founded or not. In case any action or proceeding be brought
against Lessor by reason of any of the foregoing matters, Lessee upon notice
from Lessor shall defend the same at Lessee's expense by counsel reasonably
satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense.
Lessor need not have first paid any such claim in order to be so indemnified.
8.8 Exemption of Lesser from Liability. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or
any other person in or about the Premises, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from any
other cause, whether the said injury or damage results from conditions arising
upon the Premises or upon other portions of the building of which the Premises
are a part, or from other sources or places, and regardless of whether the
cause of such damage or injury or the means of repairing the same is accessible
or not. Lessor shall not be liable for any damages arising from any act or
neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or
breach of this Lease, Lessor shall under no circumstances be liable for injury
to Lessee's business or for any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair cost of which damage or destruction is less
than 50% of the then Replacement Cost of the Premises immediately prior to such
damage or destruction, excluding from such calculation the value of the land
and Lessee Owned Alterations and Utility installations.
(b) "Premises Total Destruction" shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility Installations
the repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "Insured Loss" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible amounts
or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Partial Damage-Insured Loss. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the
insurance proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or
the insurance proceeds are not sufficient to effect such repair the Insuring
Party shall promptly contribute the shortage in proceeds (except as to the
deductible which is Lessee's responsibility) as and when required to complete
said repairs. In the event, however, the shortage in proceeds was due to the
fact that, by reason of the unique nature of the improvements, full replacement
cost insurance coverage was not commercially reasonable and available, Lessor
shall have no obligation to pay for the shortage in insurance proceeds or to
fully restore the unique aspects of the Premises unless Lessee provides Lessor
with the funds to cover same, or adequate assurance thereof, within ten (10)
days following receipt of written notice of such shortage and request therefor.
If Lessor receives said funds or adequate assurance thereof within said ten
(10) day period, the party responsible for making the repairs shall complete
them as soon as reasonably possible and this Lease shall remain in full force
and effect. If Lessor does not receive such funds or assurance within said
period, Lessor may nevertheless elect by written notice to Lessee within ten
(10) days thereafter to make such restoration and repair as is commercially
reasonable with Lessor paying any shortage in proceeds, in which case this
Lease shall remain in full force and effect. If in such case Lessor does not
so elect, then this Lease shall terminate sixty (60) days following the
occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall
in no event have any right to reimbursement from Lessor for
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any funds contributed by Lessee to repair any such damage or destruction.
Premises Partial Damaged due to flood or earthquake shall be subject to
Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some
insurance coverage, but the net proceeds of any such insurance shall be made
available for the repairs if made by either Party.
9.3 Partial Damage-Uninsured Loss. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
repair of such damage totally at Lessee's expense and without reimbursement
from Lessor. Lessee shall provide Lessor with the required funds or
satisfactory assurance thereof within thirty (30) days following Lessee's said
commitment. In such event this Lease shall continue in full force and effect,
and Lessor shall proceed to make such repairs as soon as reasonably possible
and the required funds are available. If Lessee does not give such notice and
provide the funds or assurance thereof within the times specified above, this
Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if
a Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the
damage or destruction is an Insured Loss or was caused by a negligent or
willful act of Lessee. In the event, however, that the damage or destruction
was caused by Lessee, Lessor shall have the right to recover Lessor's damages
from Lessee except as released and waived in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following
the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within thirty (30) days after the date of occurrence
of such damage. Provided, however, if Lessee at that time has an exercisable
option to extend this Lease or to purchase the Premises, then Lessee may
preserve this Lease by, within twenty (20) days following the occurrence of the
damage, or before the expiration of the time provided in such option for its
exercise, whichever is earlier ("Exercise Period"), (i) exercising such option
and (ii) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs. If Lessee duly exercises such
option during said Exercise Period and provides Lessor with funds (or adequate
assurance thereof) to cover any shortage in insurance proceeds, Lessor shall,
at Lessor's expense repair such damage as soon as reasonably possible and this
Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during said Exercise Period,
then Lessor may at Lessor's option terminate this Lease as of the expiration of
said sixty (60) day period following the occurrence of such damage by giving
written notice to Lessee of Lessor's election to do so within ten (10) days
after the expiration of the Exercise Period, notwithstanding any term or
provision in the grant of option to the contrary.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage-Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired. Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises
within ninety (90) days after such obligation shall accrue, Lessee may, at any
time prior to the commencement of such repair or restoration, give written
notice to Lessor and to any Lenders of which Lessee has actual notice of
Lessee's election to terminate this Lease on a date not less than sixty (60)
days following the giving of such notice. If Lessee gives such notice to
Lessor and such Lenders and such repair or restoration is not commenced within
thirty (30) days after receipt of such notice, this Lease shall terminate as of
the date specified in said notice. If Lessor or a Lender commences the repair
or restoration of the Premises within thirty (30) days after receipt of such
notice, this Lease shall continue in full force and effect. "Commence" as used
in this Paragraph shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.
9.7 Hazardous Substance Conditions. If a Hazardous Substance
Condition occurs, unless Lessee is legally responsible therefor (in which case
Lessee shall make the investigation and remediation thereof required by
Applicable Law and this Lease shall continue in full force and effect, but
subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option
either (i) investigate and remediate such Hazardous Substance Condition, if
required, as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) if the estimated
cost to investigate and remediate such condition exceeds twelve (12) times the
then monthly Base Rent or $100,000, whichever is greater, give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the giving of
such notice. In the event Lessor elects to give such notice of Lessor's
intention to terminate this Lease, Lessee shall have the right within ten (10)
days after the receipt of such notice to give written notice to Lessor of
Lessee's commitment to pay for the investigation and remediation of such
Hazardous Substance Condition totally at Lessee's expense and without
reimbursement from Lessor except to the extent of an amount equal to twelve
(12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with the funds required of Lessee or satisfactory
assurance thereof within thirty (30) days following Lessee's said commitment,
in such event this Lease shall continue in full force and effect, and Lessor
shall proceed to make such investigation and remediation as soon as reasonably
possible and the required funds are available. If Lessee does not give such
notice and provide the required funds or assurance thereof within the times
specified above, this Lease shall terminate as of the date specified in
Lessor's notice of termination. If a Hazardous Substance Condition occurs for
which Lessee is not legally responsible, there shall be abatement of Lessee's
obligations under this Lease to the same extent as provided in Paragraph 9.6(a)
for a period of not to exceed twelve (12) months.
9.8 Termination-Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security
Deposit as has not been, or is not then required to be, used by Lessor under
the terms of this Lease.
9.9 Waive Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions
of any present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 (a) Payment of Taxes. Lessee shall pay the Real Property Taxes,
as defined in Paragraph 10.2, applicable to the Premises during the term of
this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at
least ten (10) days prior to the delinquency date of the applicable
installment. Lessee shall promptly furnish Lessor with satisfactory evidence
that such taxes have been paid. If any such taxes to be paid by Lessee shall
cover any period of time prior to or after the expiration or earlier
termination of the term hereof, Lessee's share of such taxes shall be equitably
prorated to cover only the period of time within the tax fiscal year this Lease
is in effect, and Lessor shall reimburse Lessee for any overpayment after such
proration. If Lessee shall fail to pay any Real Property Taxes required by
this Lease to be paid by Lessee, Lessor shall have the right to pay the same,
and Lessee shall reimburse Lessor therefor upon demand.
(b) Advance Payment. In order to insure payment when due and
before delinquency of any or all Real Property Taxes, Lessor reserves the
right, at Lessor's option, to estimate the current Real Property Taxes
applicable to the Premises, and to require such current year's Real Property
Taxes to be paid in advance to Lessor by Lessee, monthly in advance with the
payment of the Base Rent. If Lessor elects to require payment monthly in
advance, the monthly payment shall be that equal monthly amount which, over the
number of months remaining before the month in which the applicable tax
installment would become delinquent (and without interest thereon), would
provide a fund large enough to fully discharge before delinquency the estimated
installment of taxes to be paid. When the actual amount of the applicable tax
bill is known, the amount of such equal monthly advance payment shall be
adjusted as required to provide the fund needed to pay the applicable taxes
before delinquency. If the amounts paid to Lessor by Lessee under the
provisions of this Paragraph are insufficient to discharge the obligations of
Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay
to Lessor, upon Lessor's demand, such additional sums as are necessary to pay
such obligations. All moneys paid to Lessor under this Paragraph may be
intermingled with other moneys of Lessor and shall not bear interest. In the
event of a Breach by Lessee in the performance of the obligations of Lessee
under this Lease, then any balance of funds paid to Lessor under the provisions
of this Paragraph may, subject to proration as provided in Paragraph 10.1(a),
at the option of Lessor, be treated as an additional Security Deposit under
Paragraph 5.
10.2 Definition of "Real Property Taxes." As used herein, the term
"Real Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the
Premises are a part, Lessor's right to rent or other income therefrom, and/or
Lessor's business of leasing the Premises. The term "Real Property Taxes"
shall also include any tax, fee, levy, assessment or charge, or any increase
therein, imposed by reason of events occurring, or changes in applicable law
taking effect, during the term of this Lease, including but not limited to a
change in the ownership of the Premises or in the improvements thereon, the
execution of this Lease, or any modification, amendment or transfer thereof,
and whether or not contemplated by the Parties.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
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assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.4 Personal Property Taxes. Lessee shall pay prior to delinquency
all taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause Its Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said personal property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property or, at Lessor's option, as provided in
Paragraph 10.1(b).
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively.
"assignment") or sublet all or any part of Lessee's interest in this Lease or
in the Premises without Lessor's prior written consent given under and subject
to the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
__FIFTY-ONE PERCENT (51%)__ or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as
hereinafter defined, by an amount equal to or greater than twenty-five percent
(25%) of such Net Worth of Lessee as it was represented to Lessor at the time
of the execution by Lessor of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment
of this Lease by Lessee to which Lessor may reasonably withhold its consent.
"Net Worth of Lessee" for purposes of this Lease shall be the net worth of
Lessee (excluding any guarantors) established under generally accepted
accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1(c), or a noncurable Breach
without the necessity of any notice and grace period. If Lessor elects to
treat such unconsented to assignment or subletting as a noncurable Breach,
Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon
thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base
Rent to fair market rental value or one hundred ten percent (110%) of the Base
Rent then in effect, whichever is greater. Pending determination of the new
fair market rental value, if disputed by Lessee, Lessee shall pay the amount
set forth in Lessor's Notice, with any overpayment credited against the next
installment(s) of Base Rent coming due, and any underpayment for the period
retroactively to the effective date of the adjustment being due and payable
immediately upon the determination thereof. Further, in the event of such
Breach and market value adjustment, (i) the purchase price of any option to
purchase the Premises held by Lessee shall be subject to similar adjustment to
the then fair market value (without the Lease being considered an encumbrance
or any deduction for depreciation or obsolescence, and considering the Premises
at its highest and best use and in good condition), or one hundred ten percent
(110%) of the price previously in effect, whichever is greater, (ii) any index-
oriented rental or price adjustment formulas contained in this Lease shall be
adjusted to require that the base index be determined with reference to the
index applicable to the time of such adjustment, and (iii) any fixed rental
adjustments scheduled during the remainder of the Lease term shall be increased
in the same ratio as the new market rental bears to the Base Rent in effect
immediately prior to the market value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease,
(ii) release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent or performance shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for the Default
or Breach by Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee
or to any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without notifying Lessee or
anyone else liable on the Lease or sublease and without obtaining their
consent, and such action shall not relieve such persons from liability under
this Lease or sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a non-
refundable deposit of $1,000 or ten percent (10%) of the current monthly Base
Rent, whichever is greater, as reasonable consideration for Lessor's
considering and processing the request for consent. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply
with each and every term, covenant, condition and obligation herein to be
observed or performed by Lessee during the term of said assignment or sublease,
other than such obligations as are contrary to or inconsistent with provisions
of an assignment or sublease to which Lessor has specifically consented in
writing.
(g) The occurrence of a transaction described in Paragraph 12.1(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased to an amount equal to __THREE (3) TIMES__ the
then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
amount required to establish such Security Deposit a condition to Lessor's
consent to such transaction.
(h)
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a
portion of the Premises heretofore or hereafter made by Lessee, and Lessor may
collect such rent and income and apply same toward Lessee's obligations under
this Lease; provided, however, that until a Breach (as defined in Paragraph
13.1) shall occur in the performance of Lessee's obligations under this Lease,
Lessee may, except as otherwise provided in this Lease, receive, collect and
enjoy the rents accruing under such sublease. Lessor shall not, by reason of
this or any other assignment of such sublease to Lessor, nor by reason of the
collection of the rents from a sublessee, be deemed liable to the sublessee for
any failure of Lessee to perform and comply with any of Lessee's obligations to
such sublessee under such sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor
stating that a Breach exists in the performance of Lessee's obligations under
this Lease, to pay to Lessor the rents and other charges due and to become due
under the sublease. Sublessee shall rely upon any such statement and request
from Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary Lessee
shall have no right or claim against said sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by
said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior
Defaults or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in
said notice as rent due and payable to cure said Default. A "Default" is
defined as failure by the Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease.
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A "Breach" is defined as the occurrence of any one or more of the following
Defaults, and, where a grace period forfeiture after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent or any other monetary
payment required to be made by Lessee hereunder, whether to Lessor or to a
third party, as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which
endangers or threatens life or property, where such failure continues for a
period of three (3) days following written notice thereof by or on behalf of
Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable Law
per Paragraph 6.3. (ii) the inspection, maintenance and service contracts
required under Paragraph 7.1(b), (iii) the recission of an unauthorized
assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per
Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease
per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations
under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution
of any document requested under Paragraph 42 (easements), or (viii) any other
documentation or information which Lessor may reasonably require of Lessee
under the terms of this Lease, where any such failure continues for a period of
ten (10) days following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf
of Lessor to Lessee; provided, however, that if the nature of Lessee's Default
is such that more than thirty (30) days are reasonably required for its cure,
then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The making
by lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. SS101 or
any successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where
possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where such seizure is not discharged within thirty (30) days; provided,
however, in the event that any provision of this subparagraph (e) is contrary
to any applicable law, such provision shall be of no force or effect, and not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g)
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee to Lessor upon invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made under this
Lease by Lessee to be made only by cashier's check. In the event of a Breach
of this Lease by Lessee, as defined in Paragraph 13.1, with or without further
notice or demand, and without limiting Lessor in the exercise of any right or
remedy which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee: (i) the worth at
the time of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to
in provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under subparagraphs 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such
case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful
detainer and a Breach of this Lease entitling Lessor to the remedies provided
for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's
Breach and abandonment and recover the rent as it becomes due, provided Lessee
has the right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver
to protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 Inducement Recapture In Event Of Breach. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions;" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such
inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance
by Lessor of rent or the cure of the Breach which initiated the operation of
this Paragraph shall not be deemed a waiver by Lessor of the provisions of this
Paragraph unless specifically so stated in writing by Lessor at the time of
such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to,
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within __TEN
(10)DAYS__ after such amount shall be due, then, without any requirement for
notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent
(6%) of such overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with
respect to such overdue amount, nor prevent Lessor from exercising any of the
other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Lessee
in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after
such notice are reasonably required for its performance, then Lessor shall not
be in breach of this Lease if performance is commenced within such thirty (30)
day period and thereafter diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
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possession, whichever first occurs. If more than ten percent (10%) of the
floor area of the Premises, or more than twenty-five percent (25%) of the land
area not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of
such notice, within ten (10) days after the condemning authority shall have
taken possession) terminate this Lease as of the date the condemning authority
takes such possession. If Lessee does not terminate this Lease in accordance
with the foregoing, this Lease shall remain in full force and effect as to the
portion of the Premises remaining, except that the Base Rent shall be reduced
in the same proportion as the rentable floor area of the Premises taken bears
to the total rentable floor area of the building located on the Premises. No
reduction of Base Rent shall occur if the only portion of the Premises taken is
land on which there is no building. Any award for the taking of all or any
part of the Premises under the power of eminent domain or any payment made
under threat of the exercise of such power shall be the property of Lessor,
whether such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee, or as severance damages; provided,
however, that Lessee shall be entitled to any compensation separately awarded
to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade
Fixtures. In the event that this Lease is not terminated by reason of such
condemnation, Lessor shall to the extent of its net severance damages received,
over and above the legal and other expenses incurred by Lessor in the
condemnation matter, repair any damage to the Premises caused by such
condemnation, except to the extent that Lessee has been reimbursed therefor by
the condemning authority. Lessee shall be responsible for the payment of any
amount in excess of such net severance damages required to complete such
repair.
15. Broker's Fee.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of
this Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to
said Brokers jointly, or in such separate shares as they may mutually designate
in writing, a fee as set forth in a separate written agreement between Lessor
and said Brokers (or in the event there is no separate written agreement
between Lessor and said Brokers, the sum of $ __PER AGREEMENT__ ) for brokerage
services rendered by said Brokers to Lessor in this transaction.
15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor
further agrees that: (a) if Lessee exercises any Option (as defined in
Paragraph 39.1) or any Option subsequently granted which is substantially
similar to an Option granted to Lessee in this Lease, or (b) if Lessee acquires
any rights to the Premises or other premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or (c) if Lessee remains in possession of the
Premises, with the consent of Lessor, after the expiration of the term of this
Lease after having failed to exercise an Option, or (d) if said Brokers are the
procuring cause of any other lease or sale entered into between the Parties
pertaining to the Premises and/or any adjacent property in which Lessor has an
interest, or (e) if Base Rent is increased, whether by agreement or operation
of an escalation clause herein, then as to any of said transactions, Lessor
shall pay said Brokers a fee in accordance with the schedule of said Brokers in
effect at the time of the execution of this Lease.
15.4 Any buyer or transferee of Lessor's interest in this Lease,
whether such transfer is by agreement or by operation of law, shall be deemed
to have assumed Lessor's obligation under this Paragraph 15. Each Broker shall
be a third party beneficiary of the provisions of this Paragraph 15 to the
extent of its interest in any commission arising from this Lease and may
enforce that right directly against Lessor and its successors.
15.5 Lessee and Lessor each represent and warrant to the other that it
has had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said transaction.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. Tenancy Statement.
16.1 Each Party (as "Responding Party") shall within ten (10) days
after written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "`Tenancy Statement" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee
and such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes
herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or,
if this is a sublease, of the Lessee's interest in the prior lease. In the
event of a transfer of Lessor's title or interest in the Premises or in this
Lease, Lessor shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit held by Lessor at the time of such transfer
or assignment. Except as provided in Paragraph 15, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject
to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined.
18. Severability. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that
it has made, and is relying solely upon, its own investigation as to the
nature, quality, character and financial responsibility of the other Party to
this Lease and as to the nature, quality and character of the Premises.
Brokers have no responsibility with respect thereto or with respect to any
default or breach hereof by either Party.
23. Notices.
23.1 All notices required or permitted by this Lease shall be in
writing and may be delivered in person (by hand or by messenger or courier
service) or may be sent by regular, certified or registered mail or U.S. Postal
Service Express Mail, with postage prepaid, or by facsimile transmission, and
shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this
Lease shall be that Party's address for delivery or mailing of notice purposes.
Either Party may by written notice to the other specify a different address for
notice purposes, except that upon Lessee's taking possession of the Premises,
the Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to
be given to Lessor hereunder shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time hereafter designate
by written notice to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon, if sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices
delivered by United States Express Mail or overnight courier that guarantees
next day delivery shall be deemed given twenty-four (24) hours after delivery
of the same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be
deemed served or delivered upon telephone confirmation of receipt of the
transmission thereof, provided a copy is also delivered via delivery or mail.
If notice is received on a Sunday or legal holiday, it shall be deemed received
on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof.
Lessor's consent to, or approval of, any act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. Regardless of Lessor's knowledge of a Default or Breach at the time
of accepting rent, the acceptance of rent by Lessor shall not be a waiver of
any preceding Default or Breach by Lessee of any provision hereof, other than
the failure of Lessee to pay the particular rent so accepted. Any payment
given Lessor by Lessee may be accepted by Lessor on account of moneys or
damages due Lessor, notwithstanding any qualifying statements or conditions
made by Lessee in connection therewith, which such statements and/or conditions
shall be of no force or effect whatsoever unless specifically agreed to in
writing by Lessor at or before the time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. Right To Holdover. __LESSOR AGREES TO ALLOW LESSEE TO HOLD OVER AND PAY
A MONTHLY RENT 125% OF THE THEN PREVAILING MARKET RENT AS THE NEW RENT DURING
THE HOLD OVER PERIOD. THE MAXIMUM TIME THAT LESSEE WILL BE ABLE TO HOLD OVER
IS THREE MONTHS.__
<PAGE 08>
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27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are locate. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the Lenders holding any such Security Device shall have no
duty, liability or obligation to perform any of the obligations of Lessor under
this Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the
cure of said default before invoking any remedies Lessee may have by reason
thereof. If any Lender shall elect to have this Lease and/or any Option
granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not:
(i) be liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership, (ii) be subject to any
offsets or defenses which Lessee might have against any prior lessor, or
(iii) be bound by prepayment of more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from
the Lender that Lessee's possession and this Lease, including any options to
extend the term hereof, will not be disturbed so long as Lessee is not in
Breach hereof and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with
a sale, financing or refinancing of the Premises, Lessee and Lessor shall
execute such further writings as may be reasonably required to separately
document any such subordination or non-subordination, attornment and/or non-
disturbance agreement as is provided for herein.
31. Attorney's Fees. If any Party or Broker brings an action or proceeding
to enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter defined) or Broker in any such proceeding, action, or appeal
thereon, shall be entitled to reasonable attorney's fees. Such fees may be
awarded in the same suit or recovered in a separate suit, whether or not such
action or proceeding is pursued to decision or judgment. The term, "Prevailing
Party" shall include, without limitation, a Party or Broker who substantially
obtains or defeats the relief sought, as the case may be, whether by
compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorney's fees award shall not be
computed in accordance with any court fee schedule, but shall be such as to
fully reimburse all attorney's fees reasonably incurred. Lessor shall be
entitled to attorney's fees, costs and expenses incurred in the preparation and
service of notices of Default and consultations in connection here, whether or
not a legal action is subsequently commenced in connection with such Default or
resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter with twenty-four (24) hours notice the Premises
at any time, in the case of an emergency, and otherwise at reasonable times for
the purpose of showing the same to prospective purchasers, lenders, or lessees,
and making such alterations, repairs, improvements or additions to the Premises
or to the building of which they are a part, as Lessor may reasonably deem
necessary. Lessor may at any time place on or about the Premises or building
any ordinary "For Sale" signs and Lessor may at any time during the last one
hundred twenty (120) days of the term hereof place on or about the Premises any
ordinary "For Lease" signs. All such activities of Lessor shall be without
abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to
the contrary in this Lease, Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, Lessor shall in the event of any such
surrender, termination or cancellation, have the option to continue any one or
all of any existing subtenancies. Lessor's failure within ten (10) days
following any such event to make a written election to the contrary by written
notice to the holder of any such lesser interest, shall constitute Lessor's
election to have such event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to
an act by or for the other Party, such consent shall not be unreasonably
withheld or delayed. Lessor's actual reasonable costs and expenses (including
but not limited to architects', attorneys', engineers' or other consultants'
fees) incurred in the consideration of, or response to, a request by Lessee for
any Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to
Lessor upon receipt of an invoice add supporting documentation therefor.
Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor
may, as a condition to considering any such request by Lessee, require that
Lessee deposit with Lessor an amount of money (in addition to the Security
Deposit held under Paragraph 5) reasonably calculated by Lessor to represent
the cost Lessor will incur in considering and responding to Lessee's request.
Except as otherwise provided, any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment
of this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgement that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease
are acknowledged by Lessee as being reasonable. The failure to specify herein
any particular condition to Lessor's consent shall not preclude the imposition
by Lessor at the time of consent of such further or other conditions as are
then reasonable with reference to the particular matter for which consent is
being given.
37. Guarantor.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises
and the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. Options.
39.1 Definition. As used in this Paragraph 39 the word "Option" has
the following meaning: (a) the right to extend the term of this Lease or to
renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal to lease the Premises or the
right of first offer to lease the Premises or the right of first refusal to
lease other property of Lessor or the right of first offer to lease other
property of Lessor; (c) the right to purchase the Premises, or the right of
first refusal to purchase the Premises, or the right of first offer to purchase
the Premises, or the right to purchase other property of Lessor, or the right
of first refusal to purchase other property of Lessor, or the right of first
offer to purchase other property of Lessor.
39.2 Options Personal To Original Lessee. Each Option granted to
Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1
hereof, and cannot be voluntarily or involuntarily assigned or exercised by any
person or entity other than said original Lessee while the original Lessee is
in full and actual possession of the Premises and without the intention of
thereafter assigning or subletting. The Options, if any, herein granted to
Lessee are not assignable, either as a part of an assignment of this Lease or
separately or apart therefrom, and no Option may be separated from this Lease
in any manner, by reservation or otherwise.
<PAGE 09>
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39.3 Multiple Options. In the event that Lessee has any Multiple
Options to extend or renew this Lease, a later Option cannot be exercised
unless the prior Options to extend or renew this Lease have been validly
exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary:
(i) during the period commencing with the giving of any notice of Default under
Paragraph 13.1 and continuing until the noticed Default is cured, or (ii)
during the period of time any monetary obligation due Lessor from Lessee is
unpaid (without regard to whether notice thereof is given Lessee), or
(iii) during the time Lessee is in Breach of this Lease, or (iv) in the event
that Lessor has given to Lessee three (3) or more notices of Default under
Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12)
month period immediately preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise
an Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due
and timely exercise of the Option, if, after such exercise and during the term
of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or
(ii) Lessor gives to Lessee three (3) or more notices of Default under
Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults
are cured, or (iii) if Lessee commits a Breach of this Lease. __SEE ADDENDUM
FOR PARAGRAPH 39.5 AND 39.6.__
40. Multiple Buildings. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for
the management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred
in connection therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. Offer. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the
property of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or
Lessee. __SEE ADDENDUM FOR PARAGRAPH 1.2 (CONTINUED), 1.3 (CONTINUED), 1.5
(CONTINUED), 1.7 (CONTINUED), 2.1 (CONTINUED), 2.3 (CONTINUED), 7.4(b)
(CONTINUED), 39.5, 39.6, 49, AND 50.__
Lessor and Lessee have carefully read and reviewed this lease and
each term and provision contained herein, and by the execution of
this lease show their informed and voluntary consent thereto. The
parties hereby agree that, at the time this lease is executed, the
terms of this lease are commercially reasonable and effectuate the
intent and purpose of lessor and lessee with respect to the
premises.
If this lease has been filled in, it has been prepared
for submission to your attorney for his approval.
Further, experts should be consulted to evaluate the
condition of the property as to the possible presence
of asbestos, storage tanks or hazardous substances.
No representation or recommendation is made by the
American Industrial Real Estate Association or by the
real estate broker(s) or their agents or employees as
to the legal sufficiency, legal effect, or tax
consequences of this lease or the transaction to which
it relates; the parties shall rely solely upon the
advice of their own counsel as to the legal and tax
consequences of this lease. If the subject property
is located in a state other than California, an
attorney from the state where the property is located
should be consulted.
The parties hereto have, executed this Lease at the place on the
dates specified above to their respective signatures.
Executed at __VISTA, CALIFORNIA__ Executed at __CARLSBAD, CALIFORNIA__
on ___________JANUARY 1, 1998____ on ___________JANUARY 5, 1998_______
by Lessor: By Lessee:
__MITSUI FUDOSAN (USA), INC.__ _PACIFIC RESEARCH & ENGINEERING CORP
__A CALIFORNIA CORPORATION____ _A CALIFORNIA CORPORATION___________
By _/S/ BERNARD W. GILMORETITLE__ By _____/S/ JACK K. WILLIAMS________
Name Printed: Name Printed:
__BERNARD W. GILMORETITLE_____ _JACK K. WILLIAMS___________________
Title: Title:
__SENIOR VICE PRESIDENT_______ _PRESIDENT / CHIEF EXECUTIVE OFFICER
Address: Address:
__2440 GRAND AVENUE, SUITE B _2770 CAMINO VIDA ROBLE
__VISTA, CALIFORNIA 92083 _CARLSBAD, CALIFORNA 92009
Tel. No. (760) 598-0264 Tel. No. (760) 438-3911
Fax No. (760) 727-3472. Fax No. (760) 438-9277
<PAGE 10>
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ADDENDUM TO AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL /
COMMERCIAL SINGLE-TENANT LEASE - NET DATED DECEMBER 19, 1998 BY AND BETWEEN
MITSUI FUDOSAN (USA), INC., A CALIFORNIA CORPORATION, AS LESSOR, AND PACIFIC
RESEARCH AND ENGINEERING CORPORATION, A CALIFORNIA CORPORATION, AS LESSEE
===============================================================================
1.2 Premises (continued).
A. Lessor and Lessee will approve those certain preliminary plans
and outline specifications including both a Site Development Plan and Tenant
Improvement Plan for construction of the subject premises and certain
improvements on the demised premises ("Leasehold Improvements"), such
preliminary pLans and outline specifications will be attached hereto as
Exhibits "A" and "B" and incorporated herein by reference. Lessor shall
construct the demised premises with the Leasehold Improvements.
B. Proposed Plans. From such preliminary plans and outline
specification, Lessor shall have an architect reasonably approved by Lessee
prepare proposed final plans and specifications ("Proposed Plans")
substantially in conformity with said preliminary plans and outline
specifications including any changes necessary to meet with governmental
building requirements. The Proposed Plans shall be delivered to Lessee as soon
as reasonably possible from the date hereof. Within seven (7) working days
after delivery of the Proposed Plans to Lessee, Lessee shall set forth in
writing with particularity and precision any (i) corrections or change
necessary to bring the Proposed Plans into substantial conformity with said
preliminary plans and outline specifications and (ii) additions which are
necessary to address details not addressed by the preliminary plans and outline
specifications. If Lessee delivers to Lessor such statement of corrections,
change and additions, except as to additions which, when viewed in the
aggregate, materially increase the costs of construction. Lessor shall have
the Proposed Plans revised substantially in accordance therewith and the
Proposed Plans as revised in accordance with such statement of corrections,
additions and change shall be deemed approved by Lessee (hereinafter, "Proposed
Plans" shall mean the Proposed Plans or revised Proposed Plans, as
appropriate). Failure to deliver to Lessor written notice of any such
corrections or changes within said seven (7) working day period shall
constitute approval of the Proposed Plans by Lessee.
C. As soon as reasonably possible, both Lessor and Lessee shall
endorse on the Plans approval thereof for the purpose of filing the same with
the City of Vista in connection with permit applications for the Improvements
(the "Endorsed Approval of the Plans") thereafter changes may be made only in
accordance with paragraph 1.2(b).
D. Lessor has obtained a Fixed Price Bid ("The Bid") for
construction of the Improvements on which Lessor has based Fixed Rent under
this lease. The Bid is based on Preliminary Plans and Specifications in that
the Proposed Plans are not expected to materially deviate from the Preliminary
Plans and Specifications. Lessor will guarantee the cost of improvements and
has based this Fixed Rent on the shell costs and a portion of the tenant
improvements up to a maximum amount of $1,120,000.00, in accordance with
Paragraph 49 of this lease. This rent will not increase unless such increases
are due to (1.) Lessees delays or change orders submitted by Lessee or
(2.) increases in the city fees that occur during the additional time resulting
from any Lessee delays or change orders.
E. Construction. Within five (5) working days following the
Endorsed Approval of the Plans, as set forth above, Lessor or the general
contractor selected by Lessor shall apply for all building permits necessary
for construction of the Improvements. Lessor, at its sole expense, shall
proceed diligently with the construction and completion of the Improvements
substantially in accordance with the Plans and building permit(s). Lessor
shall complete the construction of the shell building and Tenant Improvements
not later than eight (8) months from the date Lessor and Lessee mutually agree
upon the "Proposed Plans"; provided, however, such date shall be extended by a
period of time equal to the period of any delay or delays encountered by Lessor
affecting said work of construction because of fire, earthquake, rain, or other
acts of God in the nature of a casualty, act of public enemy, riot,
<PAGE 11>
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ADDENDUM TO AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL /
COMMERCIAL SINGLE-TENANT LEASE - NET DATED DECEMBER 19, 1998 BY AND BETWEEN
MITSUI FUDOSAN (USA), INC., A CALIFORNIA CORPORATION, AS LESSOR, AND PACIFIC
RESEARCH AND ENGINEERING CORPORATION, A CALIFORNIA CORPORATION, AS LESSEE
===============================================================================
insurrection, strikes or boycotts, shortage of material or labor, change in the
plans pursuant to Paragraph 1.2(e) or any other causes beyond the reasonable
control of Lessor including delays caused by Lessee ("Improvements Delay
Period"). Any such extension shall be conditioned upon Lessor first notifying
Lessee of a delay Lessor considers to be an Improvements Delay Period within
five (5) days following the occurrence of the subject delay. Upon reasonable
advance notice, Lessee, at its own risk and expense, may inspect the
Improvements during the course of construction and may call to Lessor's
attention any material deviation between the as-built improvements in progress
and the Plans and Lessor shall cause its general contractor to correct the
same.
F. Changes in the plans. Lessee shall have the right to request
changes in the Plans, which requests shall not be unreasonably denied;
provided, however, that (i) such right shall not be exercised unreasonably;
(ii) no such request shall result in any major structural change in the
Improvements; (iii) through an adjustment in Fixed Rent pursuant to
Paragraph 1.5, Lessee shall pay any additional costs required to implement such
changes, including, architectural fees, increase in construction costs and any
other charges payable hereunder caused by such changes; and (iv) such request
shall constitute an agreement on the part of Lessee to any delay in completion
caused by reviewing, processing and implementing such changes.
G. Completion of Punch-List Items and Adjustments. The
Improvements shall be completed in accordance with this Lease generally and
Paragraph 1.2(b) of this Lease specifically. Lessee will submit to Lessor a
punch list of items that require repair within thirty (30) days after
occupancy. Lessor shall use its best efforts to complete items submitted on
said punch list within thirty (30) days after receipt.
H. Warranties. All warranties received by Lessor from contractors
and materialmen for work done according to the Plans shall inure to the benefit
of Lessee, and during the construction period Lessor shall enforce the same on
behalf of Lessor and Lessee. Lessor agrees that it shall obtain from those who
construct the Improvements a warranty in the usual form against defective
workmanship and materials for a period of at least one (1) year from the
Occupancy Date, except that in respect of the roof such warranty shall be for a
period of ten (10) years. Lessee is responsible for normal preventive
maintenance and repair of the roof structure. A copy of all such construction
warranties shall be provided to Lessee prior to the Occupancy Date and all such
warranties shall be deemed assigned by Lessor to Lessee in the event Lessor
fails to repair or cause to be repaired warranted items during the term of the
applicable warranty.
1.3 Term (continued).
A. Notwithstanding anything in this lease to the contrary, the
term of this lease shall commence on the earlier of the following dates
("Commencement of Term").
1. Thirty (30) days subsequent to the date the demised premises
are ready for occupancy and Lessor gives to Lessee both a certificate from
Lessor's architect stating that, except for "Punch List" items, the
Improvements (as defined herein) have been completed and a copy of a
Certificate of Occupancy with respect to the demised premises duly issued by
the City of Vista; or
2. Thirty (30) days subsequent to the date Lessee occupies the
demised premises.
B. The parties agree to execute a memorandum setting forth the
occupancy date, the date of expiration of the term and any increase or decrease
in rent pursuant to Paragraph 1.5. The Improvements shall be deemed to be
<PAGE 12>
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ADDENDUM TO AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL /
COMMERCIAL SINGLE-TENANT LEASE - NET DATED DECEMBER 19, 1998 BY AND BETWEEN
MITSUI FUDOSAN (USA), INC., A CALIFORNIA CORPORATION, AS LESSOR, AND PACIFIC
RESEARCH AND ENGINEERING CORPORATION, A CALIFORNIA CORPORATION, AS LESSEE
===============================================================================
"Completed" when Lessor's architect or engineer in charge of construction has
prepared, certified by his signature and delivered to Lessor and Lessee a
written statement that the Improvements have been substantially completed in
accordance with the Plans and any properly authorized changes or amendments
thereto, and certifying the date of such completion (except for minor "punch
list" items which will not preclude Lessee from conducting business from the
Demised Premises and which can and will be completed by Lessor within thirty
(30) days after being identified by Lessor and Lessee within thirty (30) days
after the Occupancy Date).
1.5 Base Rent (continued).
Lessee shall pay the rent to Lessor in advance upon the first
business day of each Rental Period of the Term or extension thereof, at
Lessor's address or at such other place designated by Lessor in a notice to
Lessee, without any prior demand therefor and without any deduction or setoff
whatsoever. If the Term or extension thereof shall commence and end on a day
other than the first day of a Rental Period, then Lessee shall pay, upon the
commencement date the Term or extension thereof and the first day of the last
Rental Period, a pro rata portion of the Fixed Rent, prorated on a per diem
basis, with respect to the portions of the fractional Rental period included in
the Term or extension thereof.
Rent shall be increased on an annual basis in accordance with the
Consumer Price Index an urban Consumers Los Angeles/Anaheim/Riverside-
Metropolitan Area (1982-84=100) published by the United States Department of
Labor, Bureau of Labor Statistics (Index). The minimum annual increase in rent
shall be three (3%) percent with a maximum annual rent increase of five (5%)
percent. Beginning with the rent due on and after the first (1st) anniversary
of the commencement of the term of this lease, and on and after each subsequent
anniversary, the Base Monthly Rent by a fraction, the numerator of which is the
Extension Index and denominator of which is the Beginning Index. If the index
is changed so that the base year differs from that in effect when the term
commences, the Index shall be converted in accordance with the conversion
factor published by the United States Department of Labor, Bureau of Labor
Statistics. If the Index is discontinued or revised during the term, such
other government index or computation with which it is replaced shall be used
in order to obtain substantially the same result as would be obtained if the
Index has not been discontinued or revised.
1.7 Security Deposit (continued).
The following Security Deposit Amounts shall be due as indicated
below:
Upon signing the lease document: $ 47,719.03
Upon tilting of walls of premises $ 95,438.06
---------
Total $143,157.09
Upon occupancy of the premises by Lessee, the first months rent
paid per Paragraph 1.6 of the lease shall apply. Additionally, the Security
Deposit paid upon tilting of the walls of the premises shall apply as rent for
months two (2) and three (3) of the lease term.
2.1 Letting (continued).
Lessor and Lessee agree that the actual square footage of the
Premises and how it has been determined is stated in Paragraph 1.2 above.
<PAGE 13>
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ADDENDUM TO AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL /
COMMERCIAL SINGLE-TENANT LEASE - NET DATED DECEMBER 19, 1998 BY AND BETWEEN
MITSUI FUDOSAN (USA), INC., A CALIFORNIA CORPORATION, AS LESSOR, AND PACIFIC
RESEARCH AND ENGINEERING CORPORATION, A CALIFORNIA CORPORATION, AS LESSEE
===============================================================================
2.3 Compliance With Covenants, Restrictions And Building
Code(Continued).
Lessee shall comply with the Covenants, Conditions and
Restrictions established for Oak Ridge Business Center III, recorded December
28,1988 at 3:59 p.m.
7.4(b) Removal (continued).
Lessor agrees that it will review all Lessee owned alterations and
determine prior to installation by Lessee if the alterations will be required
to be removed at the expiration of the Lease.
39.5 Option To Extend Term.
In accordance with paragraph 39 of this lease and Lessee is in
possession of the Premises, Lessee shall have two (2) five (5) year options to
extend the term of this lease at a rental rate which shall be ninety-five (95%)
percent of the prevailing market rental rate for similar office / industrial
space. Lessee must give notice, in writing, to Lessor one hundred eighty (180)
days prior to expiration of the original lease term of this lease in order to
exercise said option(s). If Lessor and Lessee are not able to reach a written
agreement on the rent of this extension within thirty (30) days, of Lessee's
exercise of notice then the prevailing "fair market rental rate" shall be
determined by appraisers appointed as hereinafter set forth, based on
comparable rentals for similar office / industrial space, for non-renewing non-
encumbered tenants then charged and collected in North San Diego County taking
into account items that professional real estate appraisers customarily
consider including location, credit of the tenants of other properties, size,
age, design, utility and other relevant factors of other properties in the area
as they compare to the subject premises. The option(s) to extend is personal
to Lessee and may not be exercised or assigned voluntarily or involuntarily by
or to any person or entity other than Lessee, except to an assignee not
requiring Lessor's consent as provided in the section above. The option(s)
hereby granted to Lessee is not assignable separate and apart from this lease,
as provided in paragraph 39 above. The rent thereafter shall be adjusted in
accordance with paragraph 39.6 of the lease (Cost of Living Adjustment [for
options]). Any required appraisal in regard to "fair market rental value"
shall be made as follows: If Lessor and Lessee are unable to come to written
agreement in regard to the rent for each option period within thirty (30) days
of the exercised date, then Lessor and Lessee shall each appoint in writing an
independent qualified real estate appraiser, who shall be a member of the
American Institute of Real Estate Appraisers or equivalent, with at least five
(5) years experience appraising industrial property. Each of these two (2)
appraisers shall prepare a written determination of Fair Market Rental Value
within thirty (30) days. If the two (2) appraisals are within five (5%)
percent, with respect to the annual base rent then the average shall be
calculated and the value thus determined shall conclusively be deemed to be the
fair market rental value of the leased premises for the purposes of this
paragraph and shall accrue from the first (1st) day of the extended term
thereof. However, if the two (2) appraisals are not within (5%) percent then
upon mutual agreement, Lessor and Lessee shall instruct each of their
appraisers to appoint a third appraiser with qualifications as outlined above
within ten (10) days. Such independent third appraiser shall have twenty (20)
days to make his own determination of "fair market rental value" which shall
then conclusively be deemed to be the "fair market rental value" of the lease
premises for the purposes of this paragraph and shall accrue from the first
(1st) day of the extended term hereof. Each party shall pay for the cost of
its appointed appraiser and one-half (1/2) of the of the third (3rd) appraiser.
If either Lessor and Lessee fails to appoint an appraiser, then the appraiser
appointed by the party appointing an appraiser shall make the required
appraisal acting alone and the decision of such appraiser as to "fair market
rental value" of the premises shall be conclusive and binding upon Lessor and
Lessee. In no event shall, delay in the determination of the "fair market
<PAGE 14>
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ADDENDUM TO AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL /
COMMERCIAL SINGLE-TENANT LEASE - NET DATED DECEMBER 19, 1998 BY AND BETWEEN
MITSUI FUDOSAN (USA), INC., A CALIFORNIA CORPORATION, AS LESSOR, AND PACIFIC
RESEARCH AND ENGINEERING CORPORATION, A CALIFORNIA CORPORATION, AS LESSEE
===============================================================================
value" of the premises effect Lessee's obligation to pay the amount of rent as
is then in force, or the amount of increase, if any, immediately upon receipt
of notification of same. Lessee shall have the option to withdraw its exercise
of the option to extend within five (5) days after final determination of fair
market value by written notice to Lessor, in which event the Lease shall expire
at the end of the current term and Lessee shall reimburse Lessor for its share
of the appraisals (if any).
39.6 Cost Of Living Adjustment (For Options). The base for computing
the increase in the Consumer Price Index All Urban Consumers Los Angles /
Anaheim / Riverside-Metropolitan Area (1982-84=100), published by the United
States Department of Labor, Bureau of Labor Statistics ("Index"), which is in
effect on the ninetieth (90th) day preceding the date of the commencement of
the terms ("Beginning Index"). The Index published and in effect on the
ninetieth (90th) day preceding each anniversary of the commencement of the term
of this lease ("Extension Index") is to be used in determining the amount of
the increase from one year to the next. Beginning with the rent due on and
after the first (1st) anniversary of the commencement of the term of this
lease, and on and after each subsequent anniversary, the Base Monthly Rent by a
fraction, the numerator of which is the Extension Index and the denominator of
which is the Beginning Index. If there is a decline from one lease year to the
next in the Extension Index, the monthly rent due during the subsequent lease
year shall equal the monthly rent due during the then present lease year. If
the index is changed so that the base year differs from that in effect when the
term commences, the Index shall be converted in accordance with the conversion
factor published by the United States Department of Labor, Bureau of Labor
Statistics. If the Index is discontinued or revised during the term, such
other government index or computation with which it is replaced shall be used
in order to obtain substantially the same result as would be obtained if the
Index has not been discontinued or revised.
49. Tenant Improvements.
(1) Lessor will provide for the tenant improvements ("Tenant
Improvements") indicated on the improvement estimate attached as Exhibit "B",
which is mutually acceptable to both Lessor and Lessee. The space plan for the
Tenant Improvements ("Space Plan") shall be prepared by Howard Anderson and
Associates Architecture and shall be subject to the approval of Lessor and
Lessee. Lessee shall be responsible for executing a written fixed Price
Contract between Lessee and Howard Anderson and Associates, whose fee will be
paid out of the Tenant Improvement Allowance referenced in Paragraph 49.2
below. The parties anticipate that certain changes will be made to Exhibit "B"
in the course of finalizing the Space Plan, and the parties' approval of the
Space Plan shall not be unreasonably withheld or delayed. Lessor shall cause
working drawings ("Working Drawings") to be prepared in conformance with the
approved Space Plan. Lessee shall have the right to approve the Working
Drawings within two (2) business days after Lessee's receipt, but approval
shall not be unreasonably withheld if the Working Drawings are in conformance
with the approval Space Plan. Lessor's agent, Lusardi Construction, shall
construct the Tenant Improvements in accordance with Exhibit "B" the approved
Working Drawings. Lessor shall be deemed to have completed the Tenant
Improvements and to have delivered possession of the Property to Lessee for of
commencing the Lease Term when Lessor's architect certifies to
Lessee in writing that the Tenant Improvements have been completed in
accordance with the approved Working Drawings, with no more than minor "punch
list" items to be corrected.
(2) The costs of Tenant Improvements, including construction costs,
construction drawings, space planning, permits and fees, shall be allocated
between the parties as follows: (i) Lessor shall pay such costs up to a
maximum of $1,120,000.00; (ii) any excess costs above $1,120,000.00 shall be
covered by a contract between Lusardi Construction and Lessee. Lessee shall be
responsible for paying these excess costs directly to Lusardi Construction.
<PAGE 15>
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ADDENDUM TO AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL /
COMMERCIAL SINGLE-TENANT LEASE - NET DATED DECEMBER 19, 1998 BY AND BETWEEN
MITSUI FUDOSAN (USA), INC., A CALIFORNIA CORPORATION, AS LESSOR, AND PACIFIC
RESEARCH AND ENGINEERING CORPORATION, A CALIFORNIA CORPORATION, AS LESSEE
===============================================================================
(3) Each Party shall take all necessary actions and grant all
necessary approvals in compliance with the schedule ("Tenant Improvement
Schedule") attached hereto as Exhibit "C" in order to facilitate timely
completion of the Tenant Improvements.
(4) Lessor Warranties. In connection with its construction of
Improvements, Lessor represents and warranties:
a. That the air conditioning, heating and ventilation system
installed in the demised premises shall meet with any applicable federal and
local standards and comply with Title 24 of the California Administrative Code
as applied by the Uniform Building Code of the City of Vista as of the time of
installation of such system.
b. The Improvements shall be constructed in a first class manner,
free from defects in materials, workmanship or design and in compliance with
all current laws, ordinances, regulations and codes relating thereto including
the Americans with Disabilities Act.
"CONSULT YOUR ADVISORS - This document has been prepared for approval by your
attorney. No representation or recommendation is made by Colliers
International as to the sufficiency or tax consequences of this document or the
transaction to which it relates. These are questions for your attorney. In
any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other person,
with experience in evaluating the condition of the property, including the
possible presence of asbestos, hazardous materials and underground storage
tanks."
<PAGE 16>
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EXHIBIT B
TENANT IMPROVEMENT PLAN
(To be added at a later date.)
<PAGE 17>
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EXHIBIT C
CONSTRUCTION / TENANT IMPROVEMENT SCHEDULE
(To be added at a later date.)
<PAGE 18>
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COLLIERS ILIFF THORN
HAZARDOUS WASTES OR SUBSTANCES
ADDENDUM TO LEASEIPROPOSAL TO LEASE
Dated __December 19, 1998__
The Undersigned ("Landlord") represents that Landlord has no knowledge,
except as otherwise disclosed in writing, of the existence or prior existence
(the term "existence" including, but not being limited to, generation,
location, transportation, storage, treatment, discharge, disposal, release or
threatened release) on the Premises of the land upon which the Premises is
located (collectively, the "Property") of any Hazardous Wastes or Substances or
storage tanks above or below the ground.
Landlord is aware of the following inspection reports, studies, letters,
test results, advisories and similar documents (collectively, "Reports"),
addressing the issue of the existence or non-existence on the Property of
Hazardous Wastes or Substances or storage tanks and represents that Landlord
has no knowledge of any other Reports not listed (list all such Reports; if
none, write "No Reports").
===============================================================================
Limited Hazardous Waste Potential Assessment for Oak Ridge Business Center -
Phase III, Vista, California, November 1990. Prepared by Robert Prater
Associates Consulting Soil, Foundation & Geological Engineers.
===============================================================================
Upon execution of the Lease, Landlord shall provide Tenant with copies of
any and all Reports and any and all modifications and supplements to the
Reports which may be obtained by Landlord.
If at any time Hazardous Wastes or Substances or underground storage tanks
are determined to exist on the Property (other than as disclosed in the
Reports), Landlord shall either (a) take those steps that may be necessary or
reasonable to remove or otherwise abate the effect of such items in accordance
with all applicable rules, regulations, laws and requirements; or (b) by
written notice to Tenant, give Tenant the right to terminate this Lease.
Landlord shall use its best efforts not to materially interfere with the
conduct of Tenant's business during any such removal or abatement process.
Landlord and Tenant expressly acknowledge that Colliers Iliff Thorn
("Broker") has not made an independent investigation or determination with
respect to the existence or prior existence on the Property of Hazardous Wastes
or Substances or storage tanks. Any such investigation or determination shall
be the responsibility of Landlord and Tenant and Broker shall not be held
responsible therefor, and Landlord and Tenant shall indemnify and hold harmless
Broker from and against any liability or responsibility claimed in connection
therewith.
The term "hazardous wastes or substances" is used herein in its broadest
sense and includes, but is not limited to, petroleum base products, paints and
solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonium
compounds, asbestos, PCB's, contaminants, toxic wastes, toxic pollutants,
dredged soil, solid waste, pesticides, herbicides, fertilizers and other
agricultural chemicals, incinerator residue, sewage, garbage, sewage sludge,
munitions, chemical wastes and products, biological materials, radioactive
materials, wrecked or discarded equipment, and mining, industrial, municipal
and agricultural wastes or any other liquid, solid or gaseous pollutants or
hazardous substances, and the same or any other wastes or substances subject to
regulation under any State or Federal environmental protection law or
regulation.
Landlord: TENANT:
__Mitsui Fudosan (USA), Inc.__ _Pacific Research & Engineering Corp._
____/S/ Bernard W Gilmore_____ __________/S/ Jack Williams___________
____Senior Vice President_____ __President / Chief Executive Officer_
<PAGE 19>
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NOTICE TO OWNERS, BUYERS AND TENANTS REGARDING
HAZARDOUS WASTES OR SUBSTANCE AND
UNDERGROUND STORAGE TANKS
Comprehensive federal and state laws and regulations have been enacted in
the last few years in an effort to develop controls over the use, storage,
handling, clean-up, removal and disposal of hazardous wastes or substances
(including pollutants). Some of these laws and regulations, such as, for
example, the so-called "Superfund Act," provide for broad liability schemes
wherein an owner, tenant or other user of the property may be liable for clean-
up costs and damages regardless of fault and even though the contamination
occurred prior to the time he acquired an interest in the property. Other laws
and regulations set standards for the handling of asbestos or establish
requirements for the use, modification, abandonment, or closing of underground
storage tanks. Still other laws and regulations apply to the release of any
pollutants that may reach an aquifer or the environment.
It is often difficult to determine whether hazardous wastes or substances
are present. With respect to improved property, for instance, various items
utilized in the construction of improvements may contain materials that have
been or may in the future be determined to contain hazardous wastes or
substances and may need to be specially treated, specially handled and/or
removed from the property. For example, some electrical transformers and other
electrical components can contain PCB's, and asbestos has been used in a wide
variety of building components such as fire-proofing, air duct insulation,
acoustical tiles, spray-on acoustical materials, linoleum, floor tiles and
plaster. Hazardous wastes or substances may be in above-ground and below-
ground containers on the property or may be present on or in soil, water,
building components or other portions of the property in areas that may or may
not be accessible or noticeable. It is generally important to obtain expert
assistance for site investigations and building inspections. The past uses of
the property may also provide valuable information as to the likelihood of
hazardous wastes or substance or underground storage tanks being on the
property.
It is not practical or possible to list all the applicable laws and
regulations or all the areas of concern in this Notice. Therefore, owners,
buyers and tenants are urged to consult legal counsel to determine their
respective rights and liabilities with respect to the issues described in this
Notice as well as other aspects of the proposed transaction. You and your
counsel should review and analyze all inspection reports, studies, letters,
test results, advisories and similar documents (collectively, "Reports"),
addressing the issue of the existence or non-existence on the property of
hazardous wastes or substances or storage tanks. To the extent such Reports are
deemed inadequate or do not exist, you should obtain appropriate Reports from
qualified independent inspectors. Finally, you and your counsel should reach
an independent conclusion with respect to the impact, if any, of the existence
on the property of hazardous wastes or substances or storage tanks. If
hazardous wastes or substances (including pollutants) have been, or are going
to be used, stored, handled or disposed of on the property, or if the property
has or may have underground storage tanks, it is essential that legal and
technical advice be obtained to determine, among other things, what permits and
approvals have been or may be required, if any, the estimated costs and
expenses associated with the use, storage, handling, clean-up, removal or
disposal of the hazardous wastes or substance and what contractual provisions
and protections are necessary or desirable.
Colliers Iliff Thorn has not made investigations or obtained Reports
regarding the subject matter of this Notice, except as may described in a
separate written document signed by Colliers Iliff Thorn. Colliers Iliff Thorn
makes no representations regarding the existence or nonexistence of hazardous
wastes or substances or underground storage tanks on the property, and has no
expertise in this area that may be relied upon by any party.
The terms "hazardous wastes or substance" is used in this Notice in its
very broadest sense and includes, but is not limited to, petroleum base
products, paints and solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, ammonium compounds, asbestos, PCB's, contaminants, toxic wastes,
toxic pollutants, dredged spoil, solid waste, pesticides, herbicides,
fertilizers and other agricultural chemicals, incinerator residue, sewage,
garbage, sewage sludge, munitions, chemical wastes and products, biological
materials, radioactive materials, wrecked or discarded equipment, and mining,
industrial, municipal and agricultural wastes or any other liquid, solid or
gaseous pollutants or hazardous substance, and the same or any other wastes or
substances subject to regulation under the State or Federal environmental
protection law or regulation. Hazardous wastes or substances and underground
storage tanks may be present on all types of real property. This Notice is
therefore meant to apply to any transaction involving any type of real
property, whether improved or unimproved.
The undersigned acknowledges receipt of a copy of this Notice
Date: _8 January 1998________ Date: _____5 January 1998____________
__Mitsui Fudosan (USA), Inc.__ _Pacific Research & Engineering Corp._
____/S/ Bernard W Gilmore_____ __________/S/ Jack Williams___________
<PAGE 20>
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Attachment A
NOTICE TO OWNERS AND PROSPECTIVE BUYERS
OR TENANTS OF REAL PROPERTY REGARDING THE
AMERICANS WITH DISABILITIES ACT (ADA)
The government of the United States has recently enacted the Americans
With Disabilities Act (ADA), a federal law codified at 42/USC Section 12101
et seq. Among other requirements of the ADA that could apply to your property,
this act is intended to make owners and tenants of certain types of business
establishments defined as "public accommodations" provide facilities that are
equally accessible to persons with a variety of disabilities. State and local
laws may also impose requirements.
The real estate brokers in this transaction are not qualified to advise
you as to what, if any, changes may be required now, or in the future. We
recommend that owners and tenants consult attorneys and design professionals of
their choice for information regarding these matters and the impact, if any, on
the proposed lease or purchase agreement and the property. These are legal
issues and you are responsible for conducting your own independent
investigation of these issues. Colliers Iliff Thorn cannot give you legal
advice on these issues.
SELLER / LANDLORD: BUYER / TENANT:
MITUSI FUDOSAN (USA), INC. PACIFIC RESEARCH AND ENGINEERING CORP.
A CALIFORNIA CORPORATION A CALIFORNIA CORPORATION
By: _/S/ Bernard W Gilmore___ By: _____/S/ Jack Williams___________
____Senior Vice President_____ __President / Chief Executive Officer_
Date: _8 January 1998________ Date: _____5 January 1998____________
<PAGE 21>
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Attachment B
PUBLIC ACCOMODATION VS. COMMERCIAL FACILITY
Title III of the ADA divides covered buildings and facilities into two (2)
categories: "Public Accommodations" and "Commercial Facilities".
A public accommodation is responsible for meeting the ADA requirements for
removal of barriers. (However, areas of public accommodation that are used
only by employees at work areas are not subject to this requirement. In such
case, "reasonable accommodation" under Title 1 of the ADA must be made for
employees with a disability to enter and use those areas.)
A public accommodation must provide auxiliary aids when they are necessary
to ensure effective communication with persons who have hearing, vision, or
speech impairments. A public accommodation must also meet the technical
requirements for alterations and new construction.
The responsibilities for providing auxiliary aids and for removal of
barriers do not apply to commercial facilities. (However, "reasonable
accommodations" under Title 1 of the ADA must be made for employees with a
disability to enter and use the facility.)
USE THE CRITERIA BELOW TO DETERMINE WHICH CATEGORY
YOUR BUILDING OR FACILTIY IS IN:
PUBLIC ACCOMMODATION - A "public accommodation" is a private entity that owns,
leases (or leases to), or operates a "place of public accommodation". The
place of public accommodation is a private facility whose operations affect
commerce and fall within at least one (1) of twelve (12) categories:
* Place of lodging (e.g. an inn, hotel or motel).
* Establishment serving food or drink (a restaurant, bar, or other
establishment serving food and drink).
* Place of exhibition or entertainment (a movie house or theater).
* Place of public gathering (an auditorium, lecture hall, or convenience
center).
* Sales or rental establishment (a dry cleaner, bank, barber shop, beauty
shop, travel agency, shoe repair service, office of an accountant or lawyer,
pharmacy, insurance office, professional office of a health car provider, or
other service establishment).
* Station used for specified public transportation.
* Place of public display or collection (a museum, library, or gallery).
* Place of education (a nursery school, elementary or secondary school,
undergraduate or postgraduate private school, or other place of education).
* Social service center establishment (day care center, senior citizen center,
or food bank).
* Place of exercise or recreation (a gymnasium, health spa, or other place of
exercise or recreation).
COMMERCIAL FACILITY - A "commercial facility" is a facility intended for non-
residential use by a private entity and whose operations affect commerce.
Examples are office buildings, warehouses, factories, and other buildings in
which employment may occur.
While a public accommodation contains areas that are meant for the
public's use, a commercial facility is built for a private business and its
employees. For instance, an office building that is occupied by a single
tenant and contains no places of public accommodation would be considered a
commercial facility. According to an interpretation from the Justice
Department, it is possible for part of a building to be a commercial facility
while other portions are public accommodations.
<PAGE 22>
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Attachment C
SUMMARY OF REQUIREMENTS
UNDER TITLE III OF THE ADA
PUBLIC ACCOMMODATIONS COMMERCIAL FACILITIES
--------------------- ---------------------
Existing Buildings -
By January 26, 1992, owners, operators No requirements
and tenants must remove barriers to
access by disable persons, if the
removal is "readily achievable," and
provide auxiliary aids and services
for hearing, vision, or speech
impaired persons, unless such aids and
services would cause an "undue burden".
Alterations -
After January 26, 1992, owners, Same requirements as for public
operators and tenants must comply with accommodations
the technical requirements for
alterations to provide access for
disabled persons.
New Construction -
After January 26, 1993, owners, and Same requirements as for public
operators and tenants must comply with accommodations
the technical requirements for new
construction to provide access for
disabled persons.
<PAGE 23>
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EXHIBIT 10.12 Statement re: Line of Credit facility with Union Bank
- ----------------------------------------------------------------------------
UNION BANK OF
CALIF0RNIA
PROMISSORY NOTE
(BASE RATE)
Borrower Name PACIFIC RESEARCH & ENGINEERING CORPORATION
Borrower Address
2070 LAS PALMAS DRIVE Office: 40062 Loan Number:677 1378839 0080-00-0-000
CARLSBAD, CA 92009 Maturity Date: JUNE 7, 1999 Amount: $1,500,000.00
$1 ,500,000.00 Date MARCH 11, 1998
FOR VALUE RECEIVED, on JUNE 7. 1999, the undersigned ("Debtor") promises to pay
to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated below,
the principal sum of ONE MILLION FIVE HUNDRED THOUSAND AND NO/100 Dollars
($1,500,000.00), or so much thereof as is disbursed, together with interest
on the balance of such principal from time to time outstanding, at the per
annum rate or rates and at the times set forth below.
1. INTEREST PAYMENTS. Debtor shall pay interest on the 7TH day of each MONTH
(commencing APRIL 7. 1998). Should interest not be paid when due, it shall
become part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a year
of 360 days, for actual days elapsed.
a. BASE INTEREST RATE. At Debtor's option, amounts outstanding hereunder in
minimum amounts of at least $100,000.00 shall bear interest at a rate, based
on an index selected by Debtor, which is 2.00% per annum in excess of Bank's
LIBOR-Rate for the Interest Period selected by Debtor, acceptable to Bank.
No Base Interest Rate may be changed, altered or otherwise modified until the
expiration of the Interest Period selected by Debtor. The exercise of interest
rate options by Debtor shall be as recorded in Bank's records, which records
shall be prima facie evidence of the amount borrowed under either interest
option and the interest rate; provided, however, that failure of Bank to make
any such notation in its records shall not discharge Debtor from its obligations
to repay in full with interest all amounts borrowed. In no event shall any
Interest Period extend beyond the maturity date of this note.
To exercise this option, Debtor may, from time to time with respect to principal
outstanding on which a Base Interest Rate is not accruing, and on the expiration
of any Interest Period with respect to principal outstanding on which a Base
Interest Rate has been accruing, select an index offered by Bank for a Base
Interest Rate Loan and an Interest Period by telephoning an authorized lending
officer of Bank located at the banking office identified below prior to 10:00
a.m., Pacific time, on any Business Day and advising that officer of the
selected index, the Interest Period and the Origination Date selected
(which Origination Date, for a Base Interest Rate Loan based on the LIBOR-Rate,
shall follow the date of such selection by no more than two (2) Business Days).
Bank will mail a written confirmation of the terms of the selection to Debtor
promptly after the selection is made. Failure to send such confirmation shall
not affect Bank's rights to collect interest at the rate selected. If, on the
date of the selection, the index selected is unavailable for any reason, the
selection shall be void. Bank reserves the right to fund the principal from any
source of funds notwithstanding any Base Interest Rate selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder which is not
bearing interest at a Base Interest Rate shall bear interest at a rate per
annum equal to the Reference Rate, which rate shall vary as and when the
Reference Rate changes.
At any time prior to the maturity of this note, subject to the provisions of
paragraph 4, below, of this note, Debtor may borrow, repay and reborrow hereon
so long as the total outstanding at any one time does not exceed the principal
amount of this note. Debtor shall pay all amounts due under this note in lawful
money of the United States at Bank's SAN DIEGO COMMERCIAL BANKING Office, or
such other office as may be designated by Bank, from time to time.
<PAGE 01>
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2. LATE PAYMENTS. If any payment required by the terms of this note shall
remain unpaid ten days after same is due, at the option of Bank, Debtor shall
pay a fee of $100 to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of
Bank, and, to the extent permitted by law, interest shall be payable on the
outstanding principal under this note at a per annum rate equal to five percent
15%) in excess of the interest rate specified in paragraph 1 .b, above,
calculated from the date of default until all amounts payable under this note
are paid in full.
4. PREPAYMENT.
a. Amounts outstanding under this note bearing interest at a rate based on the
Reference Rate may be prepaid in whole or in part at any time, without penalty
or premium. Debtor may prepay amounts outstanding under this note bearing
interest at a Base Interest Rate in whole or in part provided Debtor has given
Bank not less than five (5) Business Days prior written notice of Debtor's
intention to make such prepayment and pays to Bank the liquidated damages due
as a result. Liquidated Damages shall also be paid, if Bank, for any other
reason, including acceleration or foreclosure, receives all or any portion of
principal bearing interest at a Base Interest Rate prior to its scheduled
payment date. Liquidated Damages shall be an amount equal to the present value
of the product of: (i) the difference (but not less than zero) between (a) the
Base Interest Rate applicable to the principal amount which is being prepaid,
and (b) the return which Bank could obtain if it used the amount of such
prepayment of principal to purchase at bid price regularly quoted securities
issued by the United States having a maturity date most closely coinciding
with the relevant Base Rate Maturity Date and such securities were held by Bank
until the relevant Base Rate Maturity Date ("Yield Rate"); (ii) a fraction, the
numerator of which is the number of days in the period between the date of
prepayment and the relevant Base Rate Maturity Date and the denominator of
which is 360; and (iii) the amount of the principal so prepaid (except in the
event that principal payments are required and have been made as scheduled
under the terms of the Base Interest Rate Loan being prepaid, then an amount
equal to the lesser of (A) the amount prepaid or (B) 50% of the sum of (1) the
amount prepaid and (2) the amount of principal scheduled under the terms of the
Base Interest Rate Loan being prepaid to be outstanding at the relevant Base
Rate Maturity Date). Present value under this note is determined by discounting
the above product to present value using the Yield Rate as the annual discount
factor.
b. In no event shall Bank be obligated to make any payment or refund to
Debtor, nor shall Debtor be entitled to any setoff or other claim against Bank,
should the return which Bank could obtain under this prepayment formula exceed
the interest that Bank would have received if no prepayment had occurred. All
prepayments shall include payment of accrued interest on the principal amount
so prepaid and shall be applied to payment of interest before application to
principal. A determination by Bank as to the prepayment fee amount, if any,
shall be conclusive.
c. Bank shall provide Debtor a statement of the amount payable on account of
prepayment. Debtor acknowledges that (I) Bank establishes a Base Interest Rate
upon the understanding that it apply to the Base Interest Rate Loan for the
entire Interest Period, and (ii) any prepayment may result in Bank incurring
additional costs, expenses or liabilities; and Debtor agrees to pay these
liquidated damages as a reasonable estimate of the costs, expenses and
liabilities of Bank associated with such prepayment.
5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but
not be limited to, any of the following: (a) the failure of Debtor to make
any payment required under this note when due; (b) any breach,
misrepresentation or other default by Debtor, any guarantor, co-maker,
endorser, or any person or entity other than Debtor providing security for
this note (hereinafter individually and collectively referred to as the
"Obligor") under any security agreement, guaranty or other agreement between
Bank and any Obligor; (c) the insolvency of any Obligor or the failure of any
Obligor generally to pay such Obligor's debts as such debts become due; (dl
the commencement as to any Obligor of any voluntary or involuntary proceeding
under any laws relating to bankruptcy, insolvency, reorganization, arrangement,
debt adjustment or debtor relief; (e) the assignment by any Obligor for the
benefit of such Obligor's creditors; (f) the appointment, or commencement of
any proceeding for the appointment of a receiver, trustee, custodian or
similar official for all or substantially all of any Obligor's property; (g)
the commencement of any proceeding for the dissolution or liquidation of any
Obligor; (h) the termination of existence or death of any Obligor; (i) the
revocation of any guaranty or subordination agreement given in connection with
this note; (j) the failure of any Obligor to comply with any order, judgement,
injunction, decree, writ or demand of any court or other public authority; (k)
the filing or recording against any Obligor, or the property of any Obligor,
of any notice of levy, notice to withhold, or other legal process for taxes
other than property taxes; (I) the default by any Obligor personally liable for
amounts owed hereunder on any obligation concerning the borrowing of money;
(in) the issuance against any Obligor, or the property of any Obligor, of any
writ of attachment, execution, or other judicial lien; or (n) the deterioration
of the financial condition of any Obligor which results in Bank deeming itself,
in good faith, insecure. Upon the occurrence of any such default, Bank, in its
discretion, may cease to advance funds hereunder and may declare all
obligations under this note immediately due and payable; however, upon the
occurrence of an event of default under d, e, f, or g, all principal and
interest shall automatically become immediately due and payable.
6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are
not paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or enforcement
of this note. Debtor and any endorsers of this note, for the maximum period of
time and the full extent permitted by law, (a) waive diligence, presentment,
demand, notice of nonpayment, protest, notice of protest, and notice of every
kind; (b) waive the right to assert the defense of any statute of limitations
to any debt or obligation hereunder; and (c) consent to renewals and extensions
of time for the payment of any amounts due under this note. If this note is
signed by more than one party, the term "Debtor" includes each of the
undersigned and any successors in interest thereof; all of whose liability shall
be joint and several. Any married person who signs this note agrees that
recourse may be had against the separate property of that person for any
obligations hereunder. The receipt of any check or other item of payment by
Bank, at its option, shall not be considered a payment on account until such
check or other item of payment is honored when presented for payment at the
drawee bank. Bank may delay the credit of such payment based upon Bank's
schedule of funds availability, and interest under this note shall accrue
until the funds are deemed collected. In any action brought under or arising
out of this note, Debtor and any Obligor, including their successors and
assigns, hereby consent to the jurisdiction of any competent court within the
State of
<PAGE 02>
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California, as provided in any alternative dispute resolution agreement
executed between Debtor and Bank, and consent to service of process by any
means authorized by said state's law. The term "Bank" includes, without
limitation, any holder of this note. This note shall be construed in accordance
with and governed by the laws of the State of California. This note hereby
incorporates any alternative dispute resolution agreement previously,
concurrently or hereafter executed between Debtor and Bank.
7. DEFINITIONS. As used herein, the following terms shall have the meanings
respectively set forth below: "Base Interest Rate" means a rate of interest
based on the LIBOR-Rate. "Base Interest Rate Loan" means amounts outstanding
under this note that bear interest at a Base Interest Rate. "Base Rate Maturity
Date" means the last day of the Interest Period with respect to principal
outstanding under a Base Interest Rate Loan. "Business Day" means a day on
which Bank is open for business for the funding of corporate loans, and, with
respect to the rate of interest based on the LIBOR Rate, on which dealings in
U.S. dollar deposits outside of the United States may be carried on by Bank.
"Interest Period" means with respect to funds bearing interest at a rate based
on the LIBOR Rate, any calendar period of one, three, six, nine or twelve
months. In determining an Interest Period, a month means a period that starts
on one Business Day in a month and ends on and includes the day preceding the
numerically corresponding day in the next month. For any month in which thereno
such numerically corresponding day, then as to that month, such day shall
be deemed to be the last calendar day of such month. Any Interest Period which
would otherwise end on a non-Business Day shall end on the next succeeding
Business Day unless that is the first day of a month, in which event such
Interest Period shall end on the next preceding Business Day. "LIBOR Rate"
means a per annum rate of interest (rounded upward, if necessary, to the
nearest 1/100 of 1%) at which dollar deposits, in immediately available funds
and in lawful money of the United States would be offered to Bank, outside of
the United States, for a term coinciding with the Interest Period selected by
Debtor and for an amount equal to the amount of principal covered by Debtor's
interest rate selection, plus Bank's costs, including the costs, if any, of
reserve requirements. "Origination Date" means the first day of the Interest
Period. "Reference Rate" means the rate announced by Bank from time to time at
its corporate headquarters as its Reference Rate. The Reference Rate is an
index rate determined by Bank from time to time as a means of pricing certain
extensions of credit and is neither directly tied to any external rate of
interest or index nor necessarily the lowest rate of interest charged by Bank
at any given time.
Pacific Research & Engineering Corporation
By: Larry Eyler, V.P. and CFO
<PAGE 03>
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UNION BANK OF
CALIFORNIA
PROMISSORY NOTE (BASE RATE)
Borrower Name PACIFIC RESEARCH & ENGINEERING CORPORATION
Borrower Address 2070 LAS PALMAS DRIVE CARLSBAD, CA 92009
Office 40062 Loan Number 6771378839
Maturity Date MARCH 15, 2001 Amount $750,000.00
$750,000.00 Date MARCH 11, 1998
FOR VALUE RECEIVED, on MARCH 15, 2001, the undersigned ("Debtor") promises to
pay to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated below,
the principal sum of SEVEN HUNDRED FIFTY THOUSAND AND NO/100 Dollars
($750,000.00), or so much thereof as is disbursed, together with interest on the
balance of such principal from time to time outstanding, at the per annum rate
or rates and at the times set forth below.
1. PAYMENTS.
PRINCIPAL PAYMENTS. Debtor shall pay principal in installments of TWENTY
THOUSAND EIGHT HUNDRED THIRTY THREE AND 34/100 Dollars ($20.833.34) each on
the 15TH day of each MONTH, commencing APRIL 15. 1998. The availability under
this note shall be reduced on the same day and in the same amount as each
scheduled principal payment.
INTEREST PAYMENTS. Debtor shall pay interest on the 15TH day of each MONTH
(commencing APRIL 15, 1998). Should interest not be paid when due, it shall
become part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a year
of 360 days, for actual days elapsed.
a. BASE INTEREST RATE. At Debtor's option, amounts outstanding hereunder in
minimum amounts of at least $100,000.00 shall bear interest at a rate, based
on an index selected by Debtor, which is 3.00% per annum in excess of Bank's
LIBOR-Rate for the Interest Period so selected by Debtor, acceptable to Bank.
No Base Interest Rate may be changed, altered or otherwise modified until the
expiration of the Interest Period selected by Debtor. The exercise of interest
rate options by Debtor shall be as recorded in Bank's records, which records
shall be prima facie evidence of the amount borrowed under either interest
option and the interest rate; provided, however, that failure of Bank to make
any such notation in its records shall not discharge Debtor from its
obligations to repay in full with interest all amounts borrowed. In no event
shall any Interest Period extend beyond the maturity date of this note.
To exercise this option, Debtor may, from time to time with respect to
principal outstanding on which a Base Interest Rate is not accruing, and on
the expiration of any Interest Period with respect to principal outstanding on
which a Base Interest Rate has been accruing, select an index offered by Bank
for a Base Interest Rate Loan and Interest Period by telephoning an authorized
lending officer of Bank located at the banking office identified below prior
to 10:00 a.m., Pacific time, on any Business Day and advising that officer of
the selected index, the Interest Period and the Origination Date selected
(which Origination Date, for a Base Interest Rate Loan based on the LIBOR-Rate,
shall follow the date of such selection by no more than two (2) Business Days).
Bank will mail a written communication of the terms of the selection to Debtor
promptly after the selection is made. Failure to send such confirmation shall
not affect Bank's rights to collect interest at the rate selected. If, on the
date of the selection, the index selected is unavailable for any reason, the
selection shall be void. Bank reserves the right to fund the principal from
any source of funds notwithstanding any Base Interest Rate selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder which is not
bearing interest at a Base Interest Rate shall bear interest at a rate per
annum of 0.25% in excess of the Reference Rate, which rate shall vary as and
when the Reference Rate changes.
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Debtor shall pay all amounts due under this note in lawful money of the United
States at Bank's SAN DIEGO COMMERCIAL BANKING Office, or such other office as
may be designated by Bank, from time to time.
2. LATE PAYMENTS. If any payment required by the terms of this note shall
remain unpaid ten days after same is due, at the option of Bank, Debtor shall
pay a fee of $100 to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of
Bank, and, to the extent permitted by law, interest shall be payable on the
outstanding principal under this note at a per annum rate equal to five percent
(5%) in excess of the interest rate specified in paragraph 1 .b, of this note,
calculated from the date of default until all amounts payable under this note
are paid in full.
4. PREPAYMENT.
a. Amounts outstanding under this note bearing interest at a rate based on the
Reference Rate may be prepaid in whole or in part at any time, without penalty
or premium. Debtor may prepay amounts outstanding under this note bearing
interest at a Base Interest Rate in whole or in part provided Debtor has given
Bank not less than five (5) Business Days prior written notice of Debtor's
intention to make such prepayment and pays to Bank the liquidated damages due
as a result. Liquidated Damages shall also be paid, if Bank, for any other
reason, including acceleration or foreclosure, receives all or any portion of
principal bearing interest at a Base Interest Rate prior to its scheduled
payment date. Liquidated Damages shall be an amount equal to the present
value of the product of: (i) the difference (but not less than zero) between
(a) the Base Interest Rate applicable to the principal amount which is being
prepaid, and (b) the return which Bank could obtain if it used the amount of
such prepayment of principal to purchase at bid price regularly quoted
securities issued by the United States having a maturity date most closely
coinciding with the relevant Base Rate Maturity Date and such securities were
held by Bank until the relevant Base Rate Maturity Date ("Yield Rate"); (ii)
a fraction, the numerator of which is the number of days in the period between
the date of prepayment and the relevant Base Rate Maturity Date and the
denominator of which is 360; and (iii) the amount of the principal so prepaid
(except in the event that principal payments are required and have been made
as scheduled under the terms of the Base Interest Rate Loan being prepaid,
then an amount equal to the lesser of (A) the amount prepaid or (B) 50% of the
sum of (1) the amount prepaid and (2) the amount of principal scheduled under
the terms of the Base Interest Rate Loan being prepaid to be outstanding at the
relevant Base Rate Maturity Date). Present value under this note is determined
by discounting the above product to present value using the Yield Rate as the
annual discount factor.
b. In no event shall Bank be obligated to make any payment or refund to Debtor,
nor shall Debtor be entitled to any setoff or other claim against Bank, should
the return which Bank could obtain under this prepayment formula exceed the
interest that Bank would have received if no prepayment had occurred. All
prepayments shall include payment of accrued interest on the principal amount
so prepaid and shall be applied to payment of interest before application to
principal. A determination by Bank as to the prepayment fee amount, if any,
shall be conclusive. In the event of partial prepayment, such prepayments shall
be applied to principal payments in the inverse order of their maturity.
c. Bank shall provide Debtor a statement of the amount payable on account of
prepayment. Debtor acknowledges that (i) Bank establishes a Base Interest Rate
upon the understanding that it apply to the Base Interest Rate Loan for the
entire Interest Period, and (ii) any prepayment may result in Bank incurring
additional costs, expenses or liabilities; and Debtor agrees to pay these
liquidated damages as a reasonable estimate of the costs, expenses and
liabilities of Bank associated with such prepayment.
5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but
not be limited to, any of the following: (a) the failure of Debtor to make any
payment required under this note when due; (b) any breach, misrepresentation or
other default by Debtor, any guarantor, co-maker, endorser, or any person or
entity other than Debtor providing security for this note (hereinafter
individually and collectively referred to as the "Obligor") under any security
agreement, guaranty or other agreement between Bank and any Obligor; (c) the
insolvency of any Obligor or the failure of any Obligor generally to pay such
Obligor's debts as such debts become due; (d) the commencement as to any
Obligor of any voluntary or involuntary proceeding under any laws relating
to bankruptcy, insolvency, reorganization, arrangement, debt adjustment or
debtor relief; (e) the assignment by any Obligor for the benefit of such
Obligor's creditors; (f) the appointment, or commencement of any proceeding
for the appointment of a receiver, trustee, custodian or similar official for
all or substantially all of any Obligor's property; (g) the commencement of
any proceeding for the dissolution or liquidation of any Obligor; (h) the
termination of existence or death of any Obligor; (i) the revocation of any
guaranty or subordination agreement given in connection with this note; (j)
the failure of any Obligor to comply with any order, judgement, injunction,
decree, writ or demand of any court or other public authority; (k) the filing
or recording against any Obligor, or the property of any Obligor, of any
notice of levy, notice to withhold, or other legal process for taxes other
than property taxes; (I) the default by any Obligor personally liable for
amounts owed hereunder on any obligation concerning the borrowing of money;
(in) the issuance against any Obligor, or the property of any Obligor, of
any writ of attachment, execution, or other judicial lien; or (n) the
deterioration of the financial condition of any Obligor which results in
Bank deeming itself, in good faith, insecure. Upon the occurrence of any
such default, Bank, in its discretion, may cease to advance funds hereunder
and may declare all obligations under this note immediately due and payable;
however, upon the occurrence of an event of default under d, e, f, or g, all
principal and interest shall automatically become immediately due and payable.
6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are
not paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or enforcement
of this note. Debtor and any endorsers of this note,
<PAGE 05>
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for the maximum period of time and the full extent permitted by law, (a) waive
diligence, presentment, demand, notice of nonpayment, protest, notice of
protest, and notice of every kind; (b) waive the right to assert the defense of
any statute of limitations to any debt or obligation hereunder; and (c) consent
to renewals and extensions of time for the payment of any amounts due under
this note. If this note is signed by more than one party, the term "Debtor"
includes each of the undersigned and any successors in interest thereof; all
of whose liability shall be joint and several. Any married person who signs
this note agrees that recourse may be had against the separate property of
that person for any obligations hereunder. The receipt of any check or other
item of payment by Bank, at its option, shall not be considered a payment on
account until such check or other item of payment is honored when presented for
payment at the drawee bank. Bank may delay the credit of such payment based
upon Bank's schedule of funds availability, and interest under this note shall
accrue until the funds are deemed collected. In any action brought under or
arising out of this note, Debtor and any Obligor, including their successors
and assigns, hereby consent to the jurisdiction of any competent court within
the State of California, as provided in any alternative dispute resolution
agreement executed between Debtor and Bank, and consent to service of process
by any means authorized by said state's law. The term "Bank" includes, without
limitation, any holder of this note. This note shall be construed in accordance
with and governed by the laws of the State of California. This note hereby
incorporates any alternative dispute resolution agreement previously,
concurrently or hereafter executed between Debtor and Bank.
7. DEFINITIONS. As used herein, the following terms shall have the meanings
respectively set forth below: "Base Interest Rate" means a rate of interest
based on the LIBOR-Rate. "Base Interest Rate Loan" means amounts outstanding
under this note that bear interest at a Base Interest Rate. "Base Rate
Maturity Date" means the last day of the Interest Period with respect to
principal outstanding under a Base Interest Rate Loan. " Business Day" means
a day on which Bank is open for business for the funding of corporate loans,
and, with respect to the rate of interest based on the LIBOR-Rate, on which
dealings in U.S. dollar deposits outside of the United States may be carried on
by Bank. "Interest Period" means with respect to funds bearing interest at a
rate based on the LIBOR-Rate, any calendar period of [one, two or three weeks
or one, two, three, four, five, six, nine or twelve months]. In determining an
Interest Period, a month means a period that starts on one Business Day in a
month and ends on and includes the day preceding the numerically corresponding
day in the next month. For any month in which there is no such numerically
corresponding day, then as to that month, such day shall be deemed to be the
last calendar day of such month. Any Interest Period which would otherwise end
on a non-Business Day shall end on the next succeeding Business Day unless that
is the first day of a month, in which event such Interest Period shall end on
the next preceding Business Day. " LIBOR Rate" means a per annum rate of
interest (rounded upward, if necessary, to the nearest 1/100 of 1%) at which
dollar deposits, in immediately available funds and in lawful money of the
United States would be offered to Bank, outside of the United States, for a
term coinciding with the Interest Period selected by Debtor and for an amount
equal to the amount of principal covered by Debtor's interest rate election,
plus Bank's costs, including the cost, if any, of reserve requirements.
"Origination Date" means the first day of the Interest Period. "Reference
Rate" means the rate announced by Bank from time to time at its corporate
headquarters as its Reference Rate. The Reference Rate is an index rate
determined by Bank from time to time as a means of pricing certain extensions
of credit and is neither directly tied to any external rate of interest or
index nor necessarily the lowest rate of interest charged by Bank at any given
time.
By: Larry Eyler, V.P. and CFO
<PAGE 06>
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UNION BANK OF
CALIFORNIA
BUSINESS LOAN AGREEMENT
This Business Loan Agreement (this "Agreement") is entered into as of the date
set forth below between Union Bank of California, N.A. ("Bank") and the
undersigned Pacific Research & Engineering Corporation ("Borrower") with
respect to each and every extension of credit (whether one or more,
collectively referred to as the "Loan") from Bank to Borrower. In
consideration of the Loan, Bank and Borrower agree to the following terms and
conditions:
1. THE LOAN.
1.1 The Note. The Loan is evidenced by one or more promissory notes or other
evidences of indebtedness, including each amendment, extension, renewal or
replacement thereof, which are incorporated herein by this reference
(whether one or more, collectively referred to as the "Note").
* Wherever "N/A" appears in a blank in this Agreement, it means the
Subsection in which it appears is deemed deleted from this Agreement.
1.2 Revolving Loan Clean-up Period. For any portion of the Loan which is a
revolving loan, at least N/A consecutive days during each 12 month
period the principal amount outstanding under such revolving loan must be zero.
1.3 Revolving to Term Loan Availability Period. For any portion of the Loan
which is a term loan, loan proceeds shall be available for disbursement from
N/A ,199- through N/A . 199-, only.
1.4 Fee. Borrower shall pay to Bank a fee of $4,000.00
1.5 Collateral. The payment and performance of all obligations of Borrower
under the Loan Documents is and shall be during the term of the Loan secured
by a perfected security interest in such real or personal property collateral
as is required by Bank and each security interest shall rank in first priority
unless otherwise specified in writing by Bank.
1.6 Guaranty. The payment and performance of all obligations of Borrower under
the Loan Documents are and shall be during the term of the Loan guaranteed by:
N/A
1.7 Subordination. Certain other obligations of Borrower are and shall be
during the term of the Loan subordinated, to the repayment of the Loan and all
other obligations of Borrower to Bank, pursuant to one or more subordination
agreement(s) in favor of Bank executed and delivered by: N/A
2. CONDITIONS TO AVAILABILITY OF THE LOAN. Before Bank is obligated to disburse
all or any portion of the Loan, Bank must have received (a) the Note and
other document required by Bank in connection with the Loan, each of which must
be in form and substance satisfactory to Bank (together with this Agreement,
referred to as the "Loan Documents"), (b) confirmation of the perfection of its
security interest in any collateral for the Loan, and c payment of any fee
required in connection with the Loan.
3. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants (and each
request for a disbursement of the proceeds of the Loan shall be deemed a
representation and warranty made on the date of such request) that:
3.1 Borrower is an individual or Borrower is duly organized and existing under
the laws of the state of its organization and is duly qualified to conduct
business in each jurisdiction in which its business is conducted;
3.2 The execution, delivery and performance of the Loan Documents executed by
Borrower are within Borrower's power, have been duly authorized, are legal,
valid and binding obligations of Borrower, and are not in conflict with
terms of any charter, bylaw, or other organization papers of Borrower or with
any law, indenture, agreement or undertaking to which Borrower is a party or by
which Borrower is bound or affected;
3.3 All financial statements and other financial information submitted by
Borrower to Bank are true and correct in all material respects, and there has
been no material adverse change in Borrower's financial condition since the
date of the latest of such financial statements;
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3.4 Borrower is properly licensed and in good standing in each state in which
Borrower is doing business, and Borrower has complied with all laws and
regulations affecting Borrower, including without limitation, each applicable
fictitious business name statute;
3.5 There is no event which is, or with notice or lapse of time or both would
be, an Event of Default (as defined in Article 5);
3.6 Borrower is not engaged in the business of extending credit for the
purpose of, and no part of the Loan will be used, directly or indirectly, for
purchasing or carrying margin stock within the meaning of Federal Reserve Board
Regulation U; and
3.7 Borrower is not aware of any fact, occurrence or circumstance which
Borrower has not disclosed to Bank in writing which has, or could reasonably be
expected to have, a material adverse effect on Borrower's ability to repay the
Loan or perform its obligations under the Loan Documents.
4. COVENANTS. Borrower agrees, so long as the Loan or any commitment to make
any advance under the Loan is outstanding and until full and final payment of
all sums outstanding under any Loan Document, that Borrower will:
4.1 Maintain:
(a) Working Capital equal to at least $ N/A As used herein, "Working
Capital" means the excess of current assets over current liabilities);
(b) A ratio of current assets to current liabilities of at least 1.50:1.00;
(c) A quick ratio of cash, accounts receivable and marketable securities to
current liabilities of at least N/A :1.00;
(d) Tangible Net Worth of at least $3,500,000.00 (As used herein
"Tangible Net Worth" means net worth increased by indebtedness of Borrower
subordinated to Bank and decreased by patents, licenses, trademarks, tradenames,
goodwill and other similar intangible assets, organizational expenses, and
monies due from affiliates including officers, shareholders and directors);
(e) A ratio of total liabilities to Tangible Net Worth of not greater than
1.25:1.00 (As used herein "Tangible Net Worth" means net worth increased by
indebtedness of Borrower subordinated to Bank and decreased by patents,
licenses, trademarks, trade names, goodwill and other similar intangible assets,
organizational expenses, and monies due from affiliates including officers,
shareholders and directors);
(f) A profit after taxes of not less than $ N/A ,to be measured as
of the end of each fiscal N/A of Borrower for the N/A period
immediately preceding the date of measurement;
(g) A ratio of Cash Flow to Debt Service of 1.50:1.00. Compliance with this
subsection to be measured as of the end of each fiscal Quarter of Borrower. (As
used herein, "Debt Service" means that portion of long-term liabilities and
capital leases coming due within 12 months of the date of calculation, and
"Cash Flow" means earnings before interest and taxes, to which depreciation,
amortization and other non-cash expenses are added for the 12 month period
immediately preceding the date of calculation); and
(h) N/A
All accounting terms used in this Agreement shall have the definitions given
them by generally accepted accounting principles, unless otherwise defined
herein.
4.2 Give written notice to Bank within 15 days of the following:
(a) Any litigation or arbitration proceeding affecting Borrower where the
amount in controversy is $100,000.00 or more;
(b) Any material dispute which may exist between Borrower and any government
regulatory body or law enforcement body;
(c) Any Event of Default or any event which, upon notice, or lapse of time,
or both, would become an Event of Default;
(d) Any other matter which has resulted or is likely to result in a material
adverse change in Borrower's financial condition or operation; and
(e) Any change in Borrower's name or the location of Borrower's principal
place of business, or the location of any collateral for the Loan, or the
establishment of any new place of business or the discontinuance of any
existing place of business.
4.3 Furnish to Bank an income statement, balance sheet, and statement of
retained earnings, with supportive schedules ("Financial Statement"), and any
other financial information requested by Bank, prepared in accordance with
generally accepted accounting principles and in a form satisfactory to Bank
as follows:
(a) Within 30 days after the close of each Month except for the final month
of each fiscal year, Borrower's Financial Statement as of the close of such
period;
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(b) Within 90 days after the close of each fiscal year, a copy of Borrower's
annual Financial Statement prepared by Certified Public Accountant on an
Audited basis. Any independent certified public accountant who prepares
Borrower's Financial Statement shall be selected by Borrower and reasonably
satisfactory to Bank;
(c) Within N/A days after the close of each fiscal year, a copy of each
guarantor's annual Financial Statement;
(d) If any portion of the Loan is a Borrowing Base Loan and at any time the
Loan balance equals or exceeds $750,000.00 within 15 days after each calendar
month end, a copy of Borrower's monthly accounts receivable and accounts
payable agings, and a certification of compliance with the borrowing base in
the Borrowing Base Addendum attached hereto, executed by Borrower, which
certificate shall accurately report Borrower's Accounts, Eligible Accounts,
Inventory, and Eligible Inventory; and
(e) Within 30 days after the close of each quarter, a copy of the Borrower's
accounts receivable and accounts payable agings;
(f) Promptly upon request, any other financial information requested by Bank.
4.4 Furnish to Bank, on Bank's request, a copy of Borrower's and each
guarantor's most recently filed federal income tax return with all accompanying
schedules.
4.5 Pay or reimburse Bank for all costs, expenses and fees incurred by Bank in
preparing and documenting this Agreement and the Loan, and all amendments and
modifications thereof, including but not limited to all filing and recording
fees, costs of appraisals, insurance and attorney's fees, including the
reasonable estimate of the allocated costs and expenses of in-house legal
counsel and staff.
4.6 Maintain and preserve Borrower's existence, present form of business and
all rights, privileges and franchises necessary or desirable in the normal
course of its business, and keep all of Borrower's properties in good working
order and condition.
4.7 Maintain and keep in force insurance with companies acceptable to Bank and
in such amounts and types, including without limitation fire and public
liability insurance, as is usual in the business carried on by Borrower, or as
Bank may reasonably request. Such insurance policies must be in form and
substance satisfactory to Bank.
4.8 Maintain adequate books, accounts and records and prepare all financial
statements required hereunder in accordance with generally accepted accounting
principles, and in compliance with the regulations of any governmental
regulatory body having jurisdiction over Borrower or Borrower's business and
permit employees or agents of Bank at any reasonable time to inspect Borrower's
assets and properties, and to examine or audit Borrower's books, accounts and
records and make copies and memoranda thereof.
4.9 At all times comply with, or cause to be complied with, all laws, statutes,
rules, regulations, orders and directions of any governmental authority having
jurisdiction over Borrower or Borrower's business, and all material agreements
to which Borrower is a party.
4.10 Except as provided in this Agreement, or in the ordinary course of its
business as currently conducted, not make any loans or advances, become a
guarantor or surety, pledge its credit or properties in any manner, or extend
credit.
4.11 Not purchase the debt or equity of another person or entity except for
savings accounts and certificates of deposit of Bank, direct U.S. Government
obligations and commercial paper issued by corporations with top ratings of
Moody's or Standard & Poor's, provided that all such permitted investments
shall mature within one year of purchase.
4.12 Not create, assume or suffer to exist any mortgage, encumbrance, security
interest, pledge or lien ("Lien") on Borrower's real or personal property,
whether nor owned or hereafter acquired, or upon the income or profits thereof
except the following: (a) Liens in favor of Bank, (b) Liens for taxes or other
items not delinquent or contested in good faith, or (c) other Liens which do
not exceed in the aggregate $100,000.00 at any one time.
4.13 Not sell or discount any account receivable or evidence of indebtedness,
except to Bank; not borrow any money or become contingently liable for money
borrowed, except pursuant to agreements made with Bank.
4.14 Neither liquidate, dissolve, enter into any consolidation, merger,
partnership, or other combination; nor convey, sell or lease all or the
greater part of its assets or business; nor purchase or lease all or the
greater part of the assets or business of another.
4.15 Not engage in any business activities or operations substantially
different from or unrelated to present business activities and operations.
4.16 Not, in any single fiscal year of Borrower, expend or incur obligations
of more than $100,000.00 for the acquisition of fixed or capital assets.
4.17 Not, in any single fiscal year of Borrower, enter into any lease of real
or personal property which would cause Borrower's aggregate annual obligations
under all such real and personal property leases to exceed $ 250,000.00.
4.18 Borrower will promptly, upon demand by Bank, take such further action and
execute all such additional documents and instruments in connection with this
Agreement as Bank in its reasonable discretion deems necessary, and promptly
supply Bank with such other information concerning its affairs as Bank may
request from time to time.
5. EVENTS OF DEFAULT. The occurrence of any of the following events ("Events of
Default") shall terminate any obligation on the part of Bank to make or
continue the Loan and automatically, unless otherwise provided under the Loan
Documents, shall make all sums of interest and principal and any other amounts
owing under the Loan immediately due and payable, without notice of default,
presentment or demand for payment, protest or notice of nonpayment or dishonor,
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or any other notices or demands:
5.1 Borrower shall default in the due and punctual payment of the principal of
or the interest on the Note or any of the Loan Documents;
5.2 Any default shall occur under the Note;
5.3 Borrower shall default in the due performance or observance of any covenant
or condition of the Loan Documents;
5.4 Any guaranty or subordination agreement required hereunder is breached or
becomes ineffective, or any guarantor or subordinating creditor dies or disavows
or attempts to revoke or terminate such guaranty or subordination agreement; or
5.5 There is a change in ownership or control of 10% or more of the issued and
outstanding stock of Borrower or any guarantor, or (if the Borrower is a
partnership) there is a change in ownership or control of any general partner's
interest.
6. MISCELLANEOUS.
6.1 The rights, powers and remedies given to Bank hereunder shall be cumulative
and not alternative and shall be in addition to all rights, powers, and remedies
given to Bank by law against Borrower or any other person, including but not
limited to Bank's rights of setoff or banker's lien.
6.2 Any forbearance or failure or delay by Bank in exercising any right, power
or remedy hereunder shall not be deemed a waiver thereof and any single or
partial exercise of any right, power or remedy shall not preclude the further
exercise thereof. No waiver shall be effective unless it is in writing and
signed by an officer of Bank.
6.3 The benefits of this Agreement shall inure to the successors and assigns
of Bank and the permitted successors and assignees of Borrower, and any
assignment by Borrower without Bank's consent shall be null and void.
6.4 This Agreement and all other agreements and instruments required by Bank
in connection herewith shall be governed by and construed according to the
laws of the State of California.
6.5 Should any one or more provisions of this Agreement be determined to be
illegal or unenforceable, all other provisions nevertheless shall be effective.
In the event of any conflict between the provisions of this Agreement and the
provisions of any note or reimbursement agreement evidencing any indebtedness
hereunder, the provisions of such note or reimbursement agreement shall
prevail.
6.6 Except for documents and instruments specifically referenced herein, this
Agreement constitutes the entire agreement between Bank and Borrower regarding
the Loan and all prior communications, verbal or written, between Borrower and
Bank shall be of no further effect or evidentiary value.
6.7 The section and subsection headings herein are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
6.8 This Agreement may be amended only in writing signed by all parties hereto.
6.9 Borrower and Bank may execute one or more counterparts to this Agreement,
each of which shall be deemed an original, but taken together shall be one and
the same instrument. .
6.10 Any notices or other communications provided for or allowed hereunder
shall be effective only when given by one of the following methods and addressed
to the respective party at its address given with the signatures at the end of
this Agreement and shall be considered to have been validly given: (a) upon
delivery, if delivered personally; (b) upon receipt. if mailed, first class
postage prepaid, with the United States Postal Service; c on the next business
day if sent by overnight courier service of recognized standing; and (d) upon
telephoned confirmation of receipt, if telecopied.
7. ADDITIONAL PROVISIONS. The following additional provision, if any, are
hereby made part of this Agreement:
N/A
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IN WITNESS WHEREOF, the parties hereto have duly executed this agreement as of
March 11, 1998.
Union Bank of California, N.A. ("Bank") Pacific Research & Engineering
Corporation ('Borrower")
By: Maureen Sullivan, Vice President By: Larry Eyler, V.P. and CFO
Thomas Vessey, Vice President By:
Address where notices to Bank are to be sent:
Union Bank of California
530 B Street Fourth Floor
San Diego, CA 92101
Fax Number: (619) 230-3010
Address where notices to borrower are to be sent:
Pacific Research & Engineering Corporation
2070 Las Palmas Drive
Carlsbad, CA 92008
Fax Number: (760) 438-9277
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UNION BANK OF
CALIFORNIA
BORROWING BASE ADDENDUM
This Borrowing Base Addendum is hereby made a part of and incorporated into the
Business Loan Agreement dated March 11, 1998, as amended and supplemented from
time to time (the "Agreement") by and between Union Bank of California, N.A.
('Bank") and the undersigned ("Borrower").
1.8 Borrowing Base. An amount of the Loan equal to $1,500,000 evidenced by the
Note dated March 11., 1998 is a revolving loan subject to a borrowing base
("Borrowing Base Loan"). Notwithstanding any other provision of this Agreement
or any other Loan Document, Bank shall not be obligated to advance funds under
the Borrowing Base Loan, if the principal amount of such Borrowing Base Loan
including such advance exceeds 80% of Borrower's Eligible Accounts, plus 15% of
Borrower's Eligible Inventory not to exceed $300,000.
The term "Accounts" means all presently existing and hereafter arising accounts
receivable, contract rights, chattel paper, and all other forms of obligations
owing to Borrower, payable in U.S. Dollars, arising out of the sale or lease of
goods, or the rendition of services by Borrower, whether or not earned by
performance, and any and all credit insurance, guaranties and other security, as
well as all merchandise returned to or reclaimed by Borrower and Borrower's
books and records relating to any of the foregoing.
The term "Eligible Accounts" means those Accounts, net of finance charges, which
are due and payable within Ninety (90) days, or less, from the date of invoice,
have been validly assigned to Bank and strictly comply with all of Borrower's
warranties and representations to Bank, but Eligible Accounts shall not include
the following:
(a) Any Account with respect to which the account debtor is an officer,
shareholder, director, employee or agent of Borrower;
(b) Any Account with respect to which the account debtor is a subsidiary of,
related to, or affiliated or has common officers or directors with Borrower;
(c) Any Account with respect to which goods are placed on consignment,
guaranteed sale or other terms by reason of which the payment by the account
debtor may be conditional;
(d) Any Account with respect to which the account debtor is not a resident of
the United States or Canada;
(e) Any Account with respect to which the account debtor is the United States
or any department, agency or instrumentality of the United States;
(f) Any Account with respect to which Borrower is or may become liable to
account debtor for goods sold or services rendered by the account debtor to
Borrower;
(g) Any Account with respect to which there is asserted a defense, counterclaim,
discount or setoff, whether well-founded or otherwise, except of those
discounts, allowances and returns arising in the ordinary course of Borrower's
business;
(h) Any Account with respect to which the account debtor becomes insolvent,
fails to pay its debts as they mature or goes out of business or is owed by an
account debtor which has become the subject of a proceeding under any provision
of the United States Bankruptcy Code, as amended, or under any other bankruptcy
or insolvency law, including, but not limited to, assignments for the benefit
of creditors, formal or informal moratoriums, compositions or extensions with
all or substantially all of its creditors;
(i) Any Account owed by any account debtor to which 20% or more of the aggregate
dollar amount of its Accounts is not paid within 90 days from the date of the
invoice;
(j) Any Account that is not paid by the account debtor within 90 days of the
date of the invoice;
(k) Any Account that is not paid by the account debtor and for which a credit
memo has been issued which is over 90 days old;
(l) That portion of any Account owed by any single account debtor which exceeds
15% of all of the Accounts;
(m) Any Account which Bank deems not to be an Eligible Account; and
(n) N/A
The term "Inventory" shall mean all present and future inventory in which the
Borrower has any interest, including, but not limited to, goods, machinery and
equipment held by the Borrower for sale or lease or to be furnished under a
contract of service and all of the Borrower's present and future raw materials,
work in process, finished goods and packing and shipping materials, wherever
located, and any documents of title representing any of the above.
The term "Eligible Inventory" means that portion of Borrower's inventory of raw
materials consisting of Borrower's main line of business products, which is
owned by Borrower, free and clear of all liens or encumbrances except those in
favor of Bank, (b) held for sale or lease by Borrower and
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normally and currently saleable in the ordinary course of Borrower's business,
(c) of good and merchantable quality, free from defects, (d) located only at
locations in the United States of which Bank is notified in writing, and (e)
as to which Bank has been able to perfect and maintain perfected a first
priority security interest. Eligible Inventory does not include any of the
following: work in process, spare parts, returned items, damaged, defective or
recalled items, items unfit for further processing, obsolete or unmerchantable
items, items used as salesperson's samples or demonstrators, inventory held on
a consignment basis, inventory held in stock more than twelve (12) months, or
inventory which Bank otherwise deems not to be Eligible Inventory.
Capitalized terms used herein which are not otherwise defined shall have the
meaning assigned thereto in the Agreement.
Union Bank of California, N.A. ("Bank") Pacific Research & Engineering
Corporation ('Borrower")
By: Maureen Sullivan, Vice President By: Larry Eyler, V.P. and CFO
Thomas Vessey, Vice President By:
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