UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 26, 1997
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________to__________
Commission File Number : 0-28426
ZOMAX OPTICAL MEDIA, INC.
(Name of small business issuer in its charter)
Minnesota No. 41-1833089
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
5353 Nathan Lane, Plymouth, MN 55442
(Address of Principal Executive Offices)
Issuer's telephone number (612) 553-9300
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
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[ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-K. [ X ]
Issuer's revenues for its most recent fiscal year. $37,906,853.
The aggregate market value of the voting stock held by non-affiliates was
$59,777,610 based on the closing sale price of the Company's Common Stock as
reported on the Nasdaq National Market on March 18, 1998.
The number of shares outstanding of the registrant's common stock as of
March 18, 1998: 5,273,327 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held May 14, 1998, are incorporated by reference into Part III of this report.
Transitional Small Business Disclosure Format (check one) Yes ___ No X
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Zomax Optical Media, Inc. is a leading full-service turnkey provider of
CDs, diskettes, cassettes and related value-added services. The Company services
the multimedia needs of a wide variety of customers by offering what it believes
to be the most comprehensive range of manufacturing services. Zomax focuses its
marketing efforts primarily on software distributors, computer manufacturers,
book publishers, independent record labels, and other producers of multimedia
products for retail distribution who require high quality product in a short
turnaround time, a high level of customer service and competitive prices.
In addition to actually replicating information on CDs, diskettes and
cassettes, Zomax offers its customers "one-stop shopping" by providing a full
complement of related services such as graphic design, print management,
mastering, replication, printing, packaging, warehousing and inventory
management, fulfillment and distribution, and returned merchandise processing
services.
Recent Acquisitions
Within the last year, the Company has made the following acquisitions:
Benchmark Media Services, Inc., a software media replicator with
operations in Plymouth, Minnesota and Indianapolis, Indiana; acquired
in March 1997;
Trotter Technologies, Inc., an RMA processing, warehousing and
distribution company based in San Jose, California; acquired in May
1997;
Primary Marketing Group, a manufacturers' representative group, based
in San Jose, California servicing the needs of computer hardware and
software publishers; primary sales group for Kao Infosystems Company
in California; acquired in February 1998;
Next Generation Services, LLC, an RMA processor with facilities in
Hayward, California and Boston, Massachusetts; acquired in February
1998;
Primary Marketing Group Ltd., an RMA processor and provider of
manufacturers' representative services in Ireland; acquired in
February 1998; and
Certain assets and contractual rights of Kao Infosystems Company,
including an agreement regarding the manufacture and distribution of
products for Novell, Inc.; acquired in February 1998.
<PAGE>
Industry
CD technology was introduced in 1982 as a means for digital audio signal
delivery and quickly became the standard audio media format. In 1985, CD-ROM
computer software products first became available, but for several years this
format was limited to institutional users such as libraries, schools, and large
corporations. Standardization in multimedia technology and the subsequent
introduction of multimedia PCs for consumers in 1992 led to a boom in the market
for CD-ROM products. The worldwide installed base of CD-ROM readers doubled each
year from 1992 to 1995, when the installed base approached 70 million.
The installed base of CD and DVD drives is a significant factor driving
demand for the services provided by Zomax and other multimedia manufacturers.
Currently, multimedia manufacturers can be divided into three categories: 1)
major international music company CD manufacturers who are primarily captive
providers to their affiliated music companies, 2) independent CD manufacturers,
and 3) small localized manufacturers. Affiliates of major international music
companies and independent manufacturers collectively produced a majority of the
1997 worldwide output of CD-ROM and CD-Audio. Most OEMs and software publishers
in the computer industry utilize independent manufacturers like Zomax to take
advantage of their manufacturing expertise and capital investment, enabling the
OEMs and publishers to concentrate on their own core competencies. This reliance
enables the OEMs and software publishers to reduce costs, accelerate time to
market, access advanced manufacturing and design capabilities, focus resources,
reduce capital investment, improve inventory management and purchasing power,
and access manufacturing, warehousing, and distribution capabilities in a
variety of geographic regions.
CD-ROM and Diskette Market
CD-ROM (compact disc-read only memory) technology offers the memory
capacity necessary to fully integrate sound, graphics and text. A single CD-ROM
can store approximately 630 megabytes of information (the equivalent of 200,000
pages of text) and supply high definition images, data, stereo sound, video and
text. CD-ROM is ideally suited for the storage of large amounts of stable
information for distribution to diverse user populations. Although CD-ROM
products were initially limited to business and professional applications such
as library references, the widespread presence of CD-ROM drives in personal
computers has created an enormous retail market for entertainment and
"edutainment" CD-ROM products.
Some software publishers continue to require output in both CD-ROM and
diskette formats. Despite a declining trend in diskette sales as CD-ROM and
DVD-ROM sales grow, diskette sales are expected to continue to be a meaningful
source of revenue in the near future.
DVD Market
As multimedia applications have expanded and become more complex, so has
the demand for improvement in the storage capacity of CD-ROM units. The new DVD
(digital versatile disc) technology is the next step after CD-ROM in the
evolution of digital information storage. DVD technology incorporates two CDs,
each one-half the thickness of standard CDs, bonded together to form one DVD. As
a result, depending on the configuration DVD-ROMs can store from 4.7 to 17
gigabytes of information, approximately seven to 27 times the storage capacity
of CD-ROMs. DVD-Video products can hold a full-length motion picture (135
minutes) on a standard-sized CD with video and audio quality superior to current
videocassette quality. Beginning late in 1997 and continuing in 1998, equipment
manufacturers are incorporating DVD technology into console players (used only
to play movies), as well as in personal computers as a means for reading DVD-ROM
format software. DVD-Video equipment manufacturers and movie production
companies have not yet agreed on a standard DVD-Video delivery system format,
and at present at least two competing and incompatible delivery systems exist.
CD-Audio and Cassette Market
The first major application of CD technology was in the prerecorded music
market. Consumer acceptance of CD-Audio has been driven by its demonstrated
advantages over other formats in sound quality, random accessing and indexing of
data and by the market penetration of CD players. CD-Audio has become the
standard for home audio systems, with an installed base of 171 million in North
and South America and 455 million worldwide. Additional significant market
expansion has resulted from increased sales of in-car and portable CD players.
The audio cassette is expected to continue to be a significant format in
the market, particularly in the audio book and spoken word market. The Recording
Industry Association of America estimated that 172.6 million audio cassette
units were distributed in the U.S. in 1997, down from 225.3 million units in
1996. Although a high level of hardware penetration indicates a continuing
demand for audio cassettes for several years, there can be no assurance that
audio cassettes will continue to be in demand in the future.
<PAGE>
RMA Processing
Software publishers and computer hardware manufacturers require receiving,
disassembly, sorting, recycling, repackaging, and redistribution capabilities to
effectively process returned merchandise. Although many software publishers and
computer hardware OEMs still dedicate in-house resources to RMA services,
significant and increasing demand exists for outsource services from providers
who can reliably process returned software. Such outsourcing frees software
publishers and OEMs from high costs associated with dedicating internal
facilities and personnel to processing returned products and enables them to
benefit from the outsource provider's efficiencies due to higher volume and
greater expertise.
Services
The Company believes that it offers the most comprehensive range of
multimedia manufacturing services. These value-added services cover each aspect
of a software product's life cycle. Zomax provides its customers with a turnkey
solution to managing the logistics of the manufacturing process. Customers can
engage Zomax on a service-by-service basis, depending on their needs.
Graphic Design. The Company works directly with its customers in developing
product and packaging designs.
Print Management. The Company receives print specifications from its
customers, facilitates printing purchases and implements quality controls to
ensure on-time delivery of the end product. Additionally, Zomax manages the
print inventory of its customers to assist them in order fulfillment.
Mastering. Through mastering process, metal stampers are created which
contain the bytes of data in a digital format. The metal stampers are then
mounted in the plastic injection molding equipment to create the disc. The
mastering process forms the master image of the CD from which the polycarbonate
replicas are molded. A laser beam recorder transfers the digital information
onto a photo-sensitive coating applied to a glass mastering substrate. This
process creates the "glass master" with the characteristic CD pits etched in the
photo-sensitive coating. The mastering process is critical to product quality
and is therefore conducted in a clean-room environment free of microscopic
contaminants which can obscure large amounts of data. The Company's newly
acquired mastering system has the capability of creating DVD masters.
<PAGE>
Replication. The Company has the capabilities to replicate CD-ROMs,
CD-Audio, cassettes and diskettes. With the completion of certain plant
reconfigurations, the Company expects to have the capability to replicate
DVD-ROM and DVD-Video in mid-1998. The replication of CDs utilizes a fully
integrated robotic line process which incorporates a plastic injection molding
press and metalizing, lacquering and inspection equipment. High quality,
CD-grade polycarbonate is injected into the mold cavity where the metal stamper
has been mounted. The clear polycarbonate disc containing all of the digitized
data is then covered with a metallic coating to provide for reflection of the
reading laser beam in the player. A thin layer of lacquer is then applied over
the metal to protect it and to serve as a base for printing on the disc.
Unacceptable CDs are detected and discarded through the inline inspection
process. The Company has currently 11 CD production lines at its facilities in
Minnesota and California.
Audio cassettes are mass-duplicated from a master tape which is run on an
endless loop on a high speed duplicating system comprised of a master unit which
feeds audio programming to "slave" units. The slave units make copies as the
master unit runs and reruns the tape, creating large reels or "pancakes" of tape
recorded with information. The tape is then fed into cassette loaders which
remove the duplicated tape off the reel and place it into cassette housings.
These housings are then labeled or imprinted and combined with graphics.
Computer diskettes are duplicated on multiple duplicating drives which are
connected to a PC-based controller. The master diskette is read into the system
and the controller sends the image of the master to each duplicating drive,
writing the information to the blank diskettes. Each diskette is verified after
being duplicated. After duplication, the diskettes are labeled, collated, if
necessary, and packaged for distribution.
Printing. Printing, which is the final production process, is performed in
batches off-line in order to take advantage of the high speed nature of the
printing process while avoiding the production delays typically required for
printer setup. The Company's printing equipment includes screen printing presses
with capabilities of up to six color printing. The Company produces its own
screens and custom mixes all ink in-house. Automated label and print quality
inspection equipment is integrated with the screen printers to ensure high
quality control and reduce the need for manual quality inspection.
Packaging. The Company has equipment to provide for commonly requested
packaging configurations. Currently, the standard CD packaging configuration is
the plastic "jewel box" with customer or Zomax supplied print material in the
bottom and top of the box. The standard audio cassette packaging is the "Norelco
box." For non-automated assembly requirements, the Company provides a full range
of hand assembly options. As part of its dedication to be full-service provider,
the Company works with its customers to develop sophisticated retail packaging
configurations.
Warehousing (Inventory Management). By offering warehousing and inventory
management services to its customers, Zomax can aid its customers in their
efforts to reduce costs as well as the time it takes to get products to market.
The Company is in the process of enhancing its management information systems to
allow it to coordinate its customers' inventory, replication and RMA processing
needs.
<PAGE>
Fulfillment and Distribution Services. The Company offers its customers
flexible, just-in-time delivery programs allowing product shipments to be
closely coordinated with customers' inventory requirements. Zomax can receive
and fulfill orders on a daily basis. The Company's warehousing services offer
customers the opportunity to have their products shipped directly into their
distribution channels, enabling them to be more responsive to market demand.
RMA Processing. Zomax recently expanded its array of services to include
software and hardware returned merchandise processing services. With the
addition of this service, the Company can offer its customers a solution to the
difficult problem of handling returned, obsolete and excess inventory. At the
Company's facilities in California, Indiana, Ireland, Massachusetts and
Minnesota, Zomax employees receive, sort, count, recycle, re-price, repackage
and redistribute returned software merchandise into the market. The Company also
receives, tests and redistributes hardware at one of its California facilities.
The Company believes that it is the largest independent provider of RMA
processing services.
Marketing and Sales
The Company markets and sells its multimedia products and services to
software publishers, such as Novell, Inc., and computer manufacturers, such as
Gateway 2000, book publishers, independent recording studios, marketing groups
and data base suppliers. Zomax currently services over 300 customers in these
industry segments.
Zomax's marketing strategy is to focus on a niche of various media markets,
such as multimedia software publishers and independent record labels, that
require personal service, flexibility, fast turn-around time and the turnkey
services the Company offers. The Company has successfully marketed itself to
these target market groups by emphasizing its ability to take the information to
be duplicated and perform, or arrange for the performance of, all of the steps
in the process from replication to packaging to delivery.
The Company has obtained select authorized replicator status with
Microsoft, Inc. that allows the Company to replicate Microsoft(R) products for
Gateway 2000, a licensee of Microsoft(R) products. As the Company pursues
diversification of its customer base, the Company intends to seek authorization
to replicate Microsoft(R) products for additional OEMs and licensees of these
products. In addition, the Company has passed the rigorous testing required to
become an Apple(R)-approved vendor; however, no significant sales to date have
resulted from attaining this status.
One of the Company's primary customers has been, and is expected to
continue to be, Gateway, a major manufacturer of IBM-compatible personal
computers. In 1996 and 1997, Gateway accounted for 26.1% and 48.4% of the
Company's total revenues, respectively. Zomax is a primary supplier of CDs to
Gateway and was named Gateway's 1997 Supplier of the Year in North America.
The Company employs a direct sales staff force that is responsible for
maintaining relationships with existing customers and developing new business
relationships. The sales staff is supported by a customer service staff that is
<PAGE>
responsible for ensuring that each order is processed on a timely basis, that
all required support materials are in place and that quality levels are
achieved.
Competition
The multimedia product manufacturing and service industry is highly
competitive and experiencing a trend of consolidation. Participants in this
industry are divided into three distinct categories, each consisting of niche
producers that service a defined set of customer needs:
Affiliates of major international music companies. This category
consists of large manufacturers who are affiliated with major
international music companies such as Sony Music Entertainment, Inc.,
PolyGram Holdings, Inc., Warner Music, BMG Music and EMI Music. These
manufacturers dedicate most of their production to the affiliated
record labels and typically offer a very limited amount of turnkey
services.
Independent manufacturers. Participants in this category include
companies such as Zomax, Disctronics, Inc., Denon Electronics, Inc.,
Kao Infosystems Company, Cinram International Inc., Nimbus CD
International, Inc. and Metatec Corporation. Independent manufacturers
generally have the ability to handle large volume requirements and
have varying degrees of service capability. However, most independent
manufacturers do not typically offer as comprehensive a range of
outsource services as Zomax.
Small localized manufacturers. Manufacturers in this category are
quite small, with one or two production lines, and offer a limited
range of related services. The complexity of the manufacturing process
and the large capital investment required to maintain and upgrade this
process are likely to severely limit these small manufacturers, and
potential entrants into the market, from pursuing a large segment of
the market.
Other existing technologies also compete with the Company's products that
deliver digital information. Portable media, such as digital audio tape, digital
compact cassette and mini-disc have already been introduced commercially but
have not yet achieved widespread consumer acceptance. In addition, one-time
recordable CDs ("CD-R") are available and are often used to replicate short run
products that are more expensive to manufacture in the traditional manner. The
Company does not expect any of these technologies to expand beyond their current
market niches in the near future.
Electronic on-line delivery of digital information, such as through the
Internet, is a potential future competitor of CD and DVD technology. The Company
believes that current and projected transmission speeds and infrastructure
limitations of on- line delivery systems will prevent them from replacing CD and
DVD technology in the foreseeable future. In addition, future advances in CD and
DVD technology, such as higher speed drives and greater data compression, could
increase the advantages of these technologies over electronic on-line delivery
and other potential competitive technologies.
<PAGE>
Competition in the hardware and software RMA processing industry segment is
extremely fragmented. Generally, participants in this industry segment include a
number of independent companies as well as publishers and OEMs that dedicate
in-house resources to RMA processing.
Many of the Company's national and regional competitors are, and future
potential competitors may be, larger and more established with greater financial
and other resources than the Company, particularly as consolidation in the
industry continues. As a result, such competitors may be able to respond more
quickly to market changes or to devote greater resources to the manufacture,
promotion and sale of their products and services than can the Company.
The Company believes that it competes favorably with its competitors with
respect to quality, service, reliability, price, manufacturing capacity and
timely delivery of product, the principal competitive factors in this industry.
The Company also believes that customers are willing to incur additional costs
for extra services. As such, to enhance its competitive position, the Company
offers a full range of value-added services to customers including design,
preparation and printing of artwork and packaging, warehousing and shipping and
RMA processing.
Proprietary Rights
Zomax, like most other CD manufacturers, uses patented technology primarily
under nonexclusive licenses. These licenses generally provide for the payment of
royalties based upon the number, size and use of CDs sold and terminate either
upon the expiration of the patent being licensed or on a date certain.
Zomax currently has license agreements with U.S. Philips Corporation
("Philips") and Discovision Associates ("DVA"). These agreements grant to Zomax
non-exclusive, royalty-bearing, non-transferable licenses to make, use and sell
CDs. The royalty payments due under the licenses generally depend of the number
of CDs manufactured, their size and their use. The Company's license from
Philips expires in 2006. The term of the DVA license continues until the
expiration of the last DVA patent covered by the license which is currently in
2010. This date may change in the event of a patent invalidity ruling, premature
expiration of a currently licensed patent or the subsequent issuance of a
related patent.
The Company will also be required to obtain licenses from the owners of DVD
technology to manufacture DVDs. Although the Company expects to obtain such
licenses, no assurances can be made that such licenses will be obtained and the
Company cannot predict the amount of the royalty that will be payable under any
such license.
Employees
The Company has approximately 435 full-time employees and hires additional
employees on a temporary, full-time basis to perform manufacturing-related
services as the need arises. The Company currently operates its Minneapolis
facility 24 hours a day, seven days a week. The Company believes that its
relations with its employees are good. None of the Company's employees is
covered by a collective bargaining agreement.
<PAGE>
Cautionary Statements
Certain of the statements contained herein and in the Annual Report are
forward looking, based on current expectations and are made pursuant to the safe
harbor provisions of the Private Securities Reform Act of 1995. As stated
therein, there are certain important factors that could cause results to differ
materially from those anticipated by those statements. Investors are cautioned
that all forward-looking statements involve risk and uncertainty.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases several facilities throughout the U.S. and one site in
Europe. The following table sets forth information about the Company's
facilities. All of the facilities listed below, with the exception of the main
headquarters in Minnesota, were acquired by the Company during the last 12
months. Management believes its facilities are adequate for the Company for the
foreseeable future.
Approximate Square Lease
Location Feet Expiration Services
- --------- ------------------ ---------- --------
Billerica,
Massachusetts 25,000 1999 RMA processing
Dublin,
Ireland 10,000 2002 RMA processing
Hayward,
California 64,000 2002 RMA processing and hardware
return testing and processing
Indianapolis,
Indiana 16,000 2002(1) Diskette replication, packaging,
fulfillment and distribution
Minneapolis,
Minnesota 92,000 2000(2) Graphic design, print management,
mastering, replication, printing,
packaging, warehousing,
fulfillment, distribution and
RMA processing
San Jose,
California 250,000 2002(3) Includes new facility completed
in 1998 to provide graphic
design, print management,
mastering, replication, printing,
packaging, warehousing,
fulfillment, distribution and RMA
processing
<PAGE>
- --------------------
(1) Option to extend for an additional five years.
(2) Lease with Nathan Lane Partnership, LLP (described below) expires in 2000
but has an option to extend two additional terms of three years each. Lease
for additional facility expires in 2000 but has an option to extend for an
additional three years.
(3) Includes leases for three different sites, two of which expire in 2002 but
have options to extend for an additional five years. The third lease,
covering the Berryessa facility (described below), expires in 1999.
The Company leases a majority of its manufacturing, office and warehouse
space in Minneapolis, Minnesota from Nathan Lane Limited Partnership, a
Minnesota limited liability partnership of which Mr. Phillip T. Levin, Chairman
of the Board of Zomax, owns a one-third interest. Pursuant to this lease, as
amended, the Company leases approximately 64,000 square feet at an average base
rent of $4.57 per net rentable square foot per annum. The Company is also
obligated to pay its proportionate share of taxes and operating expenses.
Pursuant to the Company's lease of its primary manufacturing facility in
San Jose, the Company leases approximately 108,000 square feet at an average
base rent of $3.06 per square foot per annum for the first year of the lease and
increasing by 3.0% each year thereafter. This lease commenced in 1997 and
expires in 2002, but the Company may, at its option, extend the lease term for
an additional five years.
The Company leases its Berryessa Road facility in San Jose under a sublease
from Novell, Inc. At this facility, the Company provides services primarily to
Novell under the terms of an Agreement for Manufacturing Turnkey Products.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in claims arising in the normal course of business.
In management's opinion, the final resolution of these claims should not have a
material adverse effect on the Company's financial position or results from
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "ZOMX." The following table sets forth, for the periods indicated,
the high and low bid prices per share since May 10, 1996, the date of the
Company's initial public offering of Common Stock. These bid quotations
represent inter-dealer prices and do not include retail mark-ups, mark-downs or
commissions and may not necessarily represent actual transactions.
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended December 27, 1996: High Low
<S> <C> <C>
Second Quarter (from May 10, 1996)................................... $7.57 $6.75
Third Quarter........................................................ 8.63 6.75
Fourth Quarter....................................................... 7.88 5.00
Fiscal Year Ended December 26, 1997:
First Quarter........................................................ $7.38 $4.75
Second Quarter....................................................... 7.63 4.13
Third Quarter........................................................ 10.38 7.75
Fourth Quarter....................................................... 15.00 10.50
</TABLE>
The Company has never declared or paid cash dividends on its capital stock
and does not anticipate declaring or paying any cash dividends in the
foreseeable future. The Company intends to retain future earnings for the
development of its business.
As of March 18, 1998, there were approximately 110 record holders of the
Company's Common Stock, excluding stockholders whose stock is held either in
nominee name and/or street name brokerage accounts. Based on information which
the Company has obtained from its transfer agent, there are approximately 2,700
stockholders of the Company's Common Stock whose stock is held either in nominee
name and/or street name brokerage accounts.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
The Company is a full-service, turnkey provider of CDs, cassettes,
diskettes and related services. The Company services the multimedia needs of a
wide variety of customers, including software distributors, computer
manufacturers, book publishers, independent record labels, and other producers
of multimedia products for retail distribution. In addition to actually
replicating information on CDs, cassettes, and diskettes, the Company offers its
customers a "one-stop shop" with a full range of related services such as
package design, graphics design, printing, mastering, packaging, warehousing,
distribution and returns processing.
The Company was incorporated on February 22, 1996 and completed the initial
public offering of its common stock on May 10, 1996. Upon completion of the
initial public offering, the Company acquired all of the operating assets,
liabilities, and debt of Zomax Optical Media Limited Partnership (Partnership)
in a tax-free exchange for 2,800,000 shares of its common stock. This transfer
was accounted for at historical cost with no change in the book and tax bases of
the assets contributed and liabilities and debts assumed, except for tax effects
resulting from converting from a partnership to a corporation.
<PAGE>
On March 31, 1997, the Company acquired the outstanding shares of Benchmark
Media Services, Inc. ("Benchmark"). Benchmark is a software media replicator
with operations in Plymouth, Minnesota and Indianapolis, Indiana. On May 1,
1997, the Company acquired the outstanding shares of Trotter Technologies, Inc.
("Trotter"). Trotter is a returned merchandise processing, warehousing and
distribution company based in San Jose, California servicing the software
publishing market. These acquisitions were accounted for using the purchase
method of accounting.
On February 4, 1998, Primary Marketing Group ("PMG") and Next Generation
Services LLC ("NGS") were merged with and into Zomax Services, Inc. (the
"Subsidiary"), a wholly-owned subsidiary of the Company pursuant to a Merger
Agreement dated February 3, 1998 (the "Merger"). In the Merger, all issued and
outstanding shares of PMG Common Stock and membership interests in NGS were
converted into the right to receive 795,860 shares of the Company's Common
Stock. Prior to the Merger, PMG and NGS provided manufacturer's representative
services and returned merchandise processing services in the computer hardware
and software publishing industries from facilities located in and around San
Jose, California and Boston, Massachusetts. The Company intends to provide
substantially the same products and services that PMG and NGS provided prior to
the merger.
As a result of the Merger, the Subsidiary succeeded to PMG's 78% ownership
stake in the capital stock of Primary Marketing Group Limited ("PMG Limited"), a
company incorporated under the laws of Ireland. Simultaneous to the Merger, the
Subsidiary acquired the remaining 22% of the outstanding capital stock of PMG
Limited in exchange for 4,142 of the Company's Common Stock pursuant to the
terms of a Stock Purchase Agreement dated February 3, 1998 (the "Acquisition").
PMG Limited's business consists of providing returned merchandise processing and
manufacturer's representative services in the computer hardware and software
publishing industries from facilities located in Dublin, Ireland. The Merger and
Acquisition will be accounted for using the pooling of interests method of
accounting.
Results of Operations
The following table sets forth certain operating data as a percentage of
sales for the periods indicated.
<TABLE>
<CAPTION>
(Predecessor
Year Ended Year Ended Partnership) Year
Dec. 26, 1997 Dec. 27, 1996 Ended Dec. 31, 1995
---------------- --------------- -------------------
<S> <C> <C> <C>
Sales 100.0 % 100.0 % 100.0 %
Cost of goods sold 74.0 % 71.5 % 75.9 %
------- ------- -------
Gross profit 26.0 % 28.5 % 24.1 %
Selling, general & administrative 15.5 % 16.4 % 15.5 %
------- ------- -------
Operating income 10.5 % 12.1 % 8.6 %
Interest expense (1.1) % (1.9) % (2.4) %
Interest income .6 % 1.5 % .5 %
------- ------- -------
Income before income taxes 10.0 % 11.7 % 6.7 %
------- ------- -------
</TABLE>
<PAGE>
Sales
Sales increased 104% to $37.9 million in 1997 from $18.5 million in 1996 as
compared to $13.2 million in 1995. The 1997 sales increase was attributable to a
69% increase related to new and existing customers with the remaining from
companies acquired during the year. The 1997 sales increase resulted from a 70%
increase in CD sales and a 1200% increase in diskette sales to $7.4 million,
partially offset by a 12% decline in audio cassette sales. The higher sales in
1996 over 1995 resulted principally from a 46% increase in CD sales and the
addition of diskette duplicating services, offset by a 16% decline in audio
cassette sales. Substantially all of the increase in CD sales in 1997 and 1996
was due to an increase in the number of units sold. The Company believes the
growth in CD sales resulted from increased production capacity in both 1997 and
1996, increased marketing efforts and the strategy of being a full service
provider of multimedia products and related services.
Cost of goods sold
Cost of goods sold as a percentage of sales was 74.0%, 71.5% and 75.9% for
1997, 1996 and 1995, respectively. One significant reason for the change in the
cost of goods sold percentage is the amount of CD outsourcing required by the
Company. The Company outsources its CD production when customer orders exceed
its production capabilities. The Company outsourced 9% of its CD sales during
1997 as compared to 3% in 1996 and 35% in 1995. The cost for such outsourced
production is significantly higher than the cost of CDs produced by the Company.
The Company was able to reduce its outsourcing from 1995 levels by increasing
its CD manufacturing capacity in 1997 and 1996 through the purchase of new
machinery.
Selling, general and administrative expense
Selling, general and administrative expense as a percentage of sales was
15.5% in 1997, 16.4% in 1996 and 15.5% in 1995. From 1996 to 1997, selling,
general and administrative expense decreased as a percentage of sales, but
increased in absolute dollars by $2.8 million. The dollar increase resulted
primarily from general increases in sales volumes and growth of the Company. The
increase in 1996 from 1995 levels resulted principally from an increase in
salary expense, due to hiring additional corporate staff in sales, customer
service, accounting and other administrative functions. In 1996, the Company
also increased its reserve for doubtful accounts, principally due to the
uncertainty regarding the collection of certain receivable balances and an
overall increase in accounts receivable balances. In 1996 and 1997, the Company
also incurred additional costs associated with being a public company.
Interest income (expense)
Interest income was $222,120, $284,624 and $70,956, for 1997, 1996 and 1995
respectively. Interest income increased in 1996 with the investment of the
proceeds from the Company's initial public offering in May 1996. Interest
expense was $408,415, $357,166, and $318,087 for 1997, 1996 and 1995,
respectively. Interest expense increased with borrowings to finance purchases of
additional CD manufacturing equipment in 1997 and 1996.
<PAGE>
Income tax provision
The Company's effective income tax rate for 1997 was 39.7% as compared to
40.4% for the period from May 11, 1996 through December 27, 1996. Prior to May
11, 1996, the Company operated as a partnership for income tax purposes.
Liquidity and Capital Resources
As of December 26, 1997, the Company had cash totaling $5,018,903 and
working capital of $4,021,175. The decrease in cash and working capital from
1996 levels of $6,914,899 and $7,810,373, respectively, resulted primarily from
cash used in purchases of property and equipment and general growth of the
Company. The Company has committed to the purchase of equipment at a cost of
$5.1 million in 1998. The majority of this equipment is related to the
construction of a new CD facility in San Jose, California. The Company plans to
finance these purchases with long term financing and cash. The Company has a
revolving line of credit facility for up to $5 million of borrowings limited to
an amount based on a formula using eligible accounts receivable and inventories.
There were no borrowings outstanding under the revolving line of credit facility
at December 26, 1997. In addition, the Company has $4.6 million available under
a capital term loan facility. The Company believes that it has sufficient
liquidity and capital resources to meet its operating needs and capital
expenditure requirements for the foreseeable future.
In 1997, the Company generated $5.0 million of cash from operations as
compared to $2.1 million in 1996 and used $.2 million in 1995. In 1997, the
Company purchased $5.7 million of equipment as compared to $4.0 million in 1996
and $2.4 million in 1995. During 1997, the Company financed equipment purchases
totaling $3,650,000 with long term debt compared to $791,000 financed with long
term debt in 1996 and $2.0 million in 1995.
Seasonality
The demand for CDs and other multimedia consumer products is seasonal, with
increases in the fall reflecting increased demand relative to the new school
year and holiday season purchases. This seasonality could result in significant
quarterly variations in financial results, with the third and fourth quarters
generally being the strongest.
Inflation
Historically, inflation has not had a material impact on the Company. The
cost of the Company's products is influenced by the cost of raw materials and
labor. There can be no assurance that the Company will be able to pass on
increased costs to its customers in the future.
Outlook
The statements contained in this Outlook section and elsewhere in this
Annual Report are based on current expectations. These statements are forward
looking and are made pursuant to the safe harbor provisions of the Private
<PAGE>
Securities Reform Act of 1995. There are certain important factors that could
cause results to differ materially from those anticipated by some of the
statements made herein. Investors are cautioned that all forward-looking
statements involve risk and uncertainty.
The Company believes the total number of CDs sold worldwide will continue
to grow in 1998. 1998 unit prices are expected to remain somewhat consistent as
the number of CD manufacturers and production capacity for existing
manufacturers has not grown significantly. Further, the Company believes that
its recent acquisitions will make significant contributions to its sales in
1998. The Company believes it has the personnel, strategies and financial
strength in place to support the expected increase in sales growth with a
minimum increase in salaried personnel. However, increases in the Company's
sales and its ability to be a leader in the industry depends on its ability to
manage industry changes as well as its own growth and organizational changes,
particularly with respect to the integration of recent acquisitions.
The Company plans to expand its manufacturing capacity with the
construction of a new facility in San Jose in the first quarter of 1998 and
additional molding equipment in the second half of 1998. Also in the first half
of 1998, the Company expects to complete upgrades to its facilities, enabling it
to manufacture DVDs, which the Company believes may have a significant impact on
the software publishing industry, and thus, on many of its customers. The
Company believes that these advancements will allow it to pursue a broader
customer base and improve the quality of its products. The Company intends to
finance these purchases with long term financing and existing cash.
Additionally, the Company intends to expand its operations nationally by
increasing its presence on the East and West coasts as well through plant
start-ups or acquisitions. There can be no guarantee, however, that the Company
will be able to secure the necessary financing or find suitable expansion
opportunities. Its inability to do so will result in the delay or cancellation
of planned equipment purchases and the need to forego other growth plans, which
may adversely impact the Company's ability to meet market demand or expand
operations. Further, there can be no assurance that market demand will support
these changes or that any acquisitions, plant start-ups or equipment purchases
will be successfully integrated into the Company's operations.
If CD market demand does not continue to grow as expected, revenue growth
would be adversely impacted and the manufacturing capacity installed may be
underutilized. Pricing strategies of competitors and general economic factors,
such as consumer confidence and inflation, all impact the Company.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial statements of the Company are included immediately
following the signature page of this report on the pages indicated:
Page
Report of Independent Public Accountants dated February 21, 1998 F-1
Consolidated Balance Sheets as of December 26, 1997 and
December 27, 1996 F-2
Consolidated Statements of Operations for
Years Ended December 26, 1997, December 27, 1996
and December 31, 1995 F-3
Consolidated Statements of Partners' Capital and Shareholders'
Equity for Years Ended December 26, 1997, December 27,
1996 and December 31, 1995 F-4
Consolidated Statements of Cash Flows for Years Ended December
26, 1997, December 27, 1996 and December 31, 1995 F-5
Notes to Consolidated Financial Statements F-6
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16A OF THE EXCHANGE ACT
The information concerning the Company's directors and executive officers
and compliance with Section 16(a) required by this item is contained in the
sections entitled "Election of Directors," "Executive Officers of the Company"
and "Compliance with Section 16(a) of the Exchange Act," appearing in the
Company's Proxy Statement to be delivered to stockholders in connection with the
Annual Meeting of Stockholders to be held on May 14, 1998. Such information is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is contained in the section entitled
"Executive Compensation" appearing in the Company's Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held on May 14, 1998. Such information is incorporated herein by
reference.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the sections entitled
"Principal Shareholders and Management Shareholdings" appearing in the Company's
Proxy Statement to be delivered to stockholders in connection with the Annual
Meeting of Stockholders to be held on May 14, 1998. Such information is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the section entitled
"Certain Transactions" appearing in the Company's Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held on May 14, 1998. Such information is incorporated herein by
reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are included in this report: See "Exhibit Index"
immediately following financial statements following the signature page of this
Form 10-KSB.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1997.
Subsequently, the Company filed a Form 8-K dated February 4, 1998 to report the
acquisition of Next Generation Services, LLC and Primary Marketing Group.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZOMAX OPTICAL MEDIA, INC.
Date: March 25, 1998
By /s/ James T. Anderson
James T. Anderson
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated below.
Each person whose signature appears below constitutes and appoints James T.
Anderson and James E. Flaherty as the undersigned's true and lawful attorneys-in
fact and agents, each acting alone, with full power of substitution and
resubstitution, for the undersigned and in the undersigned's name, place and
stead, in any and all amendments to this Annual Report on Form 10-KSB and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granted unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Name Title Date
/s/ James T. Anderson President, Chief Executive Officer March 25, 1998
James T. Anderson and Director (principal executive
officer)
/s/James E. Flaherty Chief Financial Officer March 25, 1998
James E. Flaherty and Secretary (principal financial
and accounting officer)
/s/Phillip T. Levin Chairman of the Board March 25, 1998
Phillip T. Levin
Director
Robert Ezrilov
/s/Howard P. Liszt Director March 25, 1998
Howard P. Liszt
/s/Janice Ozzello Wilcox Director March 25, 1998
Janice Ozzello Wilcox
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Zomax Optical Media, Inc.:
We have audited the accompanying consolidated balance sheets of Zomax Optical
Media, Inc. (a Minnesota corporation which operated as Zomax Optical Media
Limited Partnership through May 10, 1996) and Subsidiaries as of December 26,
1997 and December 27, 1996, and the related consolidated statements of
operations, partners' capital and shareholders' equity and cash flows for each
of the three fiscal years in the period ended December 26, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Zomax Optical Media,
Inc. and Subsidiaries as of December 26, 1997 and December 27, 1996, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended December 26, 1997, in conformity with generally
accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 21, 1998
<PAGE>
ZOMAX OPTICAL MEDIA, INC. AND SUBSIDIARIES
(Successor to Zomax Optical Media Limited Partnership)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 26, December 27,
1997 1996
------------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,018,903 $ 6,914,899
Accounts receivable, net of allowance for doubtful accounts
of $781,000 and $531,000 6,105,574 3,944,929
Inventories 1,465,911 1,262,665
Deferred income taxes 897,000 494,000
Prepaid expenses and other 781,265 110,443
------------ ------------
Total current assets 14,268,653 12,726,936
PROPERTY AND EQUIPMENT, net 13,560,563 7,574,501
GOODWILL, net 1,228,023 -
OTHER ASSETS, net 27,572 138,416
------------ ------------
$29,084,811 $20,439,853
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 2,153,950 $ 1,508,607
Accounts payable 2,835,069 1,590,088
Accrued expenses:
Accrued royalties 2,994,768 793,468
Accrued compensation 939,387 466,896
Other 328,422 249,685
Income taxes payable 240,882 513,819
------------ ------------
Total current liabilities 9,492,478 5,122,563
LONG-TERM NOTES PAYABLE, net of current portion 3,040,642 1,714,374
DEFERRED INCOME TAX LIABILITY 755,000 485,000
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)
SHAREHOLDERS' EQUITY:
Common stock, no par value, 15,000,000 shares authorized; 4,450,815 and
4,385,000 shares issued and outstanding 12,504,982 12,133,585
Retained earnings 3,291,709 984,331
------------ ------------
Total shareholders' equity 15,796,691 13,117,916
------------ ------------
$29,084,811 $20,439,853
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
<PAGE>
ZOMAX OPTICAL MEDIA, INC. AND SUBSIDIARIES
(Successor to Zomax Optical Media Limited Partnership)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Years Ended
---------------------------------------------------
December 26, December 27, December 31,
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
SALES $37,906,853 $18,547,796 $13,217,539
COST OF SALES 28,033,354 13,270,046 10,036,991
------------ ----------- -----------
Gross profit 9,873,499 5,277,750 3,180,548
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
5,859,326 3,050,980 2,053,443
------------ ----------- ----------
Operating income 4,014,173 2,226,770 1,127,105
INTEREST EXPENSE 408,915 357,166 318,087
INTEREST INCOME (222,120) (284,624) (70,956)
------------ ----------- ----------
Income before income taxes 3,827,378 2,154,228 $ 879,974
PROVISION FOR INCOME TAXES 1,520,000 668,000 -
------------ ----------- ----------
NET INCOME $ 2,307,378 $ 1,486,228 $ 879,974
=========== =========== ==========
PRO FORMA (Notes 1 and 8):
Income before income taxes $ 2,154,228 $ 879,974
Provision for income taxes 863,000 340,000
----------- ----------
Net income $ 1,291,228 $ 539,974
=========== ==========
EARNINGS PER SHARE (Pro forma for 1996 and 1995--Note 6):
Basic $ 0.52 $ 0.34 $ 0.19
=========== =========== ==========
Diluted $ 0.51 $ 0.34 $ 0.19
=========== =========== ==========
Weighted average number of shares outstanding-
Basic 4,424,166 3,789,875 2,800,000
=========== =========== ==========
Diluted 4,557,509 3,801,444 2,800,000
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
<PAGE>
ZOMAX OPTICAL MEDIA, INC. AND SUBSIDIARIES
(Successor to Zomax Optical Media Limited Partnership)
Consolidated Statements of Partners' Capital and Shareholders' Equity
<TABLE>
<CAPTION>
Shareholders' Equity
-------------------------------
Partners' Common Stock Retained
Capital Shares Amount Earnings Total
-------- ------ ------ -------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 $1,634,632 - $ - $ - $ 1,634,632
Partner capital contributions, net of issuance costs 1,527,735 - - - 1,527,735
Repurchase of limited interests (300,000) - - - (300,000)
Net income 879,974 - - - 879,974
Distributions to partners (253,084) - - - (253,084)
---------- ---------- ---------- --------- ----------
BALANCE, December 31, 1995 3,489,257 - - - 3,489,257
Net income 501,897 - - 984,331 1,486,228
Distribution to partners (1,109,419) - - - (1,109,419)
Exchange of partnership interests for common stock in the Company (2,881,735) 2,800,000 2,881,735 - -
Sale of common stock at $6.75 per share, net of offering costs
of $1,446,900
- 1,585,000 9,251,850 - 9,251,850
---------- ---------- ---------- --------- ----------
BALANCE, December 27, 1996 - 4,385,000 12,133,585 984,331 13,117,916
Common stock issued under Employee Stock Purchase Plan - 6,547 30,606 - 30,606
Common stock issued in connection with the
acquisition of Trotter
Technologies, Inc. on May 1, 1997 - 59,268 340,791 - 340,791
Net income - - - 2,307,378 2,307,378
---------- ---------- ---------- --------- ----------
BALANCE, December 26, 1997 $ - 4,450,815 $12,504,982 $3,291,709 $15,796,691
========== ========== ========== ========= ==========
</TABLE>
The accompanying notes are an
integral part of these consolidated statements.
<PAGE>
ZOMAX OPTICAL MEDIA, INC. AND SUBSIDIARIES
(Successor to Zomax Optical Media Limited Partnership)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended
-----------------------------------------------
December 26, December 27, December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $2,307,378 $1,486,228 $ 879,974
Adjustments to reconcile net income to net cash provided by (used in)
operating activities-
Depreciation and amortization 2,156,256 1,046,952 542,122
Deferred income taxes (133,000) (9,000) -
Changes in operating assets and liabilities:
Accounts receivable (342,019) (925,596) (2,527,001)
Inventories (44,025) (475,467) (375,488)
Prepaid expenses and other (605,920) (8,209) (99,397)
Accounts payable 131,158 (177,174) 1,062,782
Accrued expenses 1,817,887 667,755 335,354
Income taxes payable (272,937) 513,819 -
---------- ---------- ----------
Net cash provided by (used in) operating activities 5,014,778 2,119,308 (181,654)
---------- ---------- ----------
INVESTING ACTIVITIES:
Purchase of property and equipment, net (5,692,030) (3,957,047) (2,361,683)
Acquisitions, net of cash acquired (775,094) - -
Change in other assets 203,457 - -
Sale of financial instruments - 515,157 519,275
Purchase of financial instruments - (259,000) (391,406)
---------- ---------- ----------
Net cash used in investing activities (6,263,667) (3,700,890) (2,233,814)
---------- ---------- ----------
FINANCING ACTIVITIES:
Capital contributions, net of issuance costs - - 1,527,735
Proceeds from notes payable-
Affiliate - - 207,341
Other 3,650,000 790,500 1,845,171
Repayment of notes payable-
Affiliate - (78,175) (129,167)
Other (3,612,467) (1,294,937) (685,782)
Short-term borrowings (repayments) (715,246) - -
Repurchase of limited interests - - (300,000)
Distribution to partners - (1,109,419) (229,855)
Issuance of common stock, net of offering costs 30,606 9,251,850 -
---------- ---------- ----------
Net cash provided by (used in) financing activities (647,107) 7,559,819 2,235,443
---------- ---------- ----------
Net increase (decrease) in cash (1,895,996) 5,978,237 (180,025)
CASH AND CASH EQUIVALENTS:
Beginning of year 6,914,899 936,662 1,116,687
---------- ---------- ----------
End of year $5,018,903 $6,914,899 $ 936,662
========== ========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 427,224 $ 357,055 $ 296,524
========== ========== ==========
Cash paid for income taxes $1,953,937 $ 162,000 $ -
========== ========== ==========
Common shares issued in connection with the acquisition of
Trotter Technologies, Inc.
$ 340,791 $ - $ -
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
<PAGE>
ZOMAX OPTICAL MEDIA, INC. AND SUBSIDIARIES
(Successor to Zomax Optical Media Limited Partnership)
Notes to Consolidated Financial Statements
December 26, 1997 and December 27, 1996
1. Business Description:
Zomax Optical Media, Inc. (the Company) was incorporated on February 22, 1996
and completed its initial public common stock offering on May 10, 1996. Upon
completion of the initial public stock offering, the Company received all of the
operating assets and liabilities of Zomax Optical Media Limited Partnership (the
Predecessor Partnership) in exchange for 2,800,000 shares of its common stock.
The Company is a full-service provider of compact discs (CDs), cassettes,
diskettes and related services to a variety of customers operating primarily in
North America. The Company markets and sells its multimedia products and
services through its own sales force to a wide variety of customers, including
recording studios and other producers for retail distribution, distributors,
software developers, publishers, marketing groups and database suppliers.
For the year ended December 26, 1997, one customer accounted for 48.4% of the
Company's sales. For the years ended December 27, 1996 and December 31, 1995,
two customers accounted for 26.1% and 11.8% and 19.1% and 15.9%, respectively,
of the Company's sales. At December 26, 1997, two customers accounted for 41.1%
and 13.2% of accounts receivable.
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Benchmark Media Services, Inc. (Benchmark), a
Minnesota corporation, and Trotter Technologies, Inc. (Trotter), a California
corporation. All intercompany accounts and transactions have been eliminated in
consolidation.
Fiscal Year-End
The Company's fiscal year ends on the last Friday of the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Ultimate results could differ from those estimates.
<PAGE>
Revenue Recognition
The Company records sales revenue at the time merchandise is shipped. For
certain customers, merchandise is invoiced upon completion of orders with
shipment occurring based on written customer instructions.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid short-term investments with original
maturities of 90 days or less and are recorded at cost, which approximates
market value.
Inventories
Inventories, consisting of material, labor and overhead, are stated at the lower
of first-in, first-out cost or market.
Inventories were as follows:
December 26, December 27,
1997 1996
----------- -----------
Raw materials $1,069,822 $1,132,083
Finished goods 360,747 126,316
Work in process 35,342 4,266
---------- -----------
$1,465,911 $1,262,665
========== ===========
Property and Equipment
Property and equipment are stated at cost. Repairs and maintenance are charged
to expense as incurred, while significant improvements are capitalized.
Depreciation is calculated using the straight-line method for financial
reporting purposes over the estimated useful lives.
Property and equipment consisted of the following:
December 26, December 27,
1997 1996 Lives
----------- ----------- --------
Manufacturing equipment $16,162,792 $8,782,310 7 years
Office equipment 1,239,432 630,742 5-7 years
Building improvements 431,496 116,406 Lease term
Vehicles 54,914 28,918 5 years
----------- ----------
17,888,634 9,558,376
Less- Accumulated depreciation (4,328,071) (1,983,875)
----------- ----------
Property and equipment, net $13,560,563 $7,574,501
=========== ==========
<PAGE>
Goodwill
The Company has classified as goodwill cost in excess of fair value of the net
assets acquired in connection with the acquisitions described in Note 3.
Goodwill is being amortized on a straight-line basis over 15 years.
Amortization expense in 1997 totaled $49,587.
Other Assets
Other assets consist mainly of organization costs, which are amortized over five
years. At December 26, 1997 and December 27, 1996, accumulated amortization was
$8,833 and $6,833, respectively.
Income Taxes
Deferred income taxes are provided for differences between the tax basis of
assets and liabilities and their carrying amounts for financial reporting
purposes, based on income tax rates in effect at the balance sheet date.
Fair Value of Financial Instruments
The financial instruments with which the Company is involved are primarily of a
traditional nature. For most instruments, including cash, receivables, accounts
payable, accrued expenses and short-term debt, the Company has assumed that the
carrying amounts approximate fair value because of their short-term nature.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," effective beginning in 1998, establishes standards of
disclosure and financial statement display for reporting total comprehensive
income and the individual components thereof. The adoption of SFAS No. 130 will
not have a material impact on the Company's financial position or results of
operations.
In addition, SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," effective in 1998, establishes new standards for segment
reporting. Management has not yet determined the impact of SFAS No.
131 on the Company's financial position or results of operations.
3. Acquisitions:
On March 31, 1997, the Company acquired all of the outstanding shares of
Benchmark for no initial consideration. However, the Company agreed to pay
additional consideration based on revenues of Benchmark during 1997. Such levels
were not met, therefore no additional consideration was paid. The acquisition
was accounted for using the purchase method of accounting and accordingly, the
purchase price was allocated to net assets acquired based on their estimated
fair values. Benchmark's results of operations have been included in the
accompanying consolidated statements of operations since the date of
acquisition. Benchmark was a software replicator located in Plymouth, Minnesota,
with operations in Orlando and Indianapolis.
<PAGE>
On May 1, 1997, the Company acquired all of the outstanding shares of Trotter.
The purchase price of Trotter was $712,000 payable in cash and 59,268 shares of
the Company's common stock. The acquisition was accounted for using the purchase
method of accounting and accordingly, the purchase price was allocated to net
assets acquired based on their estimated fair values. This treatment resulted in
approximately $1.2 million of cost in excess of net assets acquired. Trotter's
results of operations have been included in the accompanying consolidated
statements of operations since the date of acquisition. Trotter was a return
merchandise processing, warehousing and distribution company based in San Jose,
California, servicing the software publishing market.
Pro forma consolidated results of operations as if the acquisitions had taken
place at the beginning of 1996 are as follows:
For the Years Ended
--------------------------
December 26 December 27
1997 1996
----------- -----------
Net sales $40,092,000 $26,400,000
Net income 2,181,000 1,125,000
Earnings per share:
Basic $ 0.49 $ 0.30
=========== ===========
Diluted $ 0.48 $ 0.30
=========== ===========
These pro forma amounts are not necessarily indicative of what the actual
results of operations might have been if the acquisitions had been effective at
the beginning of 1996.
4. Bank Credit Facilities and Long-Term Notes Payable:
As of December 26, 1997, the Company had a revolving line-of-credit facility
with a lender for up to $5,000,000, which expires on April 30, 1999. The
interest rate is at prime (8.25% at December 26, 1997). Maximum borrowings are
limited to an amount based on a formula using eligible accounts receivable and
inventories ($5,000,000 at December 26, 1997). During 1997 maximum borrowings
outstanding were $3,000,000. There were no borrowings outstanding at December
26, 1997.
In addition, the Company has a capital expenditure term loan facility with the
lender for up to $8,000,000. Borrowings under the capital expenditure term loan
may be for up to 60 months, and interest rates will vary based on the length of
the term loan and the interest rate structure selected. The interest rate
structure that can be selected by the Company varies from a variable rate of
prime plus 1/4% or a fixed rate equal to the three-year U.S. Treasury rate plus
3%. At December 26, 1997, amounts available under the term loan facility totaled
$4,350,000.
The Company also has several installment notes, with monthly installments
payable through November 2001, at interest rates ranging from 8.4% to 10.5%. The
notes are collateralized by certain equipment.
<PAGE>
Future scheduled maturities of long-term debt are as follows as of December 26,
1997:
1998 $2,153,950
1999 1,294,237
2000 966,930
2001 779,475
----------
Total 5,194,592
Less current portion (2,153,950)
----------
Long-term notes payable, net
of current portion
$3,040,642
==========
The line-of-credit agreement and certain of the notes contain covenants related
to levels of net income and net worth. The Company was in compliance with these
covenants as of December 26, 1997.
5. Shareholders' Equity:
On May 10, 1996, the Company completed the sale of 1,400,000 shares of common
stock in an initial public stock offering. On June 17, 1996, the underwriter
exercised an overallotment option and purchased an additional 185,000 shares.
The Company received proceeds from the offering, net of issuance costs, of
$9,251,850. The underwriter also purchased, for a nominal purchase price,
warrants to purchase 140,000 shares of common stock at a price of $8.10 per
share. The warrants are exercisable for a period of four years, commencing one
year from the offering date.
6. Earnings per Share:
The Company follows the procedures of SFAS No. 128, "Earnings per Share." SFAS
No. 128 establishes accounting standards for computing and presenting earnings
per share (EPS). Under SFAS No. 128, basic earnings per common share is computed
by dividing net income by the weighted average number of shares of common stock
outstanding during the period. No dilution for potentially dilutive securities
is included. Diluted earnings per share is computed under the treasury stock
method and is calculated to compute the dilutive effect of outstanding options,
warrants and other securities. SFAS No. 128 also requires the restatement of
prior years' EPS amounts.
<PAGE>
The components of basic EPS, diluted EPS and EPS as previously reported are as
follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Per Share
Net Income Outstanding Amount
------------ ---------------- ---------
<S> <C> <C> <C>
1997
Basic EPS $2,307,378 4,424,166 $0.52
Dilutive effect of stock options and warrants - 133,343 (0.01)
---------- --------- -----
Diluted EPS $2,307,378 4,557,509 $0.51
========== ========= =====
1996 (Pro Forma)
Basic EPS $1,291,228 3,789,875 $0.34
Dilutive effect of stock options and warrants - 11,569 -
---------- --------- -----
Diluted EPS $1,291,228 3,801,444 $0.34
========== ========= =====
EPS as previously reported $0.34
=====
1995 (Pro Forma)
Basic EPS $ 539,974 2,800,000 $0.19
Dilutive effect of stock options and warrants - - -
---------- --------- -----
Diluted EPS $ 539,974 2,800,000 $0.19
========== ========= =====
EPS as previously reported $0.19
</TABLE>
7. Stock Plans:
Employee Stock Purchase Plan
In March 1996, the board of directors of the Company adopted an Employee Stock
Purchase Plan (the Employee Plan) effective July 1, 1996. The Employee Plan
enables employees to contribute up to 10% of their compensation toward the
purchase of the Company's common stock at a price equal to 85% of fair market
value. A total of 250,000 shares have been reserved for issuance under this
plan. In 1997, 6,547 shares were issued under this plan. None were issued in
1996.
Stock Option Plan
In March 1996, the board of directors of the Company adopted the 1996 Stock
Option Plan (the Plan) in order to provide for the granting of stock options to
employees, officers, directors and independent consultants of the Company at
exercise prices not less than 100% of the fair market value of the Company's
common stock on the date of grant. In April 1997, the shareholders approved an
increase in the number of shares reserved for issuance upon exercise of options
granted under the Plan from 600,000 to 850,000. These options, which can be
either incentive stock options or nonqualified options, vest over a three- to
five-year schedule and expire ten years after the grant date.
<PAGE>
Information regarding the Company's stock option plan is summarized below:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year
360,000 $6.79 - $ -
Granted 295,000 5.74 395,000 6.79
Canceled - - (35,000) 6.75
------- ----- ------- -----
Options outstanding, end of year 655,000 $6.44 360,000 $6.79
======= ===== ======= =====
Options exercisable, end of year 151,000 $6.72 62,500 $6.75
======= ===== ======= =====
</TABLE>
Options outstanding at December 26, 1997 have exercise prices ranging between
$5.25 and $10.50 and a weighted average remaining contractual life of 9.17
years.
The Company accounts for its stock option grants under Accounting Principles
Board Opinion No. 25. Since options have been granted at not less than the
market value on the date of grant, no compensation expense has been recognized
for the stock options granted. Had compensation cost of option grants been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's income and EPS, on a pro forma basis, would have
been reported as follows:
1996
1997 (Pro Forma)
-------- -----------
Net income:
As reported $2,307,378 $1,291,228
========== ==========
Pro forma $1,794,378 $ 921,228
========== ==========
Earnings per share:
Basic $ 0.52 $ 0.34
========== ==========
Diluted $ 0.51 $ 0.34
========== ==========
Pro forma:
Basic $ 0.41 $ 0.24
========== ==========
Diluted $ 0.39 $ 0.24
========== ==========
<PAGE>
In determining the compensation cost of the options granted, as specified by
SFAS No. 123, the fair value of each option grant has been estimated on the date
of grant using the Black-Scholes option pricing model. The weighted average
assumptions used in these calculations are summarized below:
1997 1996
--------- -------
Risk-free interest rate 6.72% 6.97%
Expected life of options granted 10 years 10 years
Expected volatility of options granted 50.23% 76.45%
Weighted average fair value of options granted $4.47 $5.95
8. Income Taxes:
The provision for income taxes for the Company was as follows:
<TABLE>
<CAPTION>
For the Years Ended
-----------------------------------------------
December 27, December 31,
December 26, 1996 1995
1997 (Pro Forma) (Pro Forma)
------------- ------------- ------------
<S> <C> <C> <C>
Current $1,653,000 $940,000 $224,500
Deferred (133,000) (77,000) 115,500
---------- -------- --------
Total provision $1,520,000 $863,000 $340,000
========== ======== ========
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
For the Years Ended
---------------------------------------------
December 27, December 31,
December 26, 1996 1995
1997 (Pro Forma) (Pro Forma)
------------ ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax
rate 34.0% 34.0% 34.0%
State income taxes, net of
federal income tax benefit
4.7 4.1 4.0
Other 1.0 2.0 0.6
----- ---- ----
Effective income tax rate 39.7% 40.1% 38.6%
===== ==== ====
</TABLE>
<PAGE>
The components of the deferred tax asset (liability) were as follows:
<TABLE>
<CAPTION>
December 26, December 27,
1997 1996
----------- -----------
<S> <C> <C>
Current:
Accounts receivable reserves $297,000 $202,000
Inventories reserves 115,000 -
Accrued liabilities 485,000 292,000
---------- ----------
Total current deferred tax asset $897,000 $494,000
========== ==========
Long-term:
Long-lived assets ($755,000) ($485,000)
---------- ----------
Total long-term deferred tax liability ($755,000) ($485,000)
========== ==========
</TABLE>
9. Related-Party Transactions:
A significant shareholder of the Company, Metacom, Inc. ( Metacom), provides
certain administrative functions, including costs of occupancy, to the Company
for a monthly fee. Charges for these services were as follows:
For the Years Ended
-------------------------------
December 26, December 27,
1997 1996
Administrative support $ 32,323 $ 88,194
Occupancy 599,576 460,218
-------- --------
$631,899 $548,412
======== ========
In addition, the Company reimbursed Metacom $117,407 and $56,622 in 1996 and
1995, respectively, for certain expenditures for the Company.
Metacom Manufacturing Assets--Manufacturing Agreement
In January 1995, the Company acquired the entire manufacturing operation of
Metacom in exchange for cash, notes payable and assumption of liabilities
totaling $567,000 and limited interests in the Predecessor Partnership which,
upon completion of the initial public offering, were exchanged for common stock
of the Company (see Note 1). As a result of the common control of the
Predecessor Partnership and Metacom, the acquisition was accounted for
essentially as a pooling of interests and no value was assigned to the limited
partnership units issued in the transaction.
In connection with this transaction, Metacom and the Company entered into a
manufacturing agreement (the Agreement) whereby Metacom must purchase minimum
quantities of audio cassettes and CDs from the Company under normal trade terms.
In 1997 and 1996 Metacom did not fulfill its purchase commitments. As a result
of the 1996 shortfall, the Company and Metacom agreed to allow Metacom to make
<PAGE>
up the shortfall during 1997 in exchange for a contract extension until the year
2000. This contract extension specifies that Metacom is to purchase all of its
supply of CDs and audio cassettes exclusively from the Company under normal
trade terms. No minimum quantities have been established. No final agreement has
been reached regarding remediation of the 1997 shortfall.
Metacom purchases totaled $1,209,000, $1,587,000 and $2,524,000 in 1997, 1996
and 1995, respectively.
10. Commitments and Contingencies:
Litigation
The Company is involved in various claims arising in the normal course of
business. In management's opinion, the final resolution of these claims should
not have a material adverse effect on the Company's financial position or the
results of its operations.
Operating Leases
The Company is committed under operating leases with related and unrelated
parties for the rental of manufacturing, warehouse and office facilities. Future
minimum lease obligations are as follows as of December 26, 1997:
1998 $1,465,680
1999 1,721,440
2000 1,721,440
2001 800,900
2002 and thereafter 528,067
Royalty Payments
The Company accrues for all known royalties using estimated rates on all units
manufactured. Currently, the Company has license agreements with certain
companies for the use of certain CD manufacturing technology. Occasionally,
other companies may claim rights to patented CD technology. The Company believes
that these claims will not have a material effect on the Company's financial
position or the results of its operations.
Purchase Commitments
As of December 26, 1997, the Company is committed to the purchase of
approximately $5,100,000 of manufacturing equipment. The Company plans to
finance the equipment on a long-term basis.
Employment Agreement
The Company has in place an employment agreement with its chief executive
officer which provides for base compensation, bonus payments of 5% of the
Company's earnings before taxes, as defined, and a severance payout in case
employment is terminated under conditions specified in the agreement. The
agreement expires on December 31, 1998.
<PAGE>
11. Acquisition Subsequent to December 26, 1997:
On February 4, 1998, the Company acquired all of the outstanding shares of
Primary Marketing Group, Inc., Next Generation Services, LLC, and Primary
Marketing Group Limited, (collectively, the Acquired Companies) in exchange for
800,002 shares of the Company's common stock. Prior to the acquisition, the
Acquired Companies' business consisted of providing manufacturer's
representative services and returned merchandise processing services for the
computer industry. The Acquired Companies intend to provide substantially the
same products and services they provided prior to this transaction. In
connection with this transaction, the Company acquired certain assets and
assumed certain liabilities, including a lease obligation from a third party for
consideration totaling $1,124,000.
This acquisition will be accounted for as a pooling of interests. Expenses
associated with the acquisition of approximately $300,000 will be charged to
expense in the first quarter of 1998. Supplemental unaudited earnings
information assuming the merger had occurred on January 1, 1995, is as follows:
<TABLE>
<CAPTION>
For the Years Ended
-----------------------------------------------
December 26, December 27, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $47,877,000 $26,867,000 $16,858,000
Net income 3,128,000 2,152,000 2,141,000
EPS
Basic $ 0.60 $ 0.47 $ 0.59
Diluted 0.58 0.47 0.59
</TABLE>
12. Supplementary Data (Unaudited):
The Company's results of operations for each of the quarters in the years ended
December 26, 1997 and December 27, 1996 are as follows:
<TABLE>
<CAPTION>
Quarters Ended (Unaudited)
-----------------------------------------------------------------
March 28 June 27 September 26 December 26
-------- ------- ------------ -----------
1997
<S> <C> <C> <C> <C>
Sales $5,435,571 $9,540,079 $10,518,754 $12,412,449
Gross profit 1,349,319 2,193,696 2,700,873 3,629,611
Net income 278,350 402,396 589,188 1,037,444
Basic EPS 0.06 0.09 0.13 0.23
Diluted EPS 0.06 0.09 0.13 0.22
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Quarters Ended (Unaudited)
------------------------------------------------------------------
(Pro Forma) (Pro Forma)
March 29 June 30 September 27 December 27
---------- ---------- ------------ -----------
1996
<S> <C> <C> <C> <C>
Sales $3,768,134 $3,797,608 $4,768,914 $6,213,140
Gross profit 1,067,363 1,018,737 1,400,340 1,791,310
Net income 186,854 210,362 387,888 506,124
Basic EPS 0.07 0.06 0.09 0.12
Diluted EPS 0.07 0.06 0.09 0.12
</TABLE>
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
EXHIBIT INDEX TO FORM 10-KSB
For the fiscal year ended: Commission File No.
December 26, 1997 0-28426
Exhibit
Number Description
2.1 Form of Stock Purchase Agreement (1)
2.2 Stock Purchase Agreement dated March 31, 1997 between the
Company and Jesse Arveida (Incorporated by reference to Exhibit 2.1
to Current Report on Form 8-K dated March 31, 1997)
2.3 Stock Purchase Agreement dated February 3, 1998 by and among the
Company, Zomax Services, Inc., Primary Marketing Group Limited
("PMG Limited") and shareholders of PMG Limited (Incorporated by
reference to Exhibit 2.1 to Current Report on Form 8K dated
February 4, 1998)
2.4 Merger Agreement dated February 3, 1998 by and among the
Company, Zomax Services, Inc., Next Generation Services, LLC
("NGS"), Primary Marketing Group ("PMG") and holders of all
membership interests of NGS and shares of PMG (Incorporated by
reference to Exhibit 2.2 to Current Report on Form 8-K dated
February 4, 1998)
2.5 Asset Purchase Agreement dated February 3, 1998 by and among the
Company and Kao Infosystems Company (Incorporated by reference to
Exhibit 2.3 to Current Report on Form 8-K dated February 4, 1998)
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Form of Stock Certificate (1)
4.2 Articles of Incorporation (1)
4.3 Bylaws (1)
4.4 Form of Representative Warrant (1)
10.1 Forms of Incentive and Non-qualified Stock Option Agreements (1)**
10.2 1996 Employee Stock Purchase Plan (1)**
10.3 Manufacturing Agreement between the Company and Metacom, Inc. dated
January 1, 1995 (1)
10.4 Services Agreement between the Company and Metacom, Inc. dated
January 1, 1995 (1)
10.5 Lease between the Company and Metacom, Inc. dated January 1, 1995 (1)
10.6 Employment Agreement with James T. Anderson dated March 1, 1996 (1)**
10.7 License Agreement with U.S. Phillips Corporation effective January 1,
1996 (1)
10.8 License Agreement with Discovision Associates dated January 1, 1994 (1)
10.9 Loan and Security Agreement with Phoenixcor, Inc. dated May 24, 1993(1)
10.10 Loan and Security Agreement with Phoenixcor, Inc. dated July 22,
1993 (1)
10.11 Loan and Security Agreement with Phoenixcor, Inc. dated February 10,
1994 (1)
10.12 Loan and Security Agreement with Phoenixcor, Inc. dated July 5, 1995(1)
<PAGE>
10.13 Promissory Note issued by the Company to Norwest Equipment Finance,
Inc. dated May 22, 1996 and related documents (1)
10.14 Revolving Credit and Term Loan Agreement between the Company and
Marquette Capital Bank dated December 31, 1995 (1)
10.15 Amendment to Manufacturing Agreement between the Company and Metacom
Inc. dated January 31, 1997 (Incorporated by reference to Exhibit 10.15
to the Company's Annual Report on Form 10-KSB for the year ended
December 27, 1996)
10.16 First Amendment to Revolving Credit and Term Loan Agreement and Basic
Documents dated April 30, 1997 with Marquette Capital Bank, N.A.
(Incorporated by reference to Exhibit 10.16 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 28, 1997)
10.17 * 1996 Stock Option Plan, as amended through March 7, 1997**
10.18 * Amendment to Lease between the Company and Metacom, Inc. dated October
28, 1997
10.19 * Lease between the Company and Chaboya Ranch dated June 5, 1997
21.1 * Subsidiaries of the Company
23 * Consent of Arthur Andersen LLP
24 * Power of Attorney (included on signature page of this report)
27 * Financial Data Schedule (included in electronic version only)
- ----------------------
* Filed herewith
** Management agreement or compensatory plan or arrangement.
(1) Incorporated by reference to the corresponding exhibit numbers to
S-1 Registration Statement, SEC File No. 333-2430.
ZOMAX OPTICAL MEDIA, INC.
1996 STOCK OPTION PLAN
(As Amended March 7, 1997)
SECTION 1.
DEFINITIONS
As used herein, the following terms shall have the meanings indicated
below:
(a) The "Company" shall mean Zomax Optical Media, Inc., a Minnesota
corporation.
(b) A "Subsidiary" shall mean any corporation of which fifty percent
(50%) or more of the total voting power of outstanding stock is owned,
directly or indirectly in an unbroken chain, by the Company.
(c) "Option Stock" shall mean Common Stock of the Company (subject to
adjustment as described in Section 13) reserved for options pursuant
to this Plan.
(d) The "Plan" means the Zomax Optical Media, Inc. 1996 Stock Option
Plan, as amended hereafter from time to time, including the form of
Option Agreements as they may be modified by the Board from time to
time.
(e) Non-Employee Directors shall mean members of the Board who are not
employees of the Company or any Subsidiary.
(f) The "Optionee" for purposes of Section 9 is an employee of the
Company or any Subsidiary to whom an incentive stock option has been
granted under the Plan. For purposes of Section 10, the "Optionee" is
a consultant or advisor to or an employee, officer or director of the
Company or any Subsidiary to whom a nonqualified stock option has been
granted. For purposes of Section 11, the "Optionee" is a Non-Employee
Director to whom a nonqualified stock option has been granted.
(g) "Committee" shall mean a Committee of two or more directors who
shall be appointed by and serve at the pleasure of the Board. As long
as the Company's securities are registered pursuant to Section 12 of
the Securities Exchange Act of 1934, as amended, then, to the extent
necessary for compliance with Rule 16b-3, or any successor provision,
each of the members of the Committee shall be a "Non-Employee
Director." For purposes of this Section 1(g) "Non-Employee Director"
shall have the same meaning as set forth in Rule 16b-3, or any
successor provision, as then in effect, of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended.
<PAGE>
(h) The "Internal Revenue Code" is the Internal Revenue Code of 1986,
as amended from time to time.
SECTION 2.
PURPOSE
The purpose of the Plan is to promote the success of the Company and its
subsidiaries by facilitating the employment and retention of competent personnel
and by furnishing incentive to directors, officers, employees, consultants, and
advisors upon whose efforts the success of the Company and its subsidiaries will
depend to a large degree.
It is the intention of the Company to carry out the Plan through the
granting of stock options which will qualify as "Incentive Stock Options" under
the provisions of Section 422 of the Internal Revenue Code, and through the
granting of "Nonqualified Stock Options" pursuant to Sections 10 and 11 of this
Plan. Adoption of this Plan shall be and is expressly subject to the condition
of approval by the shareholders of the Company within twelve (12) months before
or after the adoption of the Plan by the Board of Directors. In no event shall
any stock options be exercisable prior to the date this Plan is approved by the
shareholders of the Company. If shareholder approval of this Plan is not
obtained within twelve (12) months after the adoption of the Plan by the Board
of Directors, any stock options previously granted shall be revoked.
SECTION 3.
EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the date it is adopted by the Board of
Directors of the Company, subject to approval by the shareholders of the Company
as required in Section 2.
SECTION 4.
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(hereinafter referred to as the "Board") or by a Stock Option Committee
(hereinafter referred to as the "Committee" and as defined in Section 1(g) of
<PAGE>
this Plan) which may be appointed by the Board from time to time. The Board or
the Committee, as the case may be, shall have all of the powers vested in it
under the provisions of the Plan, including but not limited to exclusive
authority (where applicable and within the limitations described herein) to
determine, in its sole discretion, whether an incentive stock option or
nonqualified stock option shall be granted, the individuals to whom, and the
time or times at which, options shall be granted, the number of shares subject
to each option and the option price and terms and conditions of each option. The
Board, or the Committee, shall have full power and authority to administer and
interpret the Plan, to make and amend rules, regulations and guidelines for
administering the Plan, to prescribe the form and conditions of the respective
stock option agreements (which may vary from Optionee to Optionee) evidencing
each option and to make all other determinations necessary or advisable for the
administration of the Plan. The Board's, or the Committee's, interpretation of
the Plan, and all actions taken and determinations made by the Board or the
Committee pursuant to the power vested in it hereunder, shall be conclusive and
binding on all parties concerned. No member of the Board or the Committee shall
be liable for any action taken or determination made in good faith in connection
with the administration of the Plan.
In the event the Board appoints a Committee as provided hereunder, any
action of the Committee with respect to the administration of the Plan shall be
taken pursuant to a majority vote of the Committee members or pursuant to the
written resolution of all Committee members.
SECTION 5.
PARTICIPANTS
The Board or the Committee, as the case may be, shall from time to time, at
its discretion and without approval of the shareholders, designate those
employees, directors, officers, consultants or advisors of the Company or of any
Subsidiary to whom nonqualified stock options shall be granted under this Plan;
provided, however, that consultants or advisors shall not be eligible to receive
stock options hereunder unless such consultant or advisor renders bona fide
services to the Company or Subsidiary and such services are not in connection
with the offer or sale of securities in a capital-raising transaction. The Board
or the Committee, as the case may be, shall, from time to time, at its
discretion and without approval of the shareholders, designate those employees
of the Company or any Subsidiary to whom incentive stock options shall be
granted under this Plan.
The Board or the Committee may grant additional incentive stock options or
nonqualified stock options under this Plan to some or all participants then
holding options or may grant options solely or partially to new participants. In
designating participants, the Board or the Committee shall also determine the
number of shares to be optioned to each such participant. The Board may from
time to time designate individuals as being ineligible to participate in the
Plan.
<PAGE>
SECTION 6.
STOCK
The Stock to be optioned under this Plan shall consist of authorized but
unissued shares of Option Stock. Eight hundred fifty thousand (850,000) shares
of Option Stock shall be reserved and available for options under the Plan;
provided, however, that the total number of shares of Option Stock reserved for
options under this Plan shall be subject to adjustment as provided in Section 13
of the Plan. In the event that any outstanding option under the Plan for any
reason expires or is terminated prior to the exercise thereof, the shares of
Option Stock allocable to the unexercised portion of such option shall continue
to be reserved for options under the Plan and may be optioned hereunder.
SECTION 7.
DURATION OF PLAN
Incentive stock options may be granted pursuant to the Plan from time to
time during a period of ten (10) years from the earlier of the date the Plan is
approved by the Board or the date it is approved by the shareholders of the
Company. Nonqualified stock options may be granted pursuant to the Plan from
time to time after the Plan is adopted by the Board and until the Plan is
discontinued or terminated by the Board.
SECTION 8.
PAYMENT
Optionees may pay for shares upon exercise of options granted pursuant to
this Plan with cash, certified check, Common Stock of the Company valued at such
stock's then "fair market value" as defined in Section 9 below, or such other
form of payment as may be authorized by the Board or the Committee. The Board or
the Committee may, in its sole discretion, limit the forms of payment available
to the Optionee and may exercise such discretion any time prior to the
termination of the Option granted to the Optionee or upon any exercise of the
Option by the Optionee.
<PAGE>
SECTION 9.
TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
Each incentive stock option granted pursuant to the Plan shall be evidenced
by a written stock option agreement (the "Option Agreement"). The Option
Agreement shall be in such form as may be approved from time to time by the
Board or the Committee and may vary from Optionee to Optionee; provided,
however, that each Optionee and each Option Agreement shall comply with and be
subject to the following terms and conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the incentive stock option. The
option price per share shall not be less than one hundred percent
(100%) of the fair market value of the Common Stock per share on the
date the Board or the Committee, as the case may be, grants the option;
provided, however, that if an Optionee owns stock possessing more than
ten percent (10%) of the total combined voting power of all classes of
stock of the Company or of its parent or any Subsidiary, the option
price per share of an incentive stock option granted to such Optionee
shall not be less than one hundred ten percent (110%) of the fair
market value of the Common Stock per share on the date of the grant of
the option. For purposes hereof, if such stock is then reported in the
national market system or is listed upon an established exchange or
exchanges, "fair market value" of the Common Stock per share shall be
the highest closing price of such stock in such national market system
or on such stock exchange or exchanges on the date the option is
granted or, if no sale of such stock shall have occurred on that date,
on the next preceding day on which there was a sale of stock. If such
stock is not so reported in the national market system or listed upon
an exchange, "fair market value" shall be the mean between the "bid"
and "asked" prices quoted by a recognized specialist in the Common
Stock of the Company on the date the option is granted, or if there are
no quoted "bid" and "asked" prices on such date, on the next preceding
date for which there are such quotes. If such stock is not publicly
traded as of the date the option is granted, the "fair market value" of
the Common Stock shall be determined by the Board, or the Committee, in
its sole discretion by applying principles of valuation with respect to
all such options. The Board or the Committee, as the case may be, shall
have full authority and discretion in establishing the option price and
shall be fully protected in so doing.
(b) Term and Exercisability of Incentive Stock Option. The term during
which any incentive stock option granted under the Plan may be
exercised shall be established in each case by the Board or the
Committee, as the case may be, but in no event shall any incentive
stock option be exercisable during a term of more than ten (10) years
after the date on which it is granted; provided, however, that if an
<PAGE>
Optionee owns stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or of its
parent or any Subsidiary, the incentive stock option shall be
exercisable during a term of not more than five (5) years after the
date on which it is granted. The Option Agreement shall state when the
incentive stock option becomes exercisable and shall also state the
maximum term during which the option may be exercised. In the event an
incentive stock option is exercisable immediately, the manner of
exercise of the option in the event it is not exercised in full
immediately shall be specified in the Option Agreement. The Board or
the Committee, as the case may be, may accelerate the exercise date of
any incentive stock option granted hereunder which is not immediately
exercisable as of the date of grant.
(c) Other Provisions. The Option Agreement authorized under this
Section 9 shall contain such other provisions as the Board or the
Committee, as the case may be, shall deem advisable. Any such Option
Agreement shall contain such limitations and restrictions upon the
exercise of the option as shall be necessary to ensure that such option
will be considered an "Incentive Stock Option" as defined in Section
422 of the Internal Revenue Code or to conform to any change therein.
(d) Holding Period. The disposition of any shares of Common Stock
acquired by an Optionee pursuant to the exercise of an option described
above shall not be eligible for the favorable taxation treatment of
Section 421(a) of the Internal Revenue Code unless any shares so
acquired are held by the Optionee for at least two (2) years from the
date of the granting of the option under which the shares were acquired
and at least one year after the acquisition of such shares pursuant to
the exercise of such option, or such other periods as may be prescribed
by the Internal Revenue Code. In the event of an Optionee's death, such
holding period shall not be applicable pursuant to Section 421(c)(1) of
the Internal Revenue Code.
SECTION 10.
TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS
Each nonqualified stock option granted pursuant to the Plan shall be
evidenced by a written Option Agreement. The Option Agreement shall be in such
form as may be approved from time to time by the Board or the Committee and may
vary from Optionee to Optionee; provided, however, that each Optionee and each
Option Agreement shall comply with and be subject to the following terms and
conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the nonqualified stock option.
The option price per share shall be equal to one hundred percent (100%)
of the fair market value of the Common Stock per share on the date the
Board or the Committee grants the option unless otherwise determined by
the Board or the Committee, as the case may be; provided, however, that
the option price per share shall be equal to at least eighty-five
percent (85%) of the fair market value of the Common Stock per share on
the date of grant. For purposes hereof, the "fair market value" of a
share of Common Stock shall have the same meaning as set forth under
Section 9(a) herein.
<PAGE>
(b) Term and Exercisability of Nonqualified Stock Option. The term
during which any nonqualified stock option granted under the Plan may
be exercised shall be established in each case by the Board or the
Committee, as the case may be, but in no event shall any option be
exercisable during a term of more than ten (10) years after the date on
which it was granted. The Option Agreement shall state when the
nonqualified stock option becomes exercisable and shall also state the
maximum term during which the option may be exercised. In the event a
nonqualified stock option is exercisable immediately, the manner of
exercise of the option in the event it is not exercised in full
immediately shall be specified in the Option Agreement. The Board or
the Committee, as the case may be, may accelerate the exercise date of
any nonqualified stock option granted hereunder which is not
immediately exercisable as of the date of grant.
(c) Withholding. In the event the Optionee is required under the Option
Agreement to pay the Company, or make arrangements satisfactory to the
Company respecting payment of, any federal, state, local or other taxes
required by law to be withheld with respect to the option's exercise,
the Board or the Committee, as the case may be, may, in its discretion
and pursuant to such rules as it may adopt, permit the Optionee to
satisfy such obligation, in whole or in part, by electing to have the
Company withhold shares of Common Stock otherwise issuable to the
Optionee as a result of the option's exercise equal to the amount
required to be withheld for tax purposes. Any stock elected to be
withheld shall be valued at its "fair market value," as provided under
Section 9(a) hereof, as of the date the amount of tax to be withheld is
determined under applicable tax law. The Optionee's election to have
shares withheld for this purpose shall be made on or before the date
the option is exercised or, if later, the date that the amount of tax
to be withheld is determined under applicable tax law. Such election
shall also comply with such rules as may be adopted by the Board or the
Committee to assure compliance with Rule 16b-3, as then in effect, of
the General Rules and Regulations under the Securities Exchange Act of
1934, if applicable.
(d) Other Provisions. The Option Agreement authorized under this
Section 10 shall contain such other provisions as the Board, or the
Committee, as the case may be, shall deem advisable.
SECTION 11.
GRANTING OF OPTIONS TO NON-EMPLOYEE DIRECTORS
(a) Upon Joining Board. Each Non-Employee Director whose
initial election or appointment to the Board of Directors occurs after
the date this Plan is adopted by the Board of Directors shall, as of
<PAGE>
the date of such election or appointment to the Board, automatically be
granted an option to purchase 10,000 shares of the Common Stock at an
option price per share equal to one hundred percent (100%) of the fair
market value of the Common Stock on the date of such election or
appointment. Such option shall become exercisable to the extent of
2,000 shares on each of the first, second, third, fourth and fifth
anniversaries of the date of grant.
(b) Upon Re-election to Board. Each Non-Employee Director who,
after the date this Plan is adopted by the Board of Directors, is
re-elected as a Non-Employee Director of the Company or whose term of
office continues after a meeting of shareholders at which directors are
elected shall, as of the date of such re-election or shareholder
meeting, automatically be granted an option to purchase 2,000 shares of
Common Stock at an option price per share equal to one hundred percent
(100%) of the fair market value of the Common Stock on the date of such
re-election or shareholder meeting; provided that a Non-Employee
Director who receives an option pursuant to subsection (a) above shall
not be entitled to receive an option pursuant to this subsection (b)
until at least twelve (12) months after such Non-Employee Director's
initial election to the Board. Options granted pursuant to this
subsection (b) shall be immediately exercisable in full.
(c) General. Non-Employee Directors shall not receive more
than one option to purchase 2,000 shares pursuant to this Section 11 in
any one fiscal year. All options granted pursuant to this Section 11
shall be designated as nonqualified options and shall be subject to the
same terms and provisions as are then in effect with respect to
granting of nonqualified options to officers and employees of the
Company, except that the option shall expire on the earlier of (i)
three months after the optionee ceases to be a director (except by
death) and (ii) ten (10) years after the date of grant. Notwithstanding
the foregoing, in the event of the death of a Non-Employee Director,
any option granted to such Non-Employee Director may be exercised at
any time within twelve (12) months of the death of such Non-Employee
Director or on the date on which the option, by its terms expire,
whichever is earlier.
SECTION 12.
TRANSFER OF OPTION
No option shall be transferable, in whole or in part, by the Optionee other
than by will or by the laws of descent and distribution and, during the
Optionee's lifetime, the option may be exercised only by the Optionee. If the
Optionee shall attempt any transfer of any option granted under the Plan during
the Optionee's lifetime, such transfer shall be void and the option, to the
extent not fully exercised, shall terminate.
<PAGE>
SECTION 13.
RECAPITALIZATION, SALE, MERGER, EXCHANGE OR LIQUIDATION
In the event of an increase or decrease in the number of shares of Common
Stock resulting from a subdivision or consolidation of shares or the payment of
a stock dividend or any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the Company, the
number of shares of Option Stock reserved under Section 6 hereof and the number
of shares of Option Stock covered by each outstanding option and the price per
share thereof shall be adjusted by the Board to reflect such change. Additional
shares which may be credited pursuant to such adjustment shall be subject to the
same restrictions as are applicable to the shares with respect to which the
adjustment relates.
Unless otherwise provided in the Option Agreement, in the event of the sale
by the Company of substantially all of its assets and the consequent
discontinuance of its business, or in the event of a merger, exchange,
reorganization, reclassification, extraordinary dividend, divestiture (including
a spin-off), or liquidation of the Company, the Board may, in connection with
the Board's adoption of the plan for such transaction, provide for one or more
of the following: (i) the equitable acceleration of the exercisability of any
outstanding options hereunder; (ii) the complete termination of this Plan and
cancellation of outstanding options not exercised prior to a date specified by
the Board (which date shall give Optionees a reasonable period of time in which
to exercise the options prior to the effectiveness of such sale, merger,
exchange, reorganization, reclassification, extraordinary dividend, divestiture
(including a spin-off), or liquidation); and (iii) the continuance of the Plan
with respect to the exercise of options which were outstanding as of the date of
adoption by the Board of such plan for sale, merger, exchange, reorganization,
reclassification, extraordinary dividend, divestiture (including a spin-off), or
liquidation and provide to Optionees holding such options the right to exercise
their respective options as to an equivalent number of shares of stock of the
corporation succeeding the Company by reason of such sale, merger, exchange,
reorganization, reclassification, extraordinary dividend, divestiture (including
a spin-off), or liquidation. The grant of an option pursuant to the Plan shall
not limit in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, exchange or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.
SECTION 14.
INVESTMENT PURPOSE
No shares of Common Stock shall be issued pursuant to the Plan unless and
until there has been compliance, in the opinion of Company's counsel, with all
applicable legal requirements, including without limitation those relating to
securities laws and stock exchange listing requirements. As a condition to the
issuance of Option Stock to an Optionee, the Board or the Committee may require
<PAGE>
the Optionee to (a) represent that the shares of Option Stock are being acquired
for investment and not resale and to make such other representations as the
Board, or the Committee, as the case may be, shall deem necessary or appropriate
to qualify the issuance of the shares as exempt from the Securities Act of 1933
and any other applicable securities laws, and (b) represent that Optionee shall
not dispose of the shares of Option Stock in violation of the Securities Act of
1933 or any other applicable securities laws. The Company reserves the right to
place a legend on any stock certificate issued upon exercise of an option
granted pursuant to the Plan to assure compliance with this Section 14.
SECTION 15.
RIGHTS AS A SHAREHOLDER
An Optionee (or the Optionee's successor or successors) shall have no
rights as a shareholder with respect to any shares covered by an option until
the date of the issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such stock certificate is actually issued
(except as otherwise provided in Section 13 of the Plan).
SECTION 16.
AMENDMENT OF THE PLAN
The Board may from time to time, insofar as permitted by law, suspend or
discontinue the Plan or revise or amend it in any respect; provided, however,
that no such revision or amendment, except as is authorized in Section 13, shall
impair the terms and conditions of any option which is outstanding on the date
of such revision or amendment to the material detriment of the Optionee without
the consent of the Optionee. Notwithstanding the foregoing, no such revision or
amendment shall (i) materially increase the number of shares subject to the Plan
except as provided in Section 12 hereof, (ii) change the designation of the
class of employees eligible to receive options, (iii) decrease the price at
which options may be granted, or (iv) materially increase the benefits accruing
to Optionees under the Plan, unless such revision or amendment is approved by
the shareholders of the Company. Furthermore, the Plan may not, without the
approval of the shareholders, be amended in any manner that will cause incentive
stock options to fail to meet the requirements of Section 422 of the Internal
Revenue Code. In addition to and notwithstanding the foregoing, the provisions
of Section 11 shall not be amended more than once every six months, other than
to comport with changes in the Internal Revenue Code, the Employee Retirement
Income Security Act, or the rules thereunder.
<PAGE>
SECTION 17.
NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the Optionee to
exercise such option. Further, the granting of an option hereunder shall not
impose upon the Company or any Subsidiary any obligation to retain the Optionee
in its employ for any period.
FIRST AMENDMENT TO LEASE
This First Amendment to Lease is entered into effective as of October 28,
1997 by METACOM, INC., a Minnesota corporation ("Landlord") and ZOMAX OPTICAL
MEDIA, INC., a Minnesota corporation ("Tenant").
Recitals
1. Landlord and Tenant entered into a Lease dated January 1, 1995 (the
"Lease") for premises in the building located at 5353 Nathan Lane, Plymouth,
Minnesota.
2. Since the execution of the Lease, Tenant has expanded into additional
space in the building and Landlord and Tenant have agreed to amend the Lease to
confirm the current level of occupancy by Tenant and the current practice with
respect to allocation of Taxes and Operating Expenses.
3. Capitalized terms used in this First Amendment to Lease shall have the
meanings given to them in the Lease.
NOW, THEREFORE, the parties hereto agree as follows:
1. As of the date hereof, the parties agree that Tenant occupies 8,443
square feet of office space, 10,286 square feet of production space and 45,911
feet of warehouse space. In addition, the parties agree that 3,367 square feet
of the Common Area is allocated to Tenant and Tenant pays base rent on such
Common Area space at the same rate it pays Base Rent on its office space.
2. The parties hereto acknowledge and agree that Tenant is currently paying
Base Rent (i) at the rate of $7.50 per square foot per annum on the office space
and its allocated portion of Common Area, (ii), at the rate of $5.00 per square
foot per annum on the production space and (iii) at the rate of $3.50 per square
foot per annum on 42,223 square feet of warehouse space, a negotiated
arrangement, even though Tenant occupies 45,911 of warehouse space.
3. The parties agree and acknowledge that Tenant has exercised its option
to renew the Lease for an additional three year period beginning January 1,
1998. As of January 1, 1998, Tenant will pay Base Rent for the office space and
its allocated portion of the Common Area at the rate of $7.50 per square foot
per annum plus the amount that such rate will increase in accordance with the
formula set forth in paragraph 18 of the Lease. As of January 1, 1998, Tenant
will pay Base Rent for the production space at the rate of $5.00 per square foot
per annum plus the amount that such rate will increase in accordance with the
formula set forth in paragraph 18 of the Lease. As of January 1, 1998, Tenant
shall pay Base Rent for the entire 45,911 square feet at the rate of $3.50 per
square foot per annum the amount that such rate will increase in accordance with
the formula set forth in paragraph 18 of the Lease.
<PAGE>
4. As has been the current practice, Landlord shall continue in good faith
to allocate Taxes and Operating Expenses amongst (1) the office space and Common
Area; (2) the production space; and (3) the warehouse space of the building. As
has been the current practice, Tenant agrees to pay 45.4% of the Taxes and
Operating Expenses allocated to the office and Common Area; 100% of the Taxes
and Operating Expenses allocated to the production area; and 88.72% of the Taxes
and Operating Expenses allocated to the warehouse area.
5. Except as amended hereby, all other terms and conditions of the Lease
remain in full force and effect.
METACOM, INC.
By: /s/ Phillip T. Levin
Its: CEO
ZOMAX OPTICAL MEDIA, INC.
By: /s/ James E. Flaherty
Its: CEO
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purposes only, June
5, 1997, is made by and between Chaboya ranch, a California partnership
("Lessor") and Zomax Optical Media Inc., a Minnesota corporation ("Lessee"),
(collectively the "Parties," or individually a "Party").
1.2(a) Premises: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 2070 South 7th Street, #E, located in
the City of San Jose, County of Santa Clara, State of California, with zip code
95112, as outlined on Exhibit A attached hereto ("Premises"). The "Building" is
that certain building containing the Premises and generally described as
(describe briefly the nature of the Building): an approximate 108,060 square
foot area portion of a larger building, and attached yard/parking. Lessee may
verify size but this will not alter base rent, etc., but may alter Lessee's Pro
Rata share in 1.6(b). In addition to Lessee's rights to use and occupy the
Premises as hereinafter specified, Lessee shall have non-exclusive rights to the
Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but
shall not have any rights to the roof, exterior walls or utility raceways of the
Building or to any other buildings in the Industrial Center. The Premises, the
Building, the Common Areas, the land upon which they are located, along with all
other buildings and improvements thereon, are herein collectively referred to as
the "Industrial Center." (Also see Paragraph 2.)
1.2(b) Parking: Addendum Item 55 unreserved vehicle parking spaces
("Unreserved Parking Spaces")' and Addendum A, Item 55 reserved vehicle parking
spaces ("Reserved Parking Spaces"). (Also see Paragraph 2.6.)
1.3 Term: 5 years and 1 months ("Original Term") commencing August 15, 1997
("Commencement Date") and ending August 14, 2002 ("Expiration Date"). (Also see
Paragraph 3.) See Addendum A, Item 57.
1.4 Early Possession: N/A ("Early Possession Date"). (Also see Paragraphs
3.2 and 3.3.)
1.5 Base Rent: $27,550.00 per month ("Base Rent"), payable on the 1st day
of each month commencing See Addendum A, Item 57 (Also see Paragraph 4.)
[X] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum Item 49, attached hereto.
1.6(a) Base Rent Paid Upon Execution: $27,550.00 as Base Rent for the
period second months rent.
<PAGE>
1.6(b) Lessee's Share of Common Area Operating Expenses: thirty-six percent
(+/- 36%) ("Lessee's Share") as determined by [X] prorata square footage of the
Premises as compared to the total square footage of the Building or [ ] other
criteria as described in Addendum ___.
1.7 Security Deposit: $31,008.00 ("Security Deposit"). (Also see Paragraph
5.)
1.8 Permitted Use: manufacture and distribution of compact disk products
("Permitted Use") (Also see Paragraph 6.)
1.9 Insuring Party. Lessor is the "Insuring Party." (Also see Paragraph 8.)
1.10(a) Real Estate Brokers. The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[X] Colliers Parrish International, Inc. represents Lessor exclusively
("Lessor's Broker");
[X] Saratoga Investments represents Lessee exclusively ("Lessee's Broker"); or
[ ] ________________ represents both Lessor and Lessee ("Dual Agency").
(Also see Paragraph 15.)
1.10(b) Payment to Brokers. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) 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 Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of $
separate agreement ) for brokerage services rendered by said Broker(s) in
connection with this transaction.
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by N/A ("Guarantor"). (Also see Paragraph 37.)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 67, and Exhibits A through F, all of which
constitute a part of this Lease.
2. Premises, Parking and Common Areas.
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 and/or Common Area Operating Expenses, is
an approximation which Lessor and Lessee agree is reasonable and the rental and
Lessee" Share (as defined in Paragraph 1.6(b)) based thereon is not subject to
revision whether or not the actual square footage is more or less.
<PAGE>
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, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. See Addendum Item 52. 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 thirty (30) days after the completion
of Lessor's improvements under Addendum Item 52 b, c, and d, 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 that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within 6 months following the Commencement Date
and setting forth with specificity the nature and extent of such non-compliance,
take such action, at Lessor's expense, as may be reasonable or appropriate to
rectify the non-compliance. Lessor makes no warranty that the Permitted use in
Paragraph 1.8 is permitted for the Premises under Applicable Laws (as defined in
Paragraph 2.4).
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) 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, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "Applicable Laws") 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, is satisfied with reference thereto, and assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Premises and/or the terms 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 said matters other than as set forth in this Lease.
2.5 Vehicle Parking. Lessee shall be entitled to use the number of
Unreserved Paring Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
<PAGE>
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than
full-size passenger automobiles or pick-up trucks, full size trucks and
trailers, herein called "Permitted Size Vehicles." Vehicles other than Permitted
Size Vehicles shall be parked and loaded or unloaded as directed by Lessor in
the Rules and Regulations (as defined in Paragraph 40) issued by Lessor. (Also
see Paragraph 2.9.) Addendum Item 55.
(a) Lessee shall not permit or allow any vehicles that belong
to or are controlled by Lessee or Lessee's employees, suppliers, shippers,
customers, contractors or invitees to be loaded, unloaded, or parked in areas
other than those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited
activities described in this Paragraph 2.6, then Lessor shall have the right,
without notice, in addition to such other rights and remedies that it may have,
to remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease,
provide the parking facilities required by Applicable Law.
2.6 Common Areas - Definition. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.7 Common Areas - Lessee's Rights. Lessor hereby grants to Lessee, for the
benefit of Lessee and its employees, suppliers, shippers, contractors, customers
and invitees, during the term of this Lease, the non-exclusive right to use, in
common with others entitled to such use, the Common Areas as they exist from
time to time, subject to any rights, powers, and privileges reserved by Lessor
under the terms hereof or under the terms of any rules and regulations or
restrictions governing the use of the Industrial Center. Under no circumstances
shall the right herein granted to use the Common Areas be deemed to include the
right to store any property, temporarily or permanently, in the Common Areas.
Any such storage shall be permitted only by the prior written consent of Lessor
or Lessor's designated agent, which consent may be revoked at any time. In the
event that any unauthorized storage shall occur then Lessor shall have the
right, without notice, in addition to such other rights and remedies that it may
have, to remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
2.8 Common Areas - Rules and Regulations. Lessor or such other person(s) as
Lessor may appoint shall have the exclusive control and management of the Common
Areas and shall have the right, from time to time, to establish, modify, amend
<PAGE>
and enforce reasonable Rules and Regulations with respect thereto in accordance
with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and
Regulations, and to cause its employees, suppliers, shippers, customers,
contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center.
2.9 Common Areas - Changes. Lessor shall have the right, in Lessor's sole
discretion, from time to time, so long as Lessee's use of the Premises is not
unreasonably disturbed:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, loading and unloading areas, ingress, egress,
direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises remains
available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the
Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Industrial Center as
lessor may, in the exercise of sound business judgment, deem to be appropriate.
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 an Early Possession Date is specified in Paragraph
1.4 and if Lessee totally or partially occupies the Premises after the Early
Possession Date but prior to the Commencement Date, the obligation to pay Base
Rent shall be abated for the period of such early occupancy. All other terms of
this Lease, however, (including but not limited to the obligations to pay
Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 Delay in Possession. If for any reason Lessor cannot deliver possession
of the Premises to Lessee by the Early Possession Date, if one is specified in
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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 Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original 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 the period
during which the Lessee would have otherwise 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 pay Base Rent and other rent or charges, as the
same may be adjusted from time to time, to 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 full month shall be
prorated based upon the actual number of days of the 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.
4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "Common Area Operating Expenses" are defined, for purposes
of this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat,
clean, good order and condition, of the following:
(aa) The Common Areas, including parking
areas, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, driveways, landscaped areas, striping, bumpers,
irrigation systems, Common Area lighting facilities, fences and gates,
elevators and roof.
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(bb) Exterior signs and any tenant
directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and
telephone to service the Common Areas.
(iii) Property management and security services
and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and
repair of Common Areas.
(v) Any increase above the Base Real Property
Taxes (as defined in Paragraph 10.2(b)) for the Building and the Common Areas.
(vi) Any "Insurance Cost Increase" (as defined
in Paragraph 8.1).
(vii) The cost of insurance carried by Lessor with
respect to the Common Areas.
(viii) Any deductible portion of an insured loss
concerning the Building or the Common Areas.
(ix) Any other services to be provided by Lessor
that are stated elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes
that are specifically attributable to the Building or to any other building in
the Industrial Center or to the operation, repair and maintenance thereof, shall
be allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services
set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation
upon Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be
payable by Lessee within ten (10) days after a reasonably detailed statement of
actual expenses is presented to Lessee by Lessor. At Lessor's option, however,
an amount may be estimated by Lessor from time to time of Lessee's Share of
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annual Common Area Operating Expenses and the same shall be payable quarterly,
as Lessor shall designate, during each 12-month period of the Lease term, on the
same day as the Base Rent is due hereunder. Lessor shall deliver to Lessee
within sixty (60) days after the expiration of each calendar year a reasonably
detailed statement showing Lessee's Share of the actual Common Area Operating
Expenses incurred during the preceding year. If Lessee's payments under this
Paragraph 4.2(d) during said preceding year exceed Lessee's Share as indicated
on said statement, Lessee shall be credited the amount of such overpayment
against Lessee's Share of Common Area Operating Expenses next becoming due. If
Lessee's payments under this Paragraph 4.2(d) during said preceding year were
less than Lessee's Share as indicated on said statement, Lessee shall pay to
Lessor the amount of the deficiency within ten (10) days after delivery by
Lessor to Lessee of said statement. See Addendum Item 61.
5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's 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 therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. 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 monies to be paid by Lessee under this Lease.
6. Use.
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the
Permitted Use set forth in Paragraph 1.8, or any other legal use which is
reasonably comparable thereto, and for no other purpose. Lessee shall not use or
permit the use of the Premises in a manner that is unlawful, creates waste or a
nuisance, or that disturbs owners and/or occupants of, or causes damage to the
Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay
its consent to any written request by Lessee, Lessee's assignees or subtenants,
and by prospective assignees and subtenants of Lessee, its assignees and
subtenants, for a modification of said Permitted Use, so long as the same will
not impair the structural integrity of the improvements on the Premises or in
<PAGE>
the Building or the mechanical or electrical systems therein, does not conflict
with uses by other lessees, is not significantly more burdensome to the Premises
or the Building 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 after such request 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 potential 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 or by-products
thereof. Lessee shall not engage in any activity in 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 Requirements (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, and
(iii) the presence in, on or about the Premises of a Hazardous Substance with
respect to which any Applicable Laws require that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may, without Lessor's prior consent, but upon notice to
Lessor and in compliance with all Applicable Requirements, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of the Permitted Use, 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 any
Reportable Use of any Hazardous Substance 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 therefor, including but
not limited to the installation (and, at Lessor's option, 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 has come to be located in, on,
under or about the Premises or the Building, other than as previously consented
to by Lessor, Lessee shall immediately give Lessor written notice thereof,
together with a copy of any statement, report, notice, registration,
<PAGE>
application, permit, business plan, license, claim, action, or proceeding given
to, or received from, any governmental authority or private party concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous Substance
including but not limited to all such documents as may be involved in any
Reportable Use involving the Premises. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including, without limitation, through the plumbing or sanitary sewer
system).
(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 damages, liabilities,
judgments, costs, claims, liens, expenses, penalties, loss of permits and
attorneys' and consultants' fees arising out of or involving any Hazardous
Substance brought onto the Premises by or for Lessee or by anyone under Lessee's
control. Lessee's obligations under this Paragraph 6.2(c) shall include, but not
be limited to, the effects of any contamination or injury to person, property or
the environment created of suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' 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, unless specifically so agreed by Lessor in writing at the
time of such agreement.
6.3 Lessee's Compliance with Requirements. Lessor shall indemnify and hold
Lessee harmless from any costs associated with hazardous substances existing on
the premises prior to Lessee's occupancy. Lessee shall, to the extent of
Lessee's use, unique to Lessee, at Lessee's sole cost and expense, fully,
diligently and in a timely manner, comply with all "Applicable Requirements,"
which term is used in this Lease to mean 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),
now in effect or which may hereafter come into effect. 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 Requirements 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 Requirements.
6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lenders") shall have the right
to enter the Premises at any time in the case of an emergency, and otherwise at
<PAGE>
reasonable times, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable
Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to
employ experts and/or consultants in connection therewith to advise Lessor with
respect to Lessee's activities, including but not limited to Lessee's
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance 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 by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to 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 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, Lessee to be given 24 hours notice of inspection, except in the
case of an emergency.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Condition),
2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or 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 subject to reasonable wear and
tear and casualty damage (whether or not such portion of the Premises requiring
repair, 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 specifically serving the Premises, such as plumbing,
heating, air conditioning, ventilating, electrical, lighting facilities,
boilers, fired or unfired pressure vessels, fire hose connections if within the
Premises, fixtures, interior walls, interior surfaces of exterior walls,
ceilings, floors, windows, doors and plate glass, but excluding any items which
are the responsibility of Lessor pursuant to Paragraph 7.2 below. 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.
(b) Lessee shall, at Lessee's sole cost and expense, procure
and maintain a contract, with copies to Lessor, in customary form and substance
for and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises or Lessee may do work themselves without reduction of Lessee's
responsibilities. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
<PAGE>
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguishing system including fire alarm
and/or smoke detection systems and equipment, fire hydrants, parking lots,
walkways, parkways, driveways, landscaping, fences, signs and utility systems
serving the Common Areas and all parts thereof, as well as providing the
services for which there is a Common Area Operating Expense pursuant to
Paragraph 4.2. Foundations, exterior walls (except initial painting), structural
conditions of interior bearing walls and roof (including skylights) shall not be
a part of the common area expense. Lessor shall not be obligated to paint the
exterior or interior surfaces of exterior walls nor shall Lessor be obligated to
maintain, repair or replace windows, doors or plate glass of the Premises.
Lessee expressly waives the benefit of any statute now or hereafter in effect
which would otherwise afford Lessee the right to make repairs at Lessor's
expense or to terminate this Lease because of Lessor's failure to keep the
Building, Industrial Center or Common Areas in good order, condition and repair.
7.3 Utility Installations, Trade Fixtures, Alterations.
(a) Definitions; Consent Required. The term "Utility
Installations" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection systems, communications
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 which can be removed without doing
material damage to the Premises. The term "Alterations" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "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 pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be
made 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) without Lessor's consent but upon notice to Lessor, so long as they
are not visible from the outside of the Premises, do not involve puncturing,
relocating or removing the roof or any existing walls, or changing or
interfering with the fire sprinkler or fire detection systems.
(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 detailed plans. All consents given by
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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 be in compliance with all Applicable
Requirements. 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 $2,500.00 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.
(c) Lien Protection. 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
mechanic's 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 attorneys' 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 and to cause Lessee to become the owner thereof as hereinafter provided
in this Paragraph 7.4, all Alterations and Utility Installations 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 the Premises and be surrendered
with the Premises by Lessee.
(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
that their installation may have been consented to by Lessor. Lessor may require
<PAGE>
the removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor. Lessor will inform
Lessee at the time it consents to an alteration, if Lessor will require it
removed at the end of the Lease.
(c) Surrender/Restoration. Lessee shall surrender the Premises
by the end of the last day of the Lease term or any earlier termination date,
clean and free of debris and in good operating order, condition and state of
repair, ordinary wear and tear and casualty damage 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 herein,
the Premises, as surrendered, shall include the Alterations and 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 Lessee-Owned Alterations and Utility
Installations, as well 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
Requirements and/or good 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 of Premium Increases.
(a) As used herein, the term "Insurance Cost Increase" is
defined as any increase in the actual cost of the insurance applicable to the
Building and required to be carried by Lessor pursuant to Paragraphs 8.2(b),
8.3(a) and 8.3(b), ("Required Insurance"), over and above the Base Premium, as
hereinafter defined, calculated on an annual basis. "Insurance Cost Increase"
shall include, but not be limited to, requirements of the holder of a mortgage
or deed of trust covering the Premises, increased valuation of the Premises,
and/or a general premium rate increase. The term "Insurance Cost Increase" shall
not, however, include any premium increases resulting from the nature of the
occupancy of any other lessee of the Building. If the parties insert a dollar
amount in Paragraph 1.9, such amount shall be considered the "Base Premium." If
a dollar amount has not been inserted in Paragraph 1.9 and if the Building has
been previously occupied during the twelve (12) month period immediately
preceding the Commencement Date, the "Base Premium" shall be the annual premium
applicable to such twelve (12) month period. If the Building was not fully
occupied during such twelve (12) month period, the "Base Premium" shall be the
lowest annual premium reasonably obtainable for the Required Insurance as of the
Commencement Date, assuming the most nominal use possible of the Building. In no
event, however, shall Lessee be responsible for any portion of the premium cost
attributable to liability insurance coverage in excess of $1,000,000 Primary and
$1,000,000 Umbrella procured under Paragraph 8.2(b).
(b) Lessee shall pay any Insurance Cost Increase to Lessor
pursuant to Paragraph 4.2. Premiums for policy periods commencing prior to, or
extending beyond, the term of this Lease shall be prorated to coincide with the
corresponding Commencement Date or Expiration Date.
<PAGE>
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, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) 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 Primary and
$1,000,000 Umbrella per occurrence with an "Additional Insured-Managers or
Lessors of Premises" endorsement and contain the "Amendment of the Pollution
Exclusion" endorsement for damage caused by heat, smoke or fumes from a hostile
fire. The policy shall not contain any intro-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. 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.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. Lessor 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 any Lender(s), insuring against loss or
damage to the Premises. Such insurance shall be for full replacement cost, as
the same shall exist from time to time, or the amount required by any Lender(s),
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. Lessee-Owned
Alterations and Utility Installations. Trade Fixtures and Lessee's personal
property shall be insured by lessee pursuant to Paragraph 8.4. If the coverage
is available and commercially appropriate, Lessor's 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 or included in the Base
Premium), 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 Building 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
loss, but not including plate glass insurance. Said policy or policies shall
also contain an agreed valuation provision in lieu of any co-insurance 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.
<PAGE>
(b) Rental Value. Lessor shall also 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 any Lender(s), insuring the loss of the full rental
and other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property Taxes, insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may 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 co-insurance clause, and the amount
of coverage shall be adjusted annually to reflect the projected rental income,
Real Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating Expenses
shall include any deductible amount in the event of such loss.
(c) Adjacent Premises. Lessee shall pay for any increase in
the premiums for the property insurance of the Building and for the Common Areas
or other buildings in the Industrial Center if said increase is caused by
Lessee's acts, omissions, use or occupancy of the Premises.
(d) Lessee's Improvements. Since Lessor is the Insuring Party,
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.
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, Trade Fixtures and Lessee-Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance
shall be full replacement cost coverage with a deductible not to exceed $1,000
per occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property and the restoration of Trade Fixtures and
Lessee-Owned Alterations and Utility Installations. Upon request from Lessor,
Lessee 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, 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. Lessee shall cause to be delivered to Lessor,
<PAGE>
within seven (7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the existence
and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such
policy shall be cancelable 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.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waiver their
entire right to recover damages (whether in contract or in tort) against the
other, for loss or damage to their 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. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
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,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving, or in connection
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. 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. See Addendum Item 62.
8.8 Exemption of Lessor from Liability. Except to the extent caused by
Lessor's gross negligence, 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 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, from other sources or
places, and regardless of whether the cause of such damage or injury of 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 lessee of Lessor nor
from the failure by Lessor to enforce the provisions of any other lease in the
Industrial Center. Except for 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.
<PAGE>
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" 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 less than fifty percent (50%)
of the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(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 fifty percent
(50%) or more of the then Replacement Cost of the Premises (excluding
Lessee-Owned Alterations and Utility Installations and Trade Fixtures)
immediately prior to such damage or destruction. In addition, damage or
destruction to the Building, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building, the cost of
which damage or destruction is fifty percent (50%) or more of the then
Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations
and Trade Fixtures of any lessees of the Building) of the Building shall, at the
option of Lessor, be deemed to be Premises Total Destruction.
(c) "Insured Loss" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, 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 Premises Partial Damage - Insured Loss. If 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. In the event, however, that there is a shortage of
insurance proceeds and such shortage is due to the fact that, by reason of the
<PAGE>
unique nature of the improvements in the Premises, 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 full
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, Lessor 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
Lessor does not receive such funds or assurance within such ten (10) day period,
and if Lessor does not so elect to restore and repair, then this Lease shall
terminate ninety (90) 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 any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage 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. See Addendum
Item 63.
9.3 Partial Damage - Uninsured Loss. If Premises Partial Damage that is not
an Insured Loss occurs, greater than $50,000.00, 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 date 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 such
commitment from Lessee. 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 after the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the time 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
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 9.7.
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
<PAGE>
one 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 (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such 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 such period, then this
Lease shall terminate as of the date set forth in the first sentence of this
Paragraph 9.5. The right to terminate under this paragraph shall also apply to
Lessee.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of (i) Premises Partial Damage or (ii)
Hazardous Substance Condition for which Lessee is not legally responsible, the
Base Rent, Common Area Operating Expenses and other charges, if any, payable by
Lessee hereunder for the period during which such damage or condition, its
repair, remediation or restoration continues, shall be abated in proportion to
the degree to which Lessee's use of the Premises is impaired. Except for
abatement of Base Rent, Common Area Operating Expenses 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 damage, destruction, repair, remediation 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 the receipt of such notice, this Lease
shall continue in full force and effect. "Commence" as used in this Paragraph
9.6 shall mean either the unconditional authorization of the preparation of the
required plans, or the beginning of the actual work on the Premises, whichever
occurs first.
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
<PAGE>
Requirements and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor shall
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.
9.8 Waiver of Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent it is inconsistent
herewith.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the Real Property taxes, as defined
in Paragraph 10.2(a), applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any increases in such amounts over the
Base Real Property Taxes shall be included in the calculation of Common Area
Operating Expenses in accordance with the provisions of Paragraph 4.2.
10.2 Real Property Tax Definitions.
(a) 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 Industrial Center 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 Industrial Center or any portion thereof, 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 Industrial Center
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.
(b) As used herein, the term "Base Real Property Taxes" shall
be the amount of Real Property Taxes, which are assessed against the Premises,
Building or Common Areas in the calendar year during which the Lease is
executed. In calculating Real Property Taxes for any calendar year, the Real
Property Taxes for any real estate tax year shall be included in the calculation
of Real Property Taxes for such calendar year based upon the number of days
which such calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
<PAGE>
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 Joint Assessment. If the Building is not separately assessed, Real
Property Taxes allocated to the Building 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 assigned in the assessor's work sheets or such other information may
be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, 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 property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. Utilities. Lessee shall pay directly for all utilities and services supplied
to the Premises, including but not limited to electricity, telephone, security,
gas and cleaning of the Premises, together with any taxes thereon. If any such
utilities or services are not separately metered to the Premises or separately
billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be
determined by Lessor of all such charges jointly metered or billed with other
premises in the Building, in the manner and within the time periods set forth in
Paragraph 4.2(d). Addendum Item 56.
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,
"assign") 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,
fifty-one (51%) or more of the voting control of Lessee shall constitute a
change in control for this purpose.
<PAGE>
(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 full execution and delivery 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, or a non-curable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a non-curable 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 for
the Premises to the greater of the then fair market rental value of the
Premises, as reasonably determined by Lessor, or one hundred ten percent (110%)
of the Base rent then in effect. 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 the 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 rental
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
as reasonably determined by Lessor (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, (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 rental bears to the Base Rent in effect immediately prior to the
adjustment specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
Notwithstanding the foregoing, Lessee shall have the right to assign or sublet
this Lease to any entity controlling, controlled by, or under common control
with Lessee, or any entity that acquires all or substantially all of Lessee's
assets or stock, without obtaining Lessor's consent, as long as Lessee remains
fully liable for all terms of the Lease.
(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)
<PAGE>
release Lessee of any obligations hereunder, nor (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 for 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 to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the assignee or
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 under this Lease or the sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's
obligation under this Lease, Lessor may proceed directly against Lessee, any
Guarantors or anyone else responsible for the performance of the Lessee's
obligations under this Lease, including any sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor.
(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 $500.00 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) Lessor, as a condition to giving its consent to any
assignment or subletting shall receive 50% of the amount by which the sublease
rent exceeds the rent payable under this Lease, after Lessee recovers its actual
and reasonable costs of subleasing.
<PAGE>
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 the
foregoing provision 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 such 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 under a sublease approved by Lessor 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.
<PAGE>
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 Breach (as hereinafter defined),
$350.00 is a reasonable minimum sum per such occurrence for legal services and
costs and that Lessor may include the cost of such services and costs in said
notice as rent due and payable. A "Default" by Lessee is defined as a failure by
Lessee to observe, comply with or perform any of the terms, covenants,
conditions or rules applicable to Lessee under this Lease. A "Breach" by Lessee
is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs
13.2 and/or 13.3:
(a) 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, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder 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
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (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 13.1(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) days 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. Code Section
<PAGE>
101 or any successor statute thereto (unless, in the case of a petition filed
against Lessee, the same is dismissed with 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 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 13.1(e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of
Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was
materially false.
(g) If the performance of Lessee's obligations under this
Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation or any
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such event,
to provide Lessor with written alternative assurance of security, which, when
coupled with the then existing resources of Lessee, equals or exceeds the
combined financial resources of Lessee and the Guarantors that existed at the
time of execution of this lease.
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 own
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 (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 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
<PAGE>
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 any leasing commission paid by Lessor in connection with this Lease
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 immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District
in which the Premises are located 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 13.2. 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 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 Subparagraph
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 Subparagraph
13.1(b), (c) or (d). In such case, the applicable grace period 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 (2) 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 recover the rent as it becomes due, provided Lessee has the right to
sublet or assign, subject only to reasonable limitations. Lessor and Lessee
agree that the limitations on assignment and subletting in this Lease 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 this
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
<PAGE>
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, 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 13.3 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 13.3 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 deed of trust covering the Premises.
Accordingly, if any installment of rent or 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 any Lender(s) whose name and address shall have been furnished to 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
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 portion of
the Common Areas designed for Lessee's parking, is taken by condemnation, Lessee
<PAGE>
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 Premises. No reduction of Base Rent shall
occur if the condemnation does not apply to any portion of the Premises. 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 of 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 Lessee's Share of the legal and
other expenses incurred by Lessor in the condemnation matter, repair any damage
to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. Brokers' Fees.
15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 Representations and Warranties. 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 as named in Paragraph 1.10(a) 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 Broker(s) 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 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, and/or attorneys' fees reasonably incurred
with respect thereto.
16. Tenancy and Financial Statements.
16.1 Tenancy Statement. 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 a 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.
<PAGE>
16.2 Financial Statement. If Lessor desires to finance, refinance, or sell
the Premises or the Building, or any part thereof, Lessee and all Guarantors
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. 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 15.3, 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 ten (10) days following
the date on which it was due, shall bear interest from the date due at the prime
rate charged by the largest state chartered bank in the state in which the
Premises are located plus four percent (4%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential 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. Each Broker shall be an intended third party beneficiary
of the provisions of this Paragraph 22.
<PAGE>
23. Notices.
23.1 Notice Requirements. 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
during normal business hours, and shall be deemed sufficiently given if serviced
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 Date of Notice. 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 or facsimile confirmation of
receipt of the transmission thereof, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday or a Sunday or a 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 any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such 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 waiver of any Default or Breach by Lessee of any
provision hereof. 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
<PAGE>
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to one hundred fifty
percent (150%) of the Base Rent applicable during the month immediately
preceding such expiration or earlier termination. Nothing contained herein shall
be construed as a consent by Lessor to any holding over by Lessee.
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 located. 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. Lessor will use best effort to
obtain a non-disturbance agreement from any existing holder of a security
device.
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 pursuant
to Paragraph 13.5. 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
<PAGE>
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 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 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. Attorneys' 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) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' 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
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall
have the right to enter 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, 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 eighty (180) 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.
Lessee to be given 24 hour notice except in case of emergency.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtain 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.
<PAGE>
34. Signs. Lessee shall not place any sign upon the exterior of the Premises or
the Building, 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 so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. 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 of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
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' and 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, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), 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. 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
acknowledgment 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 impositions 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.
<PAGE>
37. Guarantor.
37.1 Form of Guaranty. If there are to be any Guarantors of this Lease per
Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor
shall be in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same obligations as
Lessee under this Lease, including but not limited to the obligation to provide
the Tenancy Statement and information required in Paragraph 16.
37.2 Additional Obligations of Guarantor. It shall constitute a Default of
the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and resolution of its board of directors authorizing the making of
such guaranty, together with a certificate of incumbency showing the signatures
of the persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by Lessor, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the 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 Lease, 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 without consent of Lessor, which consent shall not be
unreasonably withheld. 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>
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 Effective 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 separate Defaults under Paragraph 13.1
during the twelve (12) month period immediately preceding the exercise of the
Option, whether or not the Defaults are cured.
(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 separate Defaults 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.
40. Rules and Regulations. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("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 the Building and the Industrial Center and their invitees.
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 the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
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.
<PAGE>
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 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 either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered 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.
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.
<PAGE>
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF
ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, 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 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 and on the dates
specified above their respective signatures.
Executed at: San Jose, CA Executed at: Plymouth, MN
on: June 11, 1997 on: June 10, 1997
By LESSOR: By LESSEE:
CHABOYA RANCH, a California Partnership ZOMAX OPTICAL MEDIA, INC.
By: By:
Name Printed: Name Printed:
Title: Title:
By: By:
Name Printed: Name Printed:
Title: Title:
<PAGE>
Address: 2150 Monterey Road Address: 5353 Nathan Lane
San Jose, CA 95112 Minneapolis, Minnesota 55422
Telephone (408) 292-0791 Telephone: (612) 553-9300
Facsimile: ( ) Facsimile: (612) 557-7772
BROKER: COLLIERS PARRISH BROKER: SARATOGA INVESTMENTS
INTERNATIONAL, INC.
Executed at: Executed at:
on: on:
By: By:
Name Printed: Name Printed:
Title: Title:
Address: 1960 The Alameda, Suite 100 Address: 4125 Blackford Avenue
San Jose, CA 95126 Suite 250
San Jose, CA 95117
Telephone (408) 554-8181 Telephone: (408) 249-8100 x315
Facsimile: (408) 247-2317 Facsimile: (612)
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 700 South Flower Street, Suite 600, Los Angeles, CA 90017.
(213) 687-8777.
<PAGE>
ADDENDUM "A" TO STANDARD INDUSTRIAL/COMMERCIAL
MULTI-TENANT LEASE-GROSS
DATEDJUNE 5, 1997 FOR PROPERTY LOCATED AT 2070 SOUTH 7TH STREET #D
BETWEEN CHABOYA RANCH, A CALIFORNIA PARTNERSHIP ("LESSOR") AND ZOMAX
OPTICAL MEDIA, INC., A MINNESOTA CORPORATION, AS ("LESSEE").
49. Monthly base rent for the sixty one (61) month term of this lease
shall be as follows:
Month's 01 No Rent
Month's 02 - 12 $27,550.00
Month's 13 - 24 $28,377.00
Month's 25 - 36 $29,228.00
Month's 37 - 48 $30,105.00
Month's 49 - 61 $31,008.00
50. Prior to execution of this Lease, Lessee shall procure all governmental
permits to operate for its intended use. Upon Lessee's execution of the
Lease, it shall be conclusively presumed that Lessee has satisfied
itself concerning this matter.
51. Any partial month's occupancy shall be prorated in the third month of
the lease.
52. Lessor, at Lessor's cost and in compliance with applicable laws, codes
and ordinances, shall provide the following improvements to the
Premises shown on the attached Exhibit B:
a. Four (4) interior loading docks, +/- 80' in overall length
with standard load revelers. Docks to be similar to those
installed for Trotter Technologies at the north end of the
property however the roof support will need to remain m the
center of the dock. Lessor will use its best efforts to
complete the docks in a timely manner. Docks to be located as
per attached Exhibit B.
b. Upgrade warehouse lights in Sections A and C to match
standard in warehouse adjacent to the Premises to the north.
c. Install ordinary hazard fire sprinklers in Section A and
in Section C if required by fire marshal.
d. Seal upper window openings currently open in Section A.
Lessor shall complete (b) and (d) above by approximately June 30, 1997. Item (a)
shall be completed by approximately July 31, 1997 and item c) by approximately
August 15, 1997.
Except as provided herein, other than the above improvements, the Premises will
be deliver in its current "as is" condition. Item 2.2 of the lease shall not
apply to Section C and D. These sections will be delivered "as is". Lessee shall
not be obligated to bring Sections C and D into compliance with any laws, codes,
or ordinances unless Lessee remodels such space. Lessor discloses that Section C
is a covered parking area that will house the loading docks. This area is
subject to water entering the building during rain storms.
<PAGE>
53. Lessee shall pay for all of its trash/debris removal. The outside
placement of any trash bins shall be subject to the approval of Lessor.
Except for vehicle parking provided under item 2.6., there shall be no
outside storage allowed in the front of the premises or the subject
property. All storage shall be inside the Premises.
54. Lessee's share of the Common Area as specified in paragraph 1.6.a.
above is an approximation. Lessor reserves the right to modify
Lessee's share based on the actual square footage of the Premises.
Lessee has the right to confirm the size of the Premises as it relates
to Lessee's share of the pro-rata share of the subject property.
55. Lessee shall be allowed unreserved parking along the front of the
Premises facing South 7th Street. Lessee may, at Lessee's cost,
install signs and other identification to designate that the
parking spaces identified on Exhibit A are for the exclusive use of
Lessee. Lessor shall not be responsible to enforce any parking
designations. Lessee shall be allowed to park trucks in front of
section C and in the yard area portion of the Premises adjacent to
section C. The Premises shall include the yard/parking area south
of the Premises as shown on Exhibit A. The balance of the yard is for
the exclusive use of the future tenant in the wooden building at the
south end of the property. Lessor reserves the right to separate
these yards with a fence at a later date.
56. Lessor and Lessor agree and understand that currently the utilities
to the Premises are not separately metered. Lessor shall, at Lessor's
cost, within ninety (90) days of lease commencement install a house
meter or individual electrical meter for electrical usage by the
Premises. If Lessor fails to do so, Lessor shall be entitled to charge
Lessee for only those prior electrical costs incurred in the ninety
(90) day period prior to such metering. Lessor shall have the option
to send the entire electrical bill for the property to Zomax, less
the sub metered amount to be paid by third party tenants not associated
with Unit A (Trotter Technologies) and Unit E, the Premises or the
successors in interest. Lessee shall not receive a bill until after
said meter is operating to measure Lessee's usage.
57. The actual date of Lease commencement shall be upon substantial
completion by Lessor of items a, b, c and d of Paragraph 52 above
estimated to be August 15, 1997. Rent shall commence thirty (30) days
thereafter. The term of the lease shall expire sixty one (61) months
after commencement. . Lessee shall be allowed to occupy the Premises
July 1, 1997, not to interfere with Lessor's improvements and subject
to all other terms and conditions of the lease except rent. The actual
lease expiration date of this lease shall be identical to that of the
Trotter technologies Lease dated May 3, 1996 for space located at 2070
So. 7th Street, #A, San Jose.
<PAGE>
58. Option To Extend:
Provided that Lessee is not in default in the performance in any of the terms
and conditions set forth herein, Lessee shall have one (1) five (5) year option
to extend the term of this Lease ("Option"). Lessee shall provide no less than
one hundred eighty (180) days written notice prior to the expiration of the
original Lease Term of its intention to extend the term of the Lease. If Lessor
does not receive from Lessee written notice of Lessee's exercise of the Options
within the time stipulated, all rights under these Options shall automatically
terminate. Time is of the essence herein.
The monthly rent for the Option Period shall be at one hundred percent (100%) of
the then prevailing market rent for the highest and best use for premises
similar to the Premises (the "Fair Market Rental Value") with market rental
escalations. The monthly Base Rent for the Option Period shall be determined as
follows:
a. The parties shall have ten (10) days after Lessor receives the
Option Notice within which to agree on the monthly Base Rent for the Option
Period. If the parties agree on the monthly Base Rent for the Option Period
within ten (10) days after Lessor receives the Option Notice, they shall
immediately execute an amendment to this Lease stating the monthly Base Rent for
the Option Period.
b. If the parties are unable to agree on the monthly Base Rent for the
Option Period within ten (10) days after Lessor receives the Option Notice, the
then current fair market rental value of the Premises shall be determined in
accordance with Paragraph c below:
c. The "Fair Market Rental Value" of the Premises shall be defined to
mean the fair market rental value of the Premises as of the commencement of the
Option Period, taking into consideration all relevant factors, including length
of term, the uses permitted under the Lease, the quality, size, design and
location of the Premises, and the monthly base rent paid by Lessees for premises
comparable to the Premises located in the same general area as the Premises, and
concessions being granted to such Lessees. Consideration will not be given to
improvements within the Premises made at Lessee's sole expense.
d. Within five (5) days after the expiration of the ten (10) day period
set forth in Paragraph a, each party, at its sole cost and by giving notice to
the other party, shall appoint a real estate appraiser with at least five (5)
years' full-time commercial appraisal experience in the area in which the
Premises are located to appraise and set the then fair market rental value of
the Premises for the Option Period. If a party does not appoint an appraiser
within this five (5) day time period, the single appraiser appointed shall be
the sole appraiser and shall set the then fair market rental value of the
Premises. If the two appraisers arc appointed by the parties as stated in this
Paragraph d, they shall meet promptly and attempt to set the then fair market
rental value of the Premises. If they are unable to agree within fifteen (15)
<PAGE>
days after the second appraiser has been appointed, they shall attempt to elect
a third appraiser meeting the qualifications stated in this Paragraph d within
five (5) days after the last day the two appraisers are given to set the then
fair market rental value of the Premises. If they are unable to agree on the
third appraiser, either of the parties to this Lease, by giving five(5) days
notice to the other party can apply to the then president of the real estate
board for the city in which the Premises are located, or the Presiding Judge of
the Santa Clara County Superior Court, for the selection of a third appraiser
who meets the qualifications stated in this Paragraph d. Each of the parties
shall bear one-half (1/2) of the cost of appointing the third appraiser and of
paying the third appraiser's fee. The third appraiser however selected shall be
a person who has not previously acted in any capacity for either party.
Within twenty (20) days after the election of the third appraiser, the three
appraisals shall be added together and their total divided by three (3); subject
to the next sentence, the resulting quotient shall be the then fair market
rental value of the Premises. If, however, the low appraisal and/or high
appraisal are/is more than ten percent (10%) lower and/or higher than the middle
appraisal, the low appraisal and/or high appraisal shall be disregarded as
stated in this Paragraph d, the middle appraisal shall be the then fair market
rental value of the Premises. After the then fair market rental value of the
Premises has been set, the appraisers shall immediately notify the parties of
such value and the monthly Base Rent for the Option Period shall be the amount
which is one hundred percent (100%) of the fair market rental value of the
Premises so set. In no event, however, shall the new monthly rental rate be less
than the monthly rent applicable to the Premises prior to the particular Rental
Adjustment date.
e. Notwithstanding anything to the contrary contained in this Lease,
this Option is personal to Lessee and may not be assigned, voluntarily or
involuntarily, separate from or as a part of the Lease without consent of Lessor
which consent shall not be unreasonably withheld.
f. Notwithstanding the exercise by Lessee of an Option, in the event
that Lessee is in default or breach of the Lease at any time from the date of
the Option Notice through the date on which the Option Period commences,
provided that Lessee has been given notice of such default and such default has
remained uncured for ten (10) days, then, at Lessor's election, and upon written
notice by Lessor to Lessee, Lessee's exercise of an Option may be voided by
Lessor and Lessee shall thereafter have no rights hereunder to extend the term
through the Option Period.
59. Lessee shall not use in any way the top level of the exterior concrete
mezzanine at the rear of the Premises shown on Exhibit A without Lessor's
consent which shall not be unreasonably withheld, delayed or conditioned.
60. Common Area Operating Expenses:
Common Area Expenses shall exclude Lessor's executive salaries, capital
expenditures or depreciation or amortization thereof, costs resulting from
defective design or construction of the building or Premises, amounts paid to
the affiliates of Lessor at rates in excess of fair market value, cost resulting
from the negligence of Lessor or its agents and employees, costs incurring in
connection with entering in new leases or disputes under existing leases,
special assessments related to initial construction of the building, costs of
removal or abatement of Hazardous Substances or asbestos other than those placed
or released by Lessee, cost recovered through insurance or other reimbursements,
costs of travel, entertainment, promotions, disproportionate use of the Common
Areas by other tenants and accounting fees and attorney's fees unless related to
actions of Lessee.
<PAGE>
Lessee's Common Area Operating Expense shall not increase by more than ten
percent (10%) over the cost of the previous year.
Lessee shall provide and pay for all of Lessee's trash disposal.
Base Real Property Taxes equal $27,629.96 and the Base Insurance Premium is
$13,422.00.
61. Except for Lessee's gross negligence and/or breach of express warranties,
Lessor shall indemnify, protect defend and hold harmless the Premises, Lessee
and its agents from and against any and all claims, damages, costs, liens,
judgments arising out of Lessor's breach of the Lease, Lessor's gross negligence
or any occurrence in the Building not caused or created by Lessee.
62. Notwithstanding the forgoing, in the event that any causality cannot be
repaired within 180 days, the Lessee shall have the right to terminate the lease
on thirty (30) days notice to Lessor. The effective date of termination shall be
the date of the casualty.
63. First Right to Negotiate: Provided Lessee is not in default, Lessee shall
have the first right to negotiate for the lease of the adjacent 30,000 and
54,000 square foot spaces adjacent to the Premises as indicated on Exhibit A. In
the event that Lessor intends to offer the property for lease, other than to the
existing tenant of the spaces, Lessor will advise Lessee or the price and terms
of the intended lease. Lessor shall be required to offer the available space to
Lessee at the same rental rate as it will to the general public at that time.
Lessee will have ten (10) days in which to negotiate for a lease. If no
agreement is reached during this time, the First Right to Negotiate will expire.
64. Concerning item 2.3, Lessor shall rectify such non-compliance issues
within sixty (60) days of notification by Lessee.
65. Concerning item 6.2, Lessor shall not unreasonably withhold, delay or
condition it's consent to a Hazardous Material by Lessee that constitutes a
"Reportable use". Lessor shall respond within two (2) business days of
notification by Lessee.
66. Concerning item 7.3 (b), Lessor shall not unreasonably withhold, delay or
condition it's consent to an alteration. Lessor shall respond within two (2)
business days of notification by Lessee.
67. Concerning item 34, Lessor shall not unreasonably withhold, delay or
condition it's consent. Lessor shall respond within two (2) business days of
notification by Lessee.
<PAGE>
AGREED & ACCEPTED:
LESSOR: CHABOYA RANCH LESSEE: ZOMAX OPTICAL MEDIA, INC.
A CALIFORNIA PARTNERSHIP A MINNESOTA CORPORATION
By: By:
By: Title:
By: Date: June 10, 1997
Date: June 11, 1997
EXHIBIT 21.1
SUBSIDIARIES
OF
ZOMAX OPTICAL MEDIA, INC.
Company State or Place of Organization
Benchmark Media Services, Inc. Colorado
Trotter Technologies, Inc. California
Zomax Services, Inc. Minnesota
Primary Marketing Group Limited* Ireland
*Subsidiary of Zomax Services, Inc.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-KSB into the Company's previously filed
Registration Statements, File Nos. 333-06133 and 333-06145.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
March 24, 1998
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