<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1996
REGISTRATION NO. 333-3621
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CHANNELL COMMERCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 3669 95-2453261
(STATE OF INCORPORATION) (PRIMARY STANDARD (I.R.S. EMPLOYER
INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
CODE NUMBER)
26040 YNEZ ROAD
TEMECULA, CA 92591-9022
(909) 694-9160
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
WILLIAM H. CHANNELL, SR.
CHAIRMAN OF THE BOARD
26040 YNEZ ROAD
TEMECULA, CA 92591-9022
(909) 694-9160
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPY TO:
EDMUND M. KAUFMAN, ESQ. C.N. FRANKLIN REDDICK III, ESQ.
IRELL & MANELLA LLP TROOP MEISINGER STEUBER & PASICH LLP
333 SOUTH HOPE STREET, SUITE 3300 10940 WILSHIRE BLVD., 8TH FLOOR
LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90024
(213) 620-1555 (310) 824-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] ______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
CROSS-REFERENCE SHEET
----------------
THE FOLLOWING SETS FORTH THE LOCATION IN THE PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-1.
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
-------------------------------- ----------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................... Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus.................. Inside Front Cover Page of
Prospectus
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges... Prospectus Summary; Risk Factors
4. Use of Proceeds...................... Use of Proceeds
5. Determination of Offering Price...... Outside Front Cover Page of
Prospectus; Underwriting
6. Dilution............................. Dilution
7. Selling Security Holders............. Principal and Selling Stockholders
8. Plan of Distribution................. Outside Front Cover Page of
Prospectus; Underwriting
9. Description of Securities to be
Registered........................... Description of Capital Stock
10. Interests of Named Experts and
Counsel.............................. Legal Matters
11. Information with Respect to the
Registrant
(a) Description of Business......... Prospectus Summary; Business;
Management's Discussion and Analysis
of Financial Condition and Results
of Operations; Certain Transactions
(b) Description of Property......... Business
(c) Legal Proceedings............... Business
(d) Market Price of and Dividends on
Common Equity and Related
Shareholder Matters............. Outside Front Cover Page of
Prospectus; Underwriting; Principal
and Selling Stockholders;
Description of Capital Stock;
Dividend Policy
(e) Financial Statements............ Financial Statements
(f) Selected Financial Data......... Capitalization; Selected Historical,
Pro Forma and Other Financial
Information
(g) Supplementary Financial
Information..................... Not Applicable
(h) Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... Management's Discussion and Analysis
of Financial Condition and Results
of Operations
(i) Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure........ Not Applicable
(j) Directors and Executive
Officers........................ Management; Certain Transactions
(k) Executive Compensation.......... Management
(l) Security Ownership of Certain
Beneficial Owners and
Management...................... Principal and Selling Stockholders
(m) Certain Relationships and
Related Transactions............ Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................... Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED JUNE 18, 1996
3,100,000 SHARES
[LOGO OF CHANNELL COMMERCIAL CORPORATION]
COMMON STOCK
($.01 PAR VALUE)
Of the 3,100,000 shares of Common Stock offered hereby, 2,700,000 shares are
being sold by Channell Commercial Corporation, a Delaware corporation (the
"Company"), and 400,000 shares are being sold by the Selling Stockholder. The
Company will not receive any of the proceeds from the sale of shares of Common
Stock by the Selling Stockholder. See "Principal and Selling Stockholders."
Prior to this Offering, there has been no public market for the Company's
Common Stock. It is currently estimated that the initial public offering price
will be between $12.00 and $14.00 per share. See "Underwriting" for information
relating to the method of determining the initial public offering price.
The Common Stock has been approved for quotation and trading on the Nasdaq
National Market under the symbol "CHNL."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER
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<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
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Total(3)........................ $ $ $ $
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</TABLE>
(1) See "Underwriting" for indemnification arrangements.
(2) Before deducting estimated expenses of $600,000 payable by the Company.
(3) The Selling Stockholder has granted the Underwriters a 30-day option to
purchase up to an additional 465,000 shares of Common Stock at the Price to
Public, less the Underwriting Discounts and Commissions shown above, solely
to cover over-allotments, if any. If this option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Stockholder will be $ ,
$ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock offered hereby are being offered by the several
Underwriters named herein, subject to prior sale and acceptance by the
Underwriters and subject to their right to reject any order in whole or in
part. It is expected that the Common Stock will be available for delivery on or
about , 1996 at the offices of Schroder Wertheim & Co.
Incorporated, New York, New York.
SCHRODER WERTHEIM & CO. SMITH BARNEY INC.
, 1996
<PAGE>
[CHANNELL LOGO] [PHOTO APPEARS HERE]
[PHOTO APPEARS HERE]
[PHOTO APPEARS HERE] CHANNELL COMMERCIAL CORPORATION is a leading
designer, manufacturer and marketer of
injection-molded thermoplastic enclosures
used by cable television ("CATV") operators
and local ("Telecom") telephone companies
worldwide.
TOP RIGHT: The Company's injection-molded
enclosure products house, protect and
provide access to the network electronics
used in the delivery of CATV services.
MIDDLE: The Company's headquarters and
custom-designed manufacturing facilities
are located in Temecula, California.
BOTTOM LEFT: The Company's rotational-molded
enclosure products are considered state-of-
the-industry for many applications.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, (i) all information,
including financial data, in this Prospectus has been adjusted to give pro
forma effect to the transactions described below under "Reorganization and
Termination of S Corporation Status," including the merger of Channell
Commercial Corporation, a California corporation (the "Predecessor"), into
Channell Commercial Corporation, a Delaware corporation (the "Company"), (ii)
all references in this Prospectus to the Company include the Company and the
Predecessor, and (iii) the information in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised.
For a definition of certain terms used herein, see "Glossary of Terms" on
page G-1 hereof.
THE COMPANY
The Company is a leading designer, manufacturer and marketer of precision-
molded thermoplastic enclosures used by cable television ("CATV") operators and
local telephone companies worldwide. The Company believes it was the first to
design, manufacture and market thermoplastic enclosure products for use in the
communications industry on a wide scale, and the Company believes it currently
supplies a substantial portion of the enclosure product requirements of a
number of major CATV and telephone company operators. The Company's products
house, protect and provide access to advanced telecommunications electronics
and transmission media, including coaxial cable, copper wire and optical
fibers, used in the delivery of CATV and telephone services. The products are
deployed within the portion of the local signal delivery network, commonly
known as the "outside plant," that connects the network provider's signal
origination office with residences and businesses. Enclosure products are
critical components of outside plants, providing protection against weather and
vandalism, access for technicians who maintain and manage the outside plant
and, in some cases, dissipation of heat created by active electronic hardware.
CATV operators and local telephone companies rely significantly on
manufacturers of protective enclosures because any material damage to the
signal delivery networks is likely to disrupt communication services. The
Company also designs and manufactures a series of termination blocks, brackets
and cable management devices that are mounted inside its enclosure products,
and the Company markets a variety of complementary products manufactured by
third parties, including grade level boxes and cable-in-conduit, in order to
provide a full system solution to meet its customers' outside plant
requirements.
From 1991 to 1995, the Company's net sales increased from $15.9 million to
$41.0 million, a compounded annual growth rate of 26.7%. During the same
period, after giving pro forma effect to certain transactions to be consummated
in connection with the Offering, the Company's adjusted net income increased
from $0.5 million to $6.4 million, a compounded annual growth rate of 90.1%.
The Company's net sales and adjusted net income increased from $9.2 million and
$1.1 million, respectively, in the first quarter of 1995 to $10.3 million and
$1.6 million, respectively, in the first quarter of 1996.
The Company has a leading share of the CATV market for enclosures in the
United States and Canada (based upon the portion of enclosure product
requirements of major CATV operators sold by the Company) and markets a wide
range of products to local telephone companies. In the last few years, the
Company began to expand its marketing efforts internationally, with product
sales in South America, the Pacific Rim, the Middle East and Europe. As part of
its strategy, the Company expects to continue to expand its international
presence in the future. During 1995, the Company shipped products to more than
4,000 customer locations. The Company's customers include many of the largest
CATV operators and local telephone companies in the world. In the United
States, major customers (determined based upon the level of sales to the
customers by the Company) include BellSouth, Comcast, Continental Cablevision,
GTE, TCI and Time Warner. In international markets, the
3
<PAGE>
Company's major customers (determined in the same manner) in its principal
geographic markets include Bricast/VisionStream (Australia), Cable Systems
Media (Israel) and Rogers Communications (Canada).
The communications industry is experiencing rapid expansion, both
domestically and internationally, in response to a number of factors, including
(i) developments in high-speed communications technologies for video, voice and
data transmission and internet access via cable modem, (ii) the convergence
occurring within the CATV and telecommunications industries, (iii) consumer
demand for enhanced communications services, and (iv) a changing regulatory and
competitive environment. The Company's customers are responding to these
changes by expanding, rebuilding and upgrading their signal delivery networks.
These activities generate demand for the types of highly engineered enclosures
and related outside plant products offered by the Company.
The Company's enclosure products are designed to provide superior
environmental sealing and protection, heat dissipation, easy access for cable
routing and network management by technicians who maintain outside plant
facilities, compatibility with a variety of signal delivery network
architectures, versatility to accommodate network growth, security and
aesthetic appeal. The Company believes that it offers the broadest line of
enclosure products for use in the CATV industry. Many of the Company's
thermoplastic enclosure products are now considered state-of-the-industry,
having received field testing and other approvals and standardization
certifications from major CATV and telephone company operators, and are often
used to replace enclosure products constructed of sheet metal and other
materials that previously had been the industry standard. Examples of
innovative products developed by the Company include its low profile (i.e.,
close to the ground) enclosures that permit 360 degree access by technicians
and pedestals that provide for mechanical sealing that is maintained without
the need for gels, compounds or heat shrinkage. Such features, in addition to
other product improvements developed by the Company over many years, received
U.S. patent protection and improve the performance and ease of use of the
Company's products in its customers' outside plant systems. The Company's
products are sold primarily through a direct sales force of technically trained
salespeople who use an application-based, complete system approach in marketing
to customers.
The Company's products are manufactured at its custom designed, 160,000
square foot facility in Temecula, California, which was originally constructed
in 1989. An adjacent 100,000 square foot building is also being constructed and
is expected to be completed in July 1996, which the Company will lease. The
Company's vertically integrated and modern manufacturing processes enable the
Company to control each step in the manufacturing process, including product
design and engineering, custom tool and die construction, molding, wiring,
assembly and packaging. The Company's vertical integration and manufacturing
expertise enable it to tailor its products to satisfy customer demands rapidly
and efficiently. In particular, the Company's in-house product design and
engineering together with its manufacturing expertise enable the Company to
provide timely solutions to its customers' product design and engineering needs
at a lower cost than would be incurred if outside design and engineering
services were required to be employed.
The Company's strategy is to capitalize on opportunities in the growing and
changing global communications industry by providing enclosures and
complementary products to meet the needs of its customers' evolving
communications networks. The Company's wide range of products, manufacturing
expertise, application-based sales and marketing approach and reputation for
high quality products address key requirements of its customers. Principal
elements of the Company's strategy include the following:
CONTINUE TO FOCUS ON CORE CATV BUSINESS. The Company intends to capitalize on
its position as a leading designer, manufacturer and marketer of broadband
enclosures for the CATV industry in the United States and Canada through new
product development for both domestic and international market applications.
The Company has positioned itself to participate in continued CATV network
construction and upgrades that are designed to improve service quality and
expand network capacity in order to prepare CATV operators for new
4
<PAGE>
competition in the broadband services market. These expansions and upgrades
will enable CATV operators to accommodate increased consumer demand for
internet access via cable modem, telephony and enhanced video services. From
1993 to 1995, the Company's net sales to the CATV industry increased from $20.4
million to $35.4 million, representing a compounded annual growth rate of
31.7%.
INCREASE SALES TO LOCAL TELEPHONE COMPANIES. The Company seeks to leverage
its in-depth knowledge of, and expertise in, the broadband telecommunications
and telephone markets to provide innovative enclosure solutions for the
telephone industry. From 1993 to 1995, the Company's net sales to local
telephone companies increased from $3.3 million to $5.6 million, representing a
compounded annual growth rate of 29.7%. The Company intends to continue to
invest in the development of a broader range of products designed specifically
for telephone market applications. The Company has already achieved significant
success in marketing its traditional CATV/broadband products to local telephone
companies which have been designing and deploying broadband networks to deliver
competitive video and data services. The Company will continue to target this
market for growth.
EXPAND INTERNATIONAL PRESENCE. Management believes that international markets
offer significant opportunities for increased sales in both the CATV and
telephone segments. From 1993 to 1995, the Company's international net sales
increased from $3.4 million to $6.1 million, representing a compounded annual
growth rate of 34.4%. Trends expected to result in international growth
opportunities include the deregulation and privatization of telecommunications
in many international markets, the focus of numerous countries on building,
expanding and enhancing their communications systems in order to participate
fully in the information-based global economy, and multi-national expansion by
many U.S.-based network carriers. The Company will concentrate on expansion in
international markets that are characterized by deregulation or privatization
of telecommunications and the availability of capital for the construction of
signal delivery networks.
DEVELOP NEW PRODUCTS AND ENTER NEW BUSINESS SEGMENTS. The Company continues
to leverage its core capabilities by developing innovative products that meet
the changing needs of its customers. The Company has a proven record in
designing, developing and manufacturing "next generation" products that provide
solutions for its customers and offer differential advantages over other
suppliers to the industry. In addition, the Company will seek to diversify its
customer base by developing new products for customers outside the
communications industry that require enclosure products, such as the utility
industry.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company...................... 2,700,000 shares
The Selling Stockholder.......... 400,000 shares
Common Stock to be outstanding
after the Offering................ 8,837,000 shares(1)
Use of Proceeds.................... Distributions and payments to Existing
Stockholders in connection with the
termination of the Company's S corporation
status, new product development, repayment
of indebtedness and general corporate
purposes.
Nasdaq National Market symbol...... CHNL
</TABLE>
- --------
(1) Excludes approximately 525,000 shares of Common Stock subject to stock
options to be issued to certain of the Company's employees and directors
(including 100,000 stock options being issued to William H. Channell, Jr.,
the Company's President) under the Company's 1996 Incentive Stock Plan at
the time of the Offering with an exercise price equal to the initial public
offering price per share. These options become exercisable in three equal
annual installments beginning on the first anniversary of the date of
issuance. See "Management--1996 Incentive Stock Plan."
5
<PAGE>
SUMMARY HISTORICAL, PRO FORMA AND OTHER FINANCIAL INFORMATION
(amounts in thousands, except per share data)
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and the notes thereto included in this Prospectus.
Data for the Company's fiscal years ended December 31, 1993, 1994 and 1995 are
derived from the Company's audited Financial Statements and the notes thereto
included in this Prospectus. Data for the Company's fiscal years ended December
31, 1991 and 1992 and the three months ended March 31, 1995 and 1996 are
derived from unaudited financial statements, which the Company believes contain
all necessary adjustments, consisting only of normal recurring adjustments,
necessary to present fairly, and in accordance with generally accepted
accounting principles, the Company's financial position and results of
operations for the periods presented. Financial results for the three months
ended March 31, 1995 and 1996 presented below are not necessarily indicative of
results of operations for a full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............... $15,893 $19,006 $23,713 $34,504 $40,972 $ 9,225 $10,279
Gross profit............ 4,381 6,465 8,879 14,754 17,913 3,738 4,541
License fees(1)......... 602 690 1,039 1,560 2,035 458 531
Income from operations.. 778 2,130 3,173 7,183 9,171 1,633 2,189
Income before income
taxes.................. 542 1,890 3,007 7,027 8,832 1,543 2,124
Pro forma net income(2). 296 1,099 1,816 4,129 5,377 927 1,279
Pro forma net income per
share(3)............... 0.72 0.17
Pro forma weighted
average shares
outstanding(3)......... 7,451 7,451
OTHER DATA:
Gross margin(4)......... 27.6% 34.0% 37.4% 42.8% 43.7% 40.5% 44.2%
Operating margin(5)..... 4.9 11.2 13.4 20.8 22.3 17.7 21.3
EBITDA(6)............... $ 1,389 $ 2,785 $ 3,949 $ 8,255 $10,583 $ 2,048 $ 2,591
Capital expenditures.... 917 1,172 1,480 5,851 2,160 1,030 472
ADJUSTED FINANCIAL
DATA(7):
Net sales (as
historically reported). $15,893 $19,006 $23,713 $34,504 $40,972 $ 9,225 $10,279
Adjusted EBITDA(8)...... 1,716 3,200 4,713 9,540 12,343 2,437 3,053
Adjusted income from
operations............. 1,105 2,545 3,937 8,468 10,931 2,022 2,651
Adjusted operating
margin(9).............. 7.0% 13.4% 16.6% 24.5% 26.7% 21.9% 25.8%
Adjusted net income..... $ 492 $ 1,349 $ 2,274 $ 4,899 $ 6,431 $ 1,149 $ 1,555
Adjusted net income per
share(10).............. 0.86 0.21
<CAPTION>
MARCH 31, 1996
---------------------
AS
ACTUAL ADJUSTED(11)
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<S> <C> <C>
BALANCE SHEET DATA:
Current assets.......... $10,004 $23,766
Total assets............ 20,655 35,089
Long-term obligations
(including current
maturities)............ 2,883 --
Stockholders' equity.... 13,263 31,055
</TABLE>
6
<PAGE>
NOTES TO SUMMARY HISTORICAL, PRO FORMA AND OTHER FINANCIAL INFORMATION
(amounts in thousands, except per share data)
(1) License fees represent the amounts paid by the Company to William H.
Channell, Sr., the Company's Chairman of the Board and Chief Executive
Officer, for the use of the Channell Patents (as defined below). Prior to
the consummation of the Offering, these patents will be sold to the
Company, the license fee arrangement with Mr. Channell, Sr. will be
terminated and, thereafter, the Company will no longer pay any license
fees with respect to the Channell Patents. See "Reorganization and
Termination of S Corporation Status."
(2) Prior to the Offering, the Company was an S corporation for federal and
state income tax purposes. The pro forma presentation reflects a provision
for income taxes as if the Company had always been a C corporation, at an
assumed effective tax rate of approximately 41% less tax credits. Such
presentation does not reflect the adjustments set forth in note (7) below.
The effect of the Company's use of a portion of the net proceeds of the
Offering to repay outstanding bank indebtedness (see "Use of Proceeds")
has not been reflected in pro forma net income or pro forma net income per
share because the impact is not material.
(3) Pro forma net income per share has been computed by dividing pro forma net
income by the pro forma weighted average shares outstanding. Pro forma
weighted average shares outstanding include 1,314 of the shares offered
hereby by the Company at an assumed price of $13.00 per share, the net
proceeds of which will be used to fund the distributions and payments in
connection with the Termination of the Company's S Corporation Status (as
defined below). See "Reorganization and Termination of S Corporation
Status."
(4) Gross margin is gross profit as a percentage of net sales.
(5) Operating margin is income from operations as a percentage of net sales.
(6) EBITDA represents income from operations before interest and income taxes,
plus depreciation and amortization expense. EBITDA is not intended to
represent cash flow, operating income or any other measure of performance
in accordance with generally accepted accounting principles, but is
included here because management believes that certain investors find it
to be a useful tool for measuring a company's ability to service its debt.
(7) The adjusted financial data reflects, in addition to the pro forma
adjustments referred to in note (2) above, (i) the elimination of the
expense for the license fees payable to Mr. Channell, Sr., and related
income tax impact, which license fees are being terminated as part of the
Termination of the Company's S Corporation Status, and (ii) an increase in
Mr. Channell, Sr.'s annual base salary from $225 to $500 in connection
with the Offering. See "Reorganization and Termination of S Corporation
Status" and "Management--Employment Contracts." Upon consummation of the
Offering, the Company also intends to increase the base salary of William
H. Channell, Jr., the Company's President, from $350 to $500 (which
increase has not been reflected in the adjusted financial data because Mr.
Channell, Jr.'s actual total compensation in 1995 exceeded $500) and to
grant a cash bonus of $200 to each of Gary W. Baker, the Company's Chief
Financial Officer, Dale C. Wooding, the Company's Vice President,
Manufacturing, and Edward J. Burke, the Company's Vice President,
Engineering, which bonus will be earned and payable in three equal
installments on each of December 31, 1997, 1998 and 1999, provided such
executive officer remains employed by the Company and subject to continued
payment in the event of the death of the executive officer. See
"Management--Executive Compensation."
(8) Adjusted EBITDA represents adjusted income from operations before
interest and income taxes, plus depreciation and amortization expense.
See note (6) above.
(9) Adjusted operating margin is adjusted income from operations as a
percentage of net sales.
(10) Adjusted net income per share is adjusted net income divided by 7,451 pro
forma weighted average shares outstanding.
(11) Adjusted to reflect the Termination of the Company's S Corporation Status
and the sale of 2,700 shares of Common Stock by the Company in the
Offering and the application of the net proceeds therefrom.
7
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered in evaluating the Company and its
business before purchasing the Common Stock offered by this Prospectus. The
following is not intended as, and should not be considered, an exhaustive list
of relevant factors.
OBSOLESCENCE; UNCERTAINTY OF MARKET ACCEPTANCE OF NEW PRODUCTS
The communications industry is characterized by rapid technological change.
The introduction of products embodying new technologies or the emergence of
new industry standards can render existing products or products under
development obsolete or unmarketable. For example, satellite, wireless and
other communication technologies currently being deployed may represent a
threat to copper, coaxial and fiber optic-based systems by reducing the need
for wire-line networks. To date, however, the Company believes that these
technologies have not had a significant impact on the demand for traditional
wire-line network based services, and management anticipates that a number of
factors, including network capacity requirements, existing investments in
wire-line networks, security and long-term cost effectiveness, will result in
continued growth of wire-line networks. However, there can be no assurance
that future advances or further development of these or other new technologies
will not have a material adverse effect on the Company's business. Further,
the Company's growth strategies are designed, in part, to take advantage of
opportunities that the Company believes are emerging as a result of the
development of enhanced voice, video and other transmission networks and
internet access in the CATV and telecommunications industries. There can be no
assurance that demand resulting from these emerging trends will develop
rapidly or that the Company's products will meet with market acceptance.
IMPORTANCE OF NEW PRODUCT DEVELOPMENT TO GROWTH
The Company's ability to anticipate changes in technology and industry
standards and to successfully develop and introduce new products on a timely
basis will be a significant factor in the Company's ability to grow and remain
competitive. New product development often requires long-term forecasting of
market trends, development and implementation of new designs and processes and
a substantial capital commitment. The trend toward consolidation of the
communications industry may require the Company to quickly adapt to rapidly
changing market conditions and customer requirements. Although the Company's
manufacturing and marketing expertise has enabled it to successfully develop
and market new products in the past, any failure by the Company to anticipate
or respond in a cost-effective and timely manner to technological developments
or changes in industry standards or customer requirements, or any significant
delays in product development or introduction, could have a material adverse
effect on the Company's business, operating results and financial condition.
Of the net proceeds of this Offering, the Company currently expects that
approximately $7.0 million to $10.0 million will be used for new product
development projects. See "Use of Proceeds."
CONCENTRATION OF CUSTOMERS; LIMITED BACKLOG
The Company's core business consists of enclosure product sales to the CATV
market. Such sales comprised approximately 86% of the Company's total net
sales in each of 1993, 1994 and 1995. The CATV industry is concentrated, with
relatively few cable operators accounting for a large percentage of the
Company's available market. Consequently, while the Company shipped product to
over 4,000 customer locations in 1995, its five largest customers (by sales
volume) accounted for 47.9% of the Company's total net sales in 1995. Two
customers, TCI and Time Warner, accounted for 17.5% and 15.6%, respectively,
of the Company's total net sales during the period.
The Company's customers typically require prompt shipment of the Company's
products. As a result, the Company has historically operated with a relatively
small backlog, and sales and operating results in any quarter are principally
dependent upon orders booked and products shipped in that quarter. Further,
the Company's customers generally do not enter into long-term supply contracts
providing for future purchase commitments for the Company's products. These
factors, when combined with the Company's operating leverage (see "Operating
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Leverage" below) and the need to incur certain capital expenditures and
expenses in part based upon the expectation of future sales, results in the
Company's operating results being at risk to changing customer buying
patterns. If sales levels in a particular period do not meet the Company's
expectations, operating results for that period may be materially and
adversely affected.
The industries in which the Company operates are highly competitive. The
Company believes that many of its customers periodically review their supply
relationships and alter buying patterns based upon their current assessment of
the products and pricing available in the marketplace. This periodic review
can and does result in significant changes from fiscal period to fiscal period
in the level of purchases of the Company's products by specific customers. The
Company understands that TCI is currently conducting such a review. TCI
indicated that its review is prompted in part by the high concentration of its
outside plant enclosure product purchases from the Company (TCI informed the
Company that, in recent periods, the Company provided a substantial majority
of outside plant enclosure products to TCI), and TCI's desire to secure
additional sources of supply. Further, TCI indicated that, for certain
applications, price, technical factors and performance characteristics may
result in the selection of metal or other types of enclosure products rather
than thermoplastic enclosures. Based upon TCI's perception of the relative
costs and benefits of thermoplastic versus metal enclosures and other business
considerations, it is possible that the Company's sales to TCI may be reduced.
However, the Company believes that, for most applications, thermoplastic
enclosures perform as well or better than metal enclosures in all significant
performance categories, and that the superior performance of thermoplastic
enclosures is evidenced by the growth of the Company's market share in the
CATV segment of the market, where plastic is now the primary material used in
enclosure products. For this reason, among others, the Company believes that
it will continue to supply a significant portion of TCI's outside plant
enclosure requirements, although there can be no assurance in this regard.
DEPENDENCE ON THE COMMUNICATIONS INDUSTRY
The Company's sales to the communications industry represent substantially
all of the Company's historical sales and are expected to continue to do so
for the foreseeable future. Within that industry, 86.4% of the Company's total
net sales in 1995 were derived from domestic and international sales to the
CATV segment, with 33.1% of total net sales for that year attributable to two
customers in that industry, TCI and Time Warner. The Company expects that
sales to the CATV industry will continue to represent a substantial portion of
its total sales. Demand for products to this segment depends primarily on
capital spending by cable operators for constructing, rebuilding, maintaining
or upgrading their systems. The amount of capital spending and, therefore, the
Company's sales and profitability are affected by a variety of factors,
including general economic conditions, access by cable operators to financing,
government regulation of cable operators, demand for cable services and
technological developments in the broadband communications industry. The
Company's remaining sales in 1995 were derived from the telecommunications
industry, primarily local telephone operators. Although local telephone
operators may have greater access to capital than many cable operators, the
same factors dictating the demand for products in the CATV segment of the
industry also apply to the local telephone segment. Thus, the Company's
success is dependent upon continued demand for products used in signal
transmission systems from the communications industry generally, including
both CATV and telephone, which may be affected by factors beyond the Company's
control, including the convergence of voice, data and video transmission
systems occurring within the CATV and telephone markets, continuing
consolidation of companies within those markets and the provision of internet
access by cable operators and local telephone companies. See "Business--
Customers."
PRICE FLUCTUATIONS OF RAW MATERIALS; AVAILABILITY OF COMPLEMENTARY PRODUCTS
The Company's cost of sales may be materially adversely affected by
increases in the market prices of the raw materials used in the Company's
manufacturing processes, including resin. The Company does not engage in
hedging transactions for such materials, although it periodically enters into
contracts for certain raw materials for as much as one year or more. There can
be no assurance that price increases in raw materials can be passed on to the
Company's customers through increases in product prices. In addition, in order
to position itself as a
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full-line product supplier, the Company relies on certain manufacturers to
supply products that complement the Company's own product line, including
grade level boxes and cable-in-conduit. Although the Company believes there
are multiple sources of supply for these products, disruptions or delays in
the supply of such products could have a material adverse effect on sales of
the Company's own products. See "Business--Raw Materials; Availability of
Complementary Products."
IMPACT OF OPERATING LEVERAGE IN THE EVENT OF SALES DECLINE
Because of the relatively high percentage of fixed costs for rent, product
development, engineering, tooling and related fixed manufacturing costs as a
percentage of total costs, the Company's ability to maintain its historic
profitability is dependent on generating a sufficient volume of product sales,
thereby spreading fixed costs over the sales base. In fiscal 1995, such fixed
costs as a percentage of total costs were 33.5%. Due to this "operating
leverage," a reduction in sales or the rate of sales growth could have a
disproportionately adverse effect on the Company's financial results.
SEASONALITY AND FLUCTUATIONS IN OPERATING RESULTS
The Company's business is somewhat seasonal in nature, with the first and
fourth quarters generally reflecting lower sales due to the impact of adverse
weather conditions on construction projects that may alter or postpone the
needs of customers for delivery of the Company's products. The Company's
operating results may also fluctuate significantly from quarter to quarter due
to several other factors, including the volume and timing of orders from, and
shipments to, major customers, the timing of new product announcements and the
availability of products by the Company or its competitors, the overall level
of capital expenditures by CATV operators and local telephone companies,
market acceptance of new and enhanced versions of the Company's products,
variations in the mix of products the Company sells, and the availability and
cost of raw materials. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Quarterly Results of Operations."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
International sales accounted for 14.4%, 13.2% and 14.8% of the Company's
net sales in 1993, 1994 and 1995, respectively, and the Company expects that
international sales may increase as a percentage of sales in the future. Due
to its international sales, the Company is subject to the risks of conducting
business internationally, including unexpected changes in, or impositions of,
legislative or regulatory requirements, fluctuations in the U.S. dollar which
could materially adversely affect U.S. dollar revenues or operating expenses,
tariffs and other barriers and restrictions, potentially longer payment
cycles, greater difficulty in accounts receivable collection, potentially
adverse taxes and the burdens of complying with a variety of international
laws and communications standards. The Company is also subject to general
geopolitical risks, such as political and economic instability and changes in
diplomatic and trade relationships, in connection with its international
operations. There can be no assurance that these risks of conducting business
internationally will not have a material adverse effect on the Company's
business.
COMPETITION
The industries in which the Company operates are highly competitive.
Further, in connection with the anticipated growth in the communications
industry generally and demand for products required in signal transmission
networks in particular, the level and intensity of competition may increase in
the future. In the telephone segment of the industry, the Company's
competition includes a company that has a significant market share. While the
Company's net sales to this segment have increased from $3.3 million in 1993
to $5.6 million in 1995, representing a compounded annual growth rate of
29.7%, and the Company's strategy includes continued focus on increasing sales
to this segment, there can be no assurance that the Company will be able to
compete successfully against that company or other competitors, many of which
may have access to greater financial resources than the Company. See
"Concentration of Customers; Limited Backlog" and "Business--Competition."
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DISRUPTIONS AT THE COMPANY'S MANUFACTURING FACILITY; LEASE WITH RELATED PARTY
All of the Company's manufacturing operations are currently located at the
Company's facility in Temecula, California, which also includes the Company's
principal warehouse and corporate offices. The Company's success depends in
large part on the orderly operation of this facility. Because the Company's
manufacturing operations and administrative departments are concentrated at
this facility, a fire, earthquake or other disaster at this facility could
materially and adversely affect its business and results of operations. The
Company maintains standard property and earthquake insurance on this facility
as well as business interruption insurance and back-up data systems. See
"Business--Properties."
The Company currently leases the Temecula facility from William H. Channell,
Sr., a principal stockholder and Chairman of the Board and Chief Executive
Officer of the Company. Annual rental expense for this property was
approximately $650,000 from 1993 through 1995. An adjacent 100,000 square foot
building is being constructed and is expected to be completed in July 1996.
This building is also being leased from Mr. Channell, Sr. and requires annual
rental payments of $420,000 commencing upon completion of construction. The
Company believes the terms of these leases are no less favorable than would be
available from an unrelated third party after arms' length negotiations.
Although the Company has renewal options through the year 2015 under these
leases, there can be no assurance that the Company and Mr. Channell, Sr. will
be able to agree on renewal terms for the properties currently leased by the
Company. The failure of the Company to renew the leases would require the
Company to relocate its existing facilities. See "Certain Transactions."
DEPENDENCE ON KEY PERSONNEL
The future success of the Company depends in part on its ability to attract
and retain key executive, engineering, marketing and sales personnel. Key
personnel of the Company include William H. Channell, Sr., the Chairman of the
Board and Chief Executive Officer, William H. Channell, Jr., the President,
and the other executive officers of the Company listed under "Management--
Executive Officers and Directors." Competition for qualified personnel in the
communications industry is intense, and the loss of certain key personnel
could have a material adverse effect on the Company. The Company has entered
into employment contracts with Mr. Channell, Sr. and Mr. Channell, Jr. See
"Management--Employment Contracts."
CHANGING REGULATORY ENVIRONMENT
The communications industry is subject to regulation in the United States
and other countries. Federal and state regulatory agencies regulate most of
the Company's domestic customers. On February 1, 1996, the United States
Congress passed the Telecommunications Act of 1996 (the "Telecommunications
Act"), which the President signed into law on February 8, 1996. The
Telecommunications Act lifts certain restrictions on the ability of companies,
including RBOCs and other customers of the Company, to compete with one
another and generally reduces the regulation of the communications industry.
While the Company believes that the deregulation of the communications
industry may increase the Company's opportunities to provide solutions for its
customers' signal transmission network needs, the effect of the
Telecommunications Act on the market for the Company's products is difficult
to predict at this time, and there can be no assurance that competition in the
Company's markets will not intensify as a result of such deregulation. Changes
in current or future laws or regulations, in the United States or elsewhere,
could materially adversely affect the Company's business.
UNCERTAIN ABILITY TO MANAGE GROWTH; RISKS ASSOCIATED WITH IMPLEMENTATION OF
NEW MANAGEMENT INFORMATION SYSTEM
The growth in the Company's business has required, and is expected to
continue to require, significant Company resources in terms of personnel,
management and other infrastructure. The Company's ability to manage any
future growth effectively will require it to attract, train, motivate and
manage new employees successfully, to integrate new employees into its overall
operations and to continue to improve its operational, financial and
management information systems. In particular, in 1996, the Company intends to
implement a new
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management information system ("MIS"). The Company believes the new MIS will
significantly affect many aspects of its business, including its accounting,
operations, purchasing, sales and marketing functions. The successful
implementation of this system will be important to the Company's provision of
services and to facilitate future growth. If the Company is not successful in
implementing its MIS or if the Company experiences difficulties in such
implementation, the Company could experience problems with delivery of its
products or an adverse impact on its ability to access financial and
accounting information on a timely basis.
ENVIRONMENTAL MATTERS
The Company is subject to a wide variety of federal, state and local
environmental laws and regulations and uses a limited number of chemicals that
are classified as hazardous or similar substances. Although management
believes that the Company's operations are in compliance in all material
respects with current environmental laws and regulations, the Company's
failure to comply with such laws and regulations could have a material adverse
effect on the Company. See "Business--Regulation."
POSSIBLE VOLATILITY OF STOCK PRICE; NO PRIOR PUBLIC MARKET
The market price of shares of the Company's Common Stock may be highly
volatile. Factors such as announcements of technological innovations or new
products by the Company or its competitors, developments in patent or other
proprietary rights by the Company or its competitors, litigation, fluctuations
in the Company's operating results, market conditions for emerging growth
stocks or communications industry stocks in general, regulatory developments
affecting the communications industry, and other factors outside the control
of the Company, could have a significant impact on the future price of the
Common Stock. Immediately prior to the Offering, there has been no public
market for any of the Company's securities. There can be no assurance that a
regular trading market will develop in the Common Stock.
EFFECT ON STOCK PRICE OF CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws and of Delaware law could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. These provisions could limit
the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. See "Description of Capital Stock--
Delaware Law and Certain Charter and Bylaw Provisions."
CONTROL BY PRINCIPAL STOCKHOLDERS
Immediately following the Offering, members of the Channell family (or
entities controlled by them) will own 64.9% of the outstanding Common Stock
(59.7% if the Underwriters' over-allotment option is exercised in full). As a
result of their interests in the Company, the members of the Channell family
together will be able to elect a majority of the Board of Directors and
control the management and affairs of the Company.
BENEFITS TO INSIDERS FROM THE OFFERING
The officers, directors and principal stockholders of the Company will
receive certain payments and other benefits in connection with the Offering.
Among other things, the Company will declare a cash dividend (currently
estimated to aggregate $12.5 million) to the existing stockholders of the
Company, representing all of the Company's S corporation "accumulated
adjustments account" remaining upon termination of the Company's S corporation
status; the Company will purchase certain patents utilized by the Company in
its business that were previously owned by William H. Channell, Sr. for
aggregate cash consideration of $3.1 million; the Selling Stockholder will
sell 400,000 shares of Common Stock (865,000 if the underwriters' over-
allotment option is exercised in full) at the initial public offering price;
and the officers and directors will enter into various new employment,
compensatory and indemnity arrangements with the Company. See "Reorganization
and Termination of S Corporation Status," "Use of Proceeds," "Management" and
"Description of Capital Stock."
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LIMITATION ON DIVIDENDS
The Company's policy is to retain its future earnings to finance the growth
and development of its business and the Company does not anticipate declaring
or paying cash dividends on its Common Stock in the foreseeable future. See
"Dividend Policy."
IMPACT ON PUBLIC TRADING MARKET OF SHARES ELIGIBLE FOR FUTURE SALE
Future sales of the Company's Common Stock could adversely affect the market
price of the Common Stock. Members of the Channell family or entities
controlled by them will hold a significant portion of the Company's
outstanding Common Stock following the Offering, and a decision by one or more
of them to sell their shares could adversely affect the market price of the
Common Stock. The Company and each of the Channell Family Trust dated June 29,
1990, as amended (the "Channell Family Trust"), William H. Channell, Jr.,
Carrie S. Rouveyrol and the Taylor Family Trust dated June 5, 1996 (the
"Taylor Family Trust") have entered into contractual "lock-up" agreements with
the Representatives of the Underwriters providing that, except for shares sold
pursuant to the Offering, they will not offer, sell, contract to sell or
otherwise dispose of the shares of Common Stock of the Company owned by them
for a period of 180 days after the effective date of the Offering without the
prior written consent of Schroder Wertheim & Co. Incorporated, subject to
certain exceptions. Following the 180-day lock-up period, 5,737,000 shares
(5,272,000 shares if the Underwriters' over-allotment option is exercised in
full) will be eligible for sale in the public market pursuant to Rule 144 or
other exemptions from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"). In general, under Rule 144, a holder
who is an "affiliate" of the Company will be able to sell, without
registration under the Securities Act, within any three-month period, a number
of shares of Common Stock that does not exceed the greater of 1% of the total
number of outstanding shares of Common Stock or the average weekly trading
volume during the four calendar weeks preceding the sale. These volume limits
will not apply to a sale by a non-affiliate who has held his or her stock for
more than three years or to any sale that is registered under the Securities
Act. Ms. Rouveyrol and the Taylor Family Trust have agreed that, during the
two-year period following the date of this Prospectus, unless otherwise
permitted by the Representatives, any sales of shares of Common Stock by them
will be subject to the volume limitations of Rule 144 of the Securities Act,
without regard to whether they are otherwise legally obligated to comply with
such limitations. See "Shares Eligible for Future Sale" and "Underwriting."
DILUTION
Purchasers of the Common Stock in this Offering will experience immediate
and substantial dilution in net tangible book value per share of Common Stock
from the initial public offering price. See "Dilution."
REORGANIZATION AND TERMINATION OF S CORPORATION STATUS
In connection with the Offering, the following transactions have been or
will be effected:
Merger of Predecessor Into Company. In contemplation of the Offering, the
Predecessor was merged with and into the Company, with the Company being the
surviving entity in the merger (the "Merger"). As part of the Merger, the
Predecessor's existing stockholders (the "Existing Stockholders") were issued
12.274 shares of the Company's Common Stock in exchange for each outstanding
share of the Predecessor's Common Stock.
Termination of S Corporation Status. Since 1990, the Company has been an S
corporation for both federal and state income tax purposes. Prior to the
consummation of the Offering, however, the Company's S corporation election
will be terminated (the "S Corporation Termination"). As a result of the
Company's S corporation status, since 1990 through the date immediately
preceding the date of the S Corporation Termination (the "Termination Date"),
the Company's earnings have been and will be taxed for federal income tax
purposes directly to the Existing Stockholders, rather than to the Company.
Other than a tax imposed on S corporations by the State of California
(currently 1.5% of income), state income taxes on earnings also have been the
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responsibility of the Existing Stockholders. On the Termination Date, the
Company will become subject to federal and state corporate income taxes. The
Company paid an aggregate of $12.0 million in S corporation distributions to
the Existing Stockholders from January 1, 1993 through April 30, 1996.
Upon the S Corporation Termination, the Company will record deferred tax
assets on its balance sheet with a corresponding credit to its statement of
operations, which will ultimately increase retained earnings. The pro forma
deferred tax assets, relating to temporary differences in the carrying value
of certain assets for book and tax purposes, were approximately $0.8 million.
Prior to the closing of the Offering, the Company will declare a dividend
(currently estimated to aggregate $12.5 million) to the Existing Stockholders
representing all of the Company's S corporation "accumulated adjustments
account" remaining at that time (the "S Corporation Distribution"). An
estimate of the S Corporation Distribution will be paid immediately upon the
closing of the Offering out of the net proceeds thereof. Upon a final
reconciliation of the accumulated adjustments account through the Termination
Date, any remaining amount of the S Corporation Distribution will be paid.
Immediately prior to the Offering, the Company and the Existing Stockholders
will enter into an agreement (the "Tax Agreement") relating to their
respective income tax liabilities. Because the Company will be fully subject
to corporate income taxation after the S Corporation Termination, the
reallocation of income and deductions between the period during which the
Company was treated as an S corporation and the period during which the
Company will be subject to corporate income taxation may increase the taxable
income of one party while decreasing that of another party. Accordingly, the
Tax Agreement is intended to assure that taxes are borne by the Company on the
one hand and the Existing Stockholders on the other only to the extent that
such parties were taxable on the related income. Pursuant to the Tax
Agreement, if the Company's taxable income for a year in which it was treated
as an S corporation is adjusted and such adjustment results in an increase in
the income tax liability (including interest and penalties and related costs
and expenses) of the Company or the Existing Stockholders, then such party
will be reimbursed the amount of such increase by the other party, but only to
the extent the other party's income tax liability (including interest) is
correspondingly decreased as a result of such adjustment. Any such
reimbursement paid to the Existing Stockholders will include all taxes imposed
upon them as a result of their receipt of such reimbursement, subject to a
ceiling on all reimbursements equal to the decrease in the related income tax
liability (including interest) of the Company. Any payment made by the Company
to the Existing Stockholders pursuant to the Tax Agreement may be considered
by the Internal Revenue Service or state taxing authorities to be non-
deductible by the Company for income tax purposes.
Termination of Patent License Fees. Prior to the Offering, William H.
Channell, Sr., the Company's Chairman of the Board and Chief Executive
Officer, owned six patents utilized by the Company in its business (the
"Channell Patents"), with respect to which Mr. Channell, Sr. was entitled to
receive license fees based upon the sale of certain products embodying the
Channell Patents. See "Certain Transactions." Prior to the Offering, the
Channell Patents will be sold to the Company for aggregate consideration of
$3.1 million, which amount will be initially funded through borrowings under
the Company's bank line and then repaid from the net proceeds of the Offering.
See "Use of Proceeds." As a result, the Company will own all of the Channell
Patents, the license fee arrangement between the Company and Mr. Channell, Sr.
will be terminated (the "License Fee Termination") and, thereafter, no license
fees will be paid to Mr. Channell, Sr. or any other person with respect to the
Channell Patents (including with respect to product sales in 1996). In
addition, any patents obtained in the future with respect to new technology
developed by Mr. Channell, Sr. will be owned by the Company.
The purchase price paid by the Company for the Channell Patents was
established in part based upon an opinion dated June 14, 1996 (the "Patent
Opinion") of Houlihan Lokey Howard & Zukin, Inc. ("Houlihan"), regarding the
fair market value of the Channell Patents. In arriving at the Patent Opinion,
among other things, Houlihan held discussions with certain members of
management of the Company concerning the uses and future prospects of the
Channell Patents and reviewed various documents pertaining to the Channell
Patents, including the registration statement containing this Prospectus as
originally filed, the Company's financial statements and notes thereto
included elsewhere therein (which management identified as the most current
financial statements
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available), and figures regarding historical sales of products embodying the
Channell Patents during the period from 1991 to 1995 and management's
projections of such sales during the period from 1996 to 2000. Houlihan then
valued the Channell Patents using the relief from royalty method. Houlihan did
not independently verify, and does not assume responsibility for, the accuracy
or completeness of the information supplied to it by the Company. The Patent
Opinion is directed solely to the valuation of the Channell Patents, not to
any other properties or assets of the Company, and does not constitute a
recommendation to anyone to purchase the securities offered hereby. The full
text of the Patent Opinion has been filed as an exhibit to the Registration
Statement that contains this Prospectus. Based upon the Patent Opinion, the
Company believes that the terms of the transactions involving the Channell
Patents are at least as favorable to the Company as those that could be
obtained from an independent third party.
Unless the context otherwise indicates, references in this Prospectus to the
"Termination of the Company's S Corporation Status" include the S Corporation
Termination, the S Corporation Distribution to the Existing Stockholders and
the License Fee Termination and payments by the Company in connection
therewith.
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USE OF PROCEEDS
The net proceeds to the Company from the Offering are expected to be
approximately $32.0 million, assuming an initial public offering price of
$13.00 per share and after deducting estimated underwriting discounts and
commissions and expenses of the Offering. The Company currently intends to use
such proceeds as follows:
. Approximately $15.6 million to fund distributions and payments being
made in connection with the Termination of the Company's S Corporation
Status. See "Reorganization and Termination of S Corporation Status." Of
the $15.6 million, the $3.1 million portion thereof representing the
purchase price to be paid by the Company for the Channell Patents will
initially be funded through bank borrowings by the Company and
subsequently repaid by the Company from the net proceeds of the
Offering.
. Approximately $7.0 million to $10.0 million to fund new product
development, including capital expenditures for new plant and equipment
(exclusive of the 100,000 square foot building currently under
construction, see "Business--Properties"), related working capital
requirements and an increase in the Company's product development and
engineering staff of approximately two to four additional employees.
Management anticipates that such proceeds will be used to fund new
product development activities over a period of one to three years. New
product development initiatives being studied by the Company include
additional products for the CATV and telecommunications market,
including product families and components designed to complement the
Company's existing product line.
. Approximately $3.5 million to repay bank indebtedness of the Company. As
of March 31, 1996, the Company's bank indebtedness consisted of
approximately $2.9 million of borrowings. It is expected that the
Company will incur additional indebtedness under its bank lines before
the closing of this Offering, consisting of indebtedness to fund working
capital requirements and miscellaneous equipment acquisitions. See
"Reorganization and Termination of S Corporation Status." All borrowings
under the Company's bank credit facilities were or will be incurred for
purposes of facility expansion and new manufacturing equipment. Such
indebtedness matures on various dates currently extending through 2001
and bears interest at the bank's reference rate plus a spread ranging
between 0.25% and 0.50%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." As indicated above, immediately prior to the closing of the
Offering, the Company anticipates that it will incur $3.1 million of
bank borrowings to fund its purchase of the Channell Patents, which
borrowings will be subsequently repaid by the Company from the net
proceeds of the Offering.
. The remainder for general corporate purposes, which may include
expansion into new international markets, acquisitions of related
businesses or product lines and potential new facility construction in
addition to that currently underway.
The net proceeds to the Selling Stockholder are expected to be approximately
$4.8 million ($10.5 million if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $13.00 per
share and after deducting estimated underwriting discounts and commissions.
The Company will not receive any proceeds from the sale of shares by the
Selling Stockholder.
DIVIDEND POLICY
The Company intends to retain future earnings to finance the growth and
development of its business and therefore does not anticipate declaring or
paying cash dividends on its Common Stock in the foreseeable future. The
Company's credit facilities also contain covenants that, under certain
circumstances, may limit its ability to pay dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
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CAPITALIZATION
(amounts in thousands, except share and per share data)
The following table sets forth the capitalization of the Company (i) at
March 31, 1996, (ii) on a pro forma basis giving effect to the Termination of
the Company's S Corporation Status, and (iii) as adjusted to reflect the
issuance and sale of 2,700,000 shares of Common Stock by the Company, at an
assumed initial public offering price of $13.00 per share, and the application
of the estimated net proceeds therefrom. See "Use of Proceeds." The table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Financial
Statements and related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------
PRO AS
ACTUAL FORMA(1) ADJUSTED(2)
------- -------- ----------
<S> <C> <C> <C>
Long-term obligations (including current
maturities)................................... $ 2,883 $ 2,883 $ --
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000
shares authorized;
none issued................................. -- -- --
Common Stock, $.01 par value; 19,000,000
shares authorized; 6,137,000 shares issued;
8,837,000 shares issued, as adjusted(3)..... 61 61 88
Additional paid-in capital................... 26 (2,543) 29,473
Retained earnings............................ 13,176 1,494 1,494
------- ------- -------
Total stockholders' equity................... 13,263 (988) 31,055
------- ------- -------
Total capitalization....................... $16,146 $ 1,895 $31,055
======= ======= =======
</TABLE>
- --------
(1) The pro forma adjustments set forth in this column give effect to the
Termination of the Company's S Corporation Status. See "Reorganization and
Termination of S Corporation Status" and note (3) to "Selected Historical,
Pro Forma and Other Financial Information."
(2) Adjusted to reflect the sale of 2,700,000 shares of Common Stock by the
Company in the Offering and the application of the net proceeds therefrom.
(3) Excludes approximately 525,000 shares of Common Stock subject to stock
options to be issued to approximately 70 of the Company's employees and
directors (including 100,000 stock options being issued to William H.
Channell, Jr., the Company's President) under the Company's 1996 Incentive
Stock Plan at the time of the Offering with an exercise price equal to the
public offering price per share. These options become exercisable in three
equal annual installments beginning on the first anniversary of the date
of issuance.
17
<PAGE>
DILUTION
The net tangible book value of the Company as of March 31, 1996 was $13.3
million, or $2.16 per share of Common Stock. Net tangible book value per share
of Common Stock represents the amount of the Company's total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of the 2,700,000 shares of Common
Stock offered by the Company in the Offering at an assumed initial public
offering price of $13.00 per share, net proceeds to the Company of $32.0
million and a decrease in net tangible book value attributable to the
Termination of the Company's S Corporation Status (which decrease is equal to
the sum of the $12.5 million S Corporation Distribution and the $3.1 million
purchase price of the Channell Patents, divided by 6,137,000 shares
outstanding), the pro forma net tangible book value of the Company at March
31, 1996 would have been $31.1 million or $3.51 per share of Common Stock.
This represents an immediate increase in net tangible book value of $3.89 per
share of Common Stock to the Existing Stockholders and an immediate dilution
of $9.49 per share of Common Stock to new investors purchasing Common Stock in
the Offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
Net tangible book value per share before the Offering....... 2.16
Decrease attributable to Termination of the Company's S
Corporation Status......................................... (2.54)
Increase attributable to new investors...................... 3.89
-----
Pro forma net tangible book value per share after the
Offering..................................................... 3.51
------
Dilution in net tangible book value per share to new
investors.................................................... $ 9.49
======
</TABLE>
18
<PAGE>
SELECTED HISTORICAL, PRO FORMA AND OTHER FINANCIAL INFORMATION
(amounts in thousands, except per share data)
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and the notes thereto included in this Prospectus.
Data for the Company's fiscal years ended December 31, 1993, 1994 and 1995 are
derived from the Company's audited Financial Statements and the notes thereto
included in this Prospectus. Data for the Company's fiscal years ended
December 31, 1991 and 1992 and the three months ended March 31, 1995 and 1996
are derived from unaudited financial statements, which the Company believes
contain all necessary adjustments, consisting only of normal recurring
adjustments, necessary to present fairly, and in accordance with generally
accepted accounting principles, the Company's financial position and results
of operations for the periods presented. Financial results for the three
months ended March 31, 1995 and 1996 presented below are not necessarily
indicative of results of operations for a full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............... $15,893 $19,006 $23,713 $34,504 $40,972 $ 9,225 $ 10,279
Cost of goods sold...... 11,512 12,541 14,834 19,750 23,059 5,487 5,738
------- ------- ------- ------- ------- --------- ---------
Gross profit............ 4,381 6,465 8,879 14,754 17,913 3,738 4,541
Commission income(1).... 473 591 686 904 1,098 262 230
------- ------- ------- ------- ------- --------- ---------
4,854 7,056 9,565 15,658 19,011 4,000 4,771
Operating expenses
Selling................ 2,563 3,061 3,767 4,952 5,600 1,339 1,553
General and
administrative........ 911 1,095 1,100 1,445 1,707 448 370
License fees(2)........ 602 690 1,039 1,560 2,035 458 531
Research and
development........... -- 80 486 518 498 122 128
------- ------- ------- ------- ------- --------- ---------
4,076 4,926 6,392 8,475 9,840 2,367 2,582
------- ------- ------- ------- ------- --------- ---------
Income from operations.. 778 2,130 3,173 7,183 9,171 1,633 2,189
Interest expense ....... 236 240 166 156 339 90 65
------- ------- ------- ------- ------- --------- ---------
Income before income
taxes.................. 542 1,890 3,007 7,027 8,832 1,543 2,124
Income taxes............ 66 124 69 429 349 61 122
------- ------- ------- ------- ------- --------- ---------
Net income.............. $ 476 $ 1,766 $ 2,938 $ 6,598 $ 8,483 $ 1,482 $ 2,002
======= ======= ======= ======= ======= ========= =========
Pro forma net income(3). $ 296 $ 1,099 $ 1,816 $ 4,129 $ 5,377 $ 927 $ 1,279
Pro forma net income per
share(4)............... 0.72 0.17
======= =========
Pro forma weighted
average shares
outstanding(4)......... 7,451 7,451
======= =========
OTHER DATA:
Gross margin(5)......... 27.6% 34.0% 37.4% 42.8% 43.7% 40.5% 44.2%
Operating margin(6)..... 4.9 11.2 13.4 20.8 22.3 17.7 21.3
EBITDA(7)............... $ 1,389 $ 2,785 $ 3,949 $ 8,255 $10,583 $ 2,048 $ 2,591
Capital expenditures.... 917 1,172 1,480 5,851 2,160 1,030 472
S Corporation dividends
declared............... -- 556 1,048 3,764 5,427 2,052 1,212
Cash provided by (used
in):
Operating activities... 292 2,343 4,181 6,201 9,758 725 897
Investing activities... (911) (1,164) (1,475) (5,880) (2,161) (1,030) (472)
Financing activities... 568 (877) (3,101) 398 (7,019) 80 (1,410)
ADJUSTED FINANCIAL
DATA(8):
Net sales (as
historically reported). $15,893 $19,006 $23,713 $34,504 $40,972 $ 9,225 $ 10,279
Adjusted EBITDA(9)...... 1,716 3,200 4,713 9,540 12,343 2,437 3,053
Adjusted income from
operations ............ 1,105 2,545 3,937 8,468 10,931 2,022 2,651
Adjusted operating
margin(10)............. 7.0% 13.4% 16.6% 24.5% 26.7% 21.9% 25.8%
Adjusted net income..... $ 492 $ 1,349 $ 2,274 $ 4,899 $ 6,431 $ 1,149 $ 1,555
Adjusted net income per
share(11).............. 0.86 0.21
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets........... $4,342 $4,695 $ 5,068 $ 8,093 $ 8,502 $ 9,295 $10,004
Total assets............. 8,286 9,152 10,189 17,951 19,103 19,767 20,655
Long-term obligations
(including current
maturities)............. 3,292 2,415 1,018 3,684 3,213 4,278 2,883
Stockholders' equity..... 3,575 4,785 6,881 9,417 12,473 10,899 13,263
</TABLE>
19
<PAGE>
NOTES TO SELECTED HISTORICAL, PRO FORMA AND OTHER FINANCIAL INFORMATION
(amounts in thousands, except per share data)
(1) Commission income represents the amount of commissions paid to the
Company by the manufacturer of certain cable-in-conduit products in
connection with the Company's sale of such products, which the Company
offers to its customers in order to complement its own product line.
(2) License fees represent the amounts paid by the Company to William H.
Channell, Sr., the Company's Chairman of the Board and Chief Executive
Officer, for the use of the Channell Patents. Prior to the consummation
of the Offering, these patents will be sold to the Company, the license
fee arrangement with Mr. Channell, Sr. will be terminated and,
thereafter, the Company will no longer pay any license fees with respect
to the Channell Patents. See "Reorganization and Termination of S
Corporation Status."
(3) Prior to the Offering, the Company was an S corporation for federal and
state income tax purposes. The pro forma presentation reflects a
provision for income taxes as if the Company had always been a C
corporation, at an assumed effective tax rate of approximately 41% less
tax credits. Such presentation does not reflect the adjustments set forth
in note (8) below. The effect of the Company's use of a portion of the
net proceeds of the Offering to repay outstanding bank indebtedness (see
"Use of Proceeds") has not been reflected in pro forma net income or pro
forma net income per share because the impact is not material.
(4) Pro forma net income per share has been computed by dividing pro forma
net income by the pro forma weighted average shares outstanding. Pro
forma weighted average shares outstanding include 1,314 of the shares
offered hereby by the Company at an assumed price of $13.00 per share,
the net proceeds of which will be used to fund the distributions in
connection with the Termination of the Company's S Corporation Status.
See "Reorganization and Termination of S Corporation Status."
(5) Gross margin is gross profit as a percentage of net sales.
(6) Operating margin is income from operations as a percentage of net sales.
(7) EBITDA represents income from operations before interest and income
taxes, plus depreciation and amortization expense. EBITDA is not intended
to represent cash flow, operating income or any other measure of
performance in accordance with generally accepted accounting principles,
but is included here because management believes that certain investors
find it to be a useful tool for measuring a company's ability to service
its debt.
(8) The adjusted financial data reflects, in addition to the pro forma
adjustments referred to in note (3) above, (i) the elimination of the
expense for the license fees payable to Mr. Channell, Sr., and related
income tax impact, which license fees are being terminated as part of the
Termination of the Company's S Corporation Status, and (ii) an increase
in Mr. Channell, Sr.'s annual base salary from $225 to $500 in connection
with the Offering. See "Reorganization and Termination of S Corporation
Status" and "Management--Employment Contracts." Upon consummation of the
Offering, the Company also intends to increase the base salary of William
H. Channell, Jr., the Company's President, from $350 to $500 (which
increase has not been reflected in the adjusted financial data because
Mr. Channell, Jr.'s actual total compensation in 1995 exceeded $500) and
to grant a cash bonus of $200 to each of Gary W. Baker, the Company's
Chief Financial Officer, Dale C. Wooding, the Company's Vice President,
Manufacturing, and Edward J. Burke, the Company's Vice President,
Engineering, which bonus will be earned and payable in three equal
installments on each of December 31, 1997, 1998 and 1999, provided such
executive officer remains employed by the Company and subject to
continued payment in the event of the death of the executive officer. See
"Management--Executive Compensation."
(9) Adjusted EBITDA represents adjusted income from operations before
interest and income taxes, plus depreciation and amortization expense.
See note (7) above.
(10) Adjusted operating margin is adjusted income from operations as a
percentage of net sales.
(11) Adjusted net income per share is adjusted net income divided by 7,451 pro
forma weighted average shares outstanding.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading designer, manufacturer and marketer of precision-
molded thermoplastic enclosures used by CATV operators and local telephone
companies worldwide. The Company believes it currently supplies a substantial
portion of the enclosure product requirements of a number of major CATV and
telephone company operators. The Company was incorporated on April 23, 1996 as
the successor to the Predecessor, which is being merged into the Company in
connection with the Offering. All financial data contained herein with respect
to the Company include the financial data of the Predecessor.
Since 1990, the Company has been an S corporation for federal and state
income tax purposes. Prior to the Offering, however, the Company will change
in form from an S corporation to a C corporation. As an S corporation, the
Company's income, whether or not distributed, was taxed at the stockholder
level for federal income tax purposes. For California franchise tax purposes,
S corporations were taxed at 2.5% of taxable income in 1993 and 1.5% of
taxable income in 1994, 1995 and the first quarter of 1996. Currently, the top
federal tax rate for C corporations is 35% and the corporate tax rate in
California is 9.3%. As a result, the change in form will affect the earnings
and the cash flows of the Company by increasing the level of federal and state
income tax. The pro forma provision for income taxes in the accompanying
statements of income shows results as if the Company had always been a C
corporation and had adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" prior to January 1, 1991. See
"Reorganization and Termination of S Corporation Status."
Prior to the consummation of the Offering, the Company will purchase the
Channell Patents and, accordingly, the license fee arrangement between the
Company and Mr. Channell, Sr. with respect to such patents will be terminated
and, thereafter, no license fees will be paid to Mr. Channell, Sr. or any
other party with respect to the Channell Patents. In addition, any patents
obtained in the future with respect to new technology developed by Mr.
Channell, Sr. will be owned by the Company. Prior to the termination, a 10%
license fee on the sale of certain products utilizing the Channell Patents was
payable to Mr. Channell, Sr. See "Certain Transactions." During 1993, 1994,
1995 and the first quarter of 1996, the license fees payable to Mr. Channell,
Sr. were $1.0 million, $1.6 million, $2.0 million and $0.5 million,
respectively. In connection with the consummation of the Offering, no license
fees will be paid with respect to product sales during 1996.
In connection with the Offering, the annual base salary of Mr. Channell, Sr.
will be increased from $225,000 to $500,000, and the annual base salary of
William H. Channell, Jr., the Company's President, will be increased from
$350,000 to $500,000, which amounts do not include any bonuses that may be
payable to such executive officers. Upon consummation of the Offering, Mr.
Channell, Jr. will also receive options to acquire 100,000 shares of Common
Stock with an exercise price equal to the initial public offering price per
share, which options will become exercisable in three equal annual
installments beginning on the first anniversary of the date of issuance. See
"Management--Employment Contracts." In addition, the Company expects to incur
additional rent expense in 1996 and future periods when compared to prior
periods due to an addition to its facilities (see "Business--Properties") and
additional increases in compensation expense in 1996 when compared with prior
periods due to increased personnel, customary wage increases and the
implementation of management incentive programs described under "Management."
The Company's core business consists of enclosure product sales to the CATV
market, which comprised approximately 86% of the Company's total net sales in
each of 1993, 1994 and 1995, with two customers, TCI and Time Warner,
accounting for 17.5% and 15.6%, respectively, of the Company's total net sales
during 1995. The Company believes that many of its customers periodically
review their supply relationships, and the Company can experience significant
changes in buying patterns from specific customers between fiscal periods.
TCI, the Company's largest customer (by sales volume) in 1995, is currently
conducting such a review. See "Risk Factors--Concentration of Customers;
Limited Backlog." The Company has historically operated with a relatively
small backlog, and sales and operating results in any quarter are principally
dependent upon orders
21
<PAGE>
booked and products shipped in that quarter. Further, the Company's customers
generally do not enter into long-term supply contracts providing for future
purchase commitments for the Company's products. These factors, when combined
with the Company's operating leverage and the need to incur certain capital
expenditures and expenses in part based upon the expectation of future sales,
results in the Company's operating results being at risk to changing customer
buying patterns. If sales levels in a particular period do not meet the
Company's expectations, operating results for that period may be materially
and adversely affected. See "Risk Factors--Concentration of Customers; Limited
Backlog" and "--Dependence on the Communications Industry."
The Company uses numerous raw materials in its manufacturing processes.
Although management believes that the Company has adequate sources of supply
for such raw materials, increases in the market prices of the Company's raw
materials could significantly increase the Company's cost of goods sold and
materially adversely affect the Company's profitability. See "Risk Factors--
Price Fluctuations of Raw Materials; Availability of Complementary Products."
The Company's profitability may also be materially adversely affected by
decreases in its sales volume because many of the costs associated with the
Company's rent, product development, engineering, tooling and other
manufacturing processes are fixed in nature and must be spread over its sales
base in order to maintain historic levels of profitability. See "Risk
Factors--Operating Leverage."
In addition to Company manufactured products, the Company markets
complementary products manufactured by third parties. With respect to sales of
cable-in-conduit products, the Company generally receives a commission upon
the sale of such products. Pursuant to the agreements under which the Company
markets such products, during the terms thereof and for a period of two years
thereafter, each of the Company and the manufacturer of such products is
prohibited from competing with the other in any product line that is, or
within the year prior to termination has been, represented, manufactured or
sold by the other within the specified markets covered by the agreements.
During the periods discussed under "Results of Operations" below, the
Company's sales increases resulted primarily from additional sales to the
Company's existing customers as they expanded, rebuilt and upgraded their
signal delivery networks in order to deliver enhanced communications services,
as well as additional sales to new customers, particularly telephone companies
that have recently entered the CATV market and international customers.
Except for historical information contained herein, the matters discussed in
this Prospectus are forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those set forth in such forward-looking statements. Such risks and
uncertainties include, without limitation, the Company's ability to develop
new products in response to technological, regulatory and competitive factors
affecting the communications industry, the impact on profitability of
increases in raw material prices or lower sales levels, increased competition
and the effect of changing economic conditions. For a discussion of certain
considerations relevant to an investment in the Common Stock, see "Risk
Factors."
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the Company's operating results for the
periods indicated expressed as a percentage of sales. Results of operations
for the periods ended March 31, 1995 and 1996 are derived from unaudited
interim financial statements and are not necessarily indicative of results of
operations for a full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------- --------------
1993 1994 1995 1995 1996
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...................... 62.6 57.2 56.3 59.5 55.8
----- ----- ----- ------ ------
Gross profit............................ 37.4 42.8 43.7 40.5 44.2
Commission income....................... 2.9 2.6 2.7 2.8 2.2
Selling................................. 15.9 14.4 13.7 14.5 15.1
General and administrative.............. 4.6 4.2 4.2 4.9 3.6
License fees............................ 4.4 4.5 5.0 4.9 5.2
Research and development................ 2.0 1.5 1.2 1.3 1.2
----- ----- ----- ------ ------
Income from operations.................. 13.4 20.8 22.3 17.7 21.3
Interest expense........................ 0.7 0.4 0.8 1.0 0.6
----- ----- ----- ------ ------
Income before income taxes.............. 12.7 20.4 21.5 16.7 20.7
Pro forma income taxes(1)............... 5.0 8.4 8.4 6.6 8.2
----- ----- ----- ------ ------
Pro forma net income(1)................. 7.7% 12.0% 13.1% 10.1% 12.5%
===== ===== ===== ====== ======
Adjusted income from operations(2)...... 16.6% 24.5% 26.7% 21.9% 25.8%
</TABLE>
- --------
(1) Pro forma income taxes and pro forma net income have been determined
giving effect to the Termination of the Company's S Corporation Status.
See "Reorganization and Termination of S Corporation Status" and note (3)
to "Selected Historical, Pro Forma and Other Financial Information."
(2) Adjusted income from operations has been determined giving effect to the
transactions described in notes (3) and (8) to "Selected Historical, Pro
Forma and Other Financial Information."
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1995 WITH THE THREE MONTHS
ENDED MARCH 31, 1996
Net Sales. Net sales increased $1.1 million or 11.4% from $9.2 million in
the first quarter of 1995 to $10.3 million in the first quarter of 1996. CATV
net sales increased $1.2 million or 15.6% from $7.8 million in the first
quarter of 1995 to $9.0 million in the first quarter of 1996 as a result of
continued demand for CATV outside plant products for network rebuild
construction, upgrades and expansion, particularly in the southeastern part of
the United States. Telecommunications net sales decreased $0.1 million or
11.3% from $1.4 million in the first quarter of 1995 to $1.3 million in the
first quarter of 1996 as a result of the severe weather conditions in the
Northeast in the first three months of 1996.
Domestic net sales increased $1.1 million or 13.6% from $8.3 million in the
first quarter of 1995 to $9.4 million in the first quarter of 1996.
International net sales decreased $0.1 million or 8.3% from $0.9 million in
the 1995 period to $0.8 million in the 1996 period, primarily as a result of a
customer's overstocking of product and a delay in planned network construction
by a large international customer resulting in a reduction of new sales.
Gross Profit. Gross profit increased $0.8 million or 21.5% from $3.7 million
in the first quarter of 1995 to $4.5 million in the first quarter of 1996.
Gross margin increased from 40.5% to 44.2% during the comparable periods. The
improvement in gross profit and gross margin was primarily due to a higher
margin mix of products sold in the 1996 period versus the 1995 period as well
as an overall increase in sales volume, which resulted in higher operating
leverage (i.e., a higher percentage of sales relative to fixed costs).
23
<PAGE>
Commission Income. Commission income decreased $0.1 million or 12.2% from
$0.3 million in the first quarter of 1995 to $0.2 million in the first quarter
of 1996. The decrease resulted from lower sales volume of cable-in-conduit
products due to the severe winter weather conditions in the northeastern part
of the United States in the first three months of 1996.
Selling. Selling expense increased $0.3 million or 16.0% from $1.3 million
in the first quarter of 1995 to $1.6 million in the first quarter of 1996,
primarily as a result of increased payroll in connection with expanded
marketing and sales activities. As a percentage of net sales, selling expense
increased from 14.5% in the 1995 period to 15.1% in the 1996 period.
General and Administrative. General and administrative expenses were $0.4
million in both the first quarter of 1995 and 1996, but declined as a
percentage of net sales from 4.9% in the 1995 period to 3.6% in the 1996
period as a result of spreading the fixed portion of such expenses over a
larger sales base.
License Fees. License fees were approximately $0.5 million in both the first
quarter of 1995 and 1996, but increased as a percentage of net sales from 4.9%
in the 1995 period to 5.2% in the 1996 period. In connection with the
consummation of the Offering, no license fees will be paid with respect to
product sales during 1996.
Research and Development. Research and development expenses were $0.1
million in both the first quarter of 1995 and 1996. Research and development
expense is expected to be higher in the future in light of the Company's plans
for new product development following the Offering.
Income From Operations. As a result of the items discussed above, income
from operations increased $0.6 million or 34.0% from $1.6 million in the first
quarter of 1995 to $2.2 million in the first quarter of 1996, and operating
margin increased from 17.7% to 21.3%. After giving effect to the transactions
described in notes (3) and (8) to "Selected Historical, Pro Forma and Other
Financial Information," adjusted income from operations increased $0.7 million
or 31.1% from $2.0 million in the first quarter of 1995 to $2.7 million in the
first quarter of 1996. As a percentage of net sales, adjusted income from
operations increased from 21.9% in the 1995 period to 25.8% in the 1996
period.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1994 WITH THE YEAR ENDED DECEMBER
31, 1995
Net Sales. Net sales increased $6.5 million or 18.7% from $34.5 million in
1994 to $41.0 million in 1995. CATV net sales increased $5.7 million or 19.2%
from $29.7 million in 1994 to $35.4 million in 1995, principally due to
continued demand for CATV outside plant products for network rebuild
construction, upgrades and expansion, as well as new product introductions to
meet higher performance requirements of certain CATV customers.
Telecommunications net sales increased $0.8 million or 15.7% from $4.8 million
in 1994 to $5.6 million in 1995, due to the completion of field testing of
products for sale to certain telecommunications customers permitting sales of
products in quantity to those customers. Telecommunications net sales also
benefited from the trend toward convergence of the CATV and telecommunications
markets, as local telephone company customers increased services relating to
video and data transmission and internet access.
Domestic net sales increased $5.0 million or 16.5% from $29.9 million in
1994 to $34.9 million in 1995, principally due to the factors affecting CATV
sales summarized above. International net sales increased $1.5 million or
33.2% from $4.6 million in 1994 to $6.1 million in 1995, mainly due to new
CATV network construction by certain Pacific Rim and European customers.
Gross Profit. Gross profit increased $3.2 million or 21.4% from $14.8
million in 1994 to $17.9 million in 1995. Gross margin increased from 42.8% in
1994 to 43.7% in 1995. The Company's improvement in gross profit and gross
margin was primarily due to a higher margin mix of products sold as well as an
overall increase in sales volume, which resulted in higher operating leverage.
Commission Income. Commission income increased $0.2 million or 21.5% from
$0.9 million in 1994 to $1.1 million in 1995, due to higher sales of cable-in-
conduit products.
Selling. Selling expense increased $0.6 million or 13.1% from $5.0 million
in 1994 to $5.6 million in 1995, primarily as a result of higher payroll and
related expense in the amount of $0.4 million and higher marketing
24
<PAGE>
related expense in the amount of $0.1 million. These increases were due
primarily to increased sales and marketing efforts during the 1995 period. As
a percentage of net sales, selling expense declined from 14.4% in 1994 to
13.7% in 1995 as a result of spreading certain fixed selling expenses over a
larger sales base.
General and Administrative. General and administrative expenses increased
$0.3 million or 18.1% from $1.4 million in 1994 to $1.7 million in 1995,
primarily as a result of higher compensation expense in connection with staff
increases. As a percentage of net sales, general and administrative expense
was 4.2% during 1994 and 1995.
License Fees. License fees increased $0.4 million or 30.4% from $1.6 million
in 1994 to $2.0 million in 1995 as a result of an increase in sales of
products subject to patent license fee arrangements relating to the Channell
Patents.
Research and Development. Research and development expenses were $0.5
million in both 1994 and 1995, but declined as a percentage of net sales from
1.5% in 1994 to 1.2% in 1995.
Income From Operations. As a result of the items discussed above, income
from operations increased $2.0 million or 27.7% from $7.2 million in 1994 to
$9.2 million in 1995, and operating margin increased from 20.8% to 22.3%.
After giving effect to the transactions described in notes (3) and (8) to
"Selected Historical, Pro Forma and Other Financial Information," adjusted
income from operations increased $2.5 million or 29.1% from $8.5 million in
1994 to $10.9 million in 1995. As a percentage of net sales, adjusted income
from operations increased from 24.5% in 1994 to 26.7% in 1995.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1993 WITH THE YEAR ENDED DECEMBER
31, 1994
Net Sales. Net sales increased $10.8 million or 45.5% from $23.7 million in
1993 to $34.5 million in 1994. CATV net sales increased $9.3 million or 45.7%
from $20.4 million in 1993 to $29.7 million in 1994 as a result of the CATV
technology changes referred to above. Telecommunications net sales increased
$1.5 million or 44.3% from $3.3 million in 1993 to $4.8 million in 1994,
principally as a result of the completion of field testing of products for
certain customers, permitting sales of the products in quantity to those
customers.
Domestic net sales increased $9.6 million or 47.5% from $20.3 million in
1993 to $29.9 million in 1994, largely due to changes in broadband technology,
which generated an increase in CATV network rebuilds to convert to 750 MHz
systems. International net sales increased $1.2 million or 33.9% from $3.4
million in 1993 to $4.6 million in 1994, as a result of a new marketing
arrangement with a strategic partner in Canada and related increased marketing
efforts in that market in 1994.
Gross Profit. Gross profit increased $5.9 million or 66.2% from $8.9 million
in 1993 to $14.8 million in 1994. Gross margin increased from 37.4% to 42.8%.
The Company's improvement in gross profit and gross margin was primarily due
to a higher margin mix of products sold as well as an overall increase in
sales volume, which resulted in higher operating leverage.
Commission Income. Commission income increased $0.2 million or 31.7% from
$0.7 million in 1993 to $0.9 million in 1994, due to higher sales of cable-in-
conduit products.
Selling. Selling expense increased $1.2 million or 31.5% from $3.8 million
in 1993 to $5.0 million in 1994, primarily as a result of higher sales
commissions in the amount of $0.2 million and higher shipping expense in the
amount of $0.2 million, both resulting from higher net sales during the 1994
period. As a percentage of net sales, selling expense declined from 15.9% in
1993 to 14.4% in 1994 as a result of spreading certain fixed selling expenses
over a larger sales base.
General and Administrative. General and administrative expenses increased
$0.3 million or 31.4% from $1.1 million in 1993 to $1.4 million in 1994. No
single expense category increased more than $0.1 million. As a
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percentage of net sales, general and administrative expenses declined from
4.6% in 1993 to 4.2% in 1994 as a result of spreading the fixed portion of
these expenses over a larger sales base.
License Fees. License fees increased $0.6 million or 50.1% from $1.0 million
in 1993 to $1.6 million in 1994, as a result of an increase in sales of
products subject to patent license fee arrangements relating to the Channell
Patents.
Research and Development. Research and development expenses were
approximately $0.5 million in both 1993 and 1994, but declined as a percentage
of sales from 2.0% in 1993 to 1.5% in 1994.
Income From Operations. As a result of the items discussed above, income
from operations increased $4.0 million or 126.4% from $3.2 million in 1993 to
$7.2 million in 1994, and operating margin increased from 13.4% to 20.8%.
After giving effect to the transactions described in notes (3) and (8) to
"Selected Historical, Pro Forma and Other Financial Information," adjusted
income from operations increased $4.5 million or 115.1% from $3.9 million in
1993 to $8.5 million in 1994. As a percentage of net sales, adjusted income
from operations increased from 16.6% in 1993 to 24.5% in 1994.
QUARTERLY RESULTS OF OPERATIONS
Set forth below is certain unaudited quarterly financial information. The
Company believes that all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to
present fairly, and in accordance with generally accepted accounting
principles, the selected quarterly information when read in conjunction with
the Financial Statements included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDING
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------- ------------------------------- -----------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH 1ST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $7,134 $9,219 $9,902 $8,249 $9,225 $11,784 $10,758 $9,205 $10,279
Gross profit............ 2,992 4,112 4,037 3,613 3,738 5,387 4,534 4,254 4,541
Income from operations.. 1,389 2,247 2,035 1,512 1,633 3,005 2,577 1,956 2,189
Income before income
taxes.................. 1,368 2,211 1,992 1,456 1,543 2,887 2,486 1,916 2,124
</TABLE>
Historically, the Company has experienced lower sales in the first and
fourth quarters due to adverse weather conditions that may affect the timing
of orders from customers and create seasonal fluctuations in demand. See "Risk
Factors--Seasonality and Fluctuations in Operating Results; Limited Backlog."
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital expenditures through
internally generated funds and bank borrowings. Net cash provided by operating
activities was $6.2 million and $9.8 million in 1994 and 1995, respectively.
Net cash provided by financing activities was $0.4 million in 1994, and net
cash used in financing activities was $7.0 million in 1995.
Net cash provided by operating activities was $0.7 million and $0.9 million
for the three months ended March 31, 1995 and 1996, respectively. Net cash
provided by financing activities was $0.1 million for the three months ended
March 31, 1995, and net cash used in financing activities was $1.4 million for
the three months ended March 31, 1996. Accounts receivable increased from $4.1
million at December 31, 1995 to $6.7 million at March 31, 1996 as a result of
increased sales in the first quarter of the current year (in particular, in
February and March 1996) and unusually slow collection experience encountered
with certain customers.
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<PAGE>
The Company made capital expenditures of $5.9 million and $2.2 million in
1994 and 1995, respectively. The Company anticipates making capital
expenditures in 1996 of approximately $4.0 million, primarily relating to new
machinery, material handling, test equipment, product tooling and MIS, which
will be funded through internally generated funds, bank borrowings and the net
proceeds of the Offering. The Company's material commitments consist of a
capital lease for various computer equipment in connection with the Company's
new management information system, which lease will require aggregate payments
of approximately $1.0 million over a three-year period that commenced in April
1996, and various operating leases with third parties for facilities, sales
fleet and a shipping trailer, which required aggregate payments of $0.2
million in 1995. The Company also leases its manufacturing and headquarters
facility in Temecula, California, consisting of two buildings of approximately
160,000 and 100,000 square feet, respectively, which require annual lease
payments of approximately $650,000 and $420,000, respectively. See "Business--
Properties" and "Certain Transactions."
The Company currently maintains a revolving credit facility (as amended to
date, the "Revolving Credit Facility") with Bank of America National Trust and
Savings Association ("Bank of America"), consisting of (i) a $3.5 million
working capital revolving line of credit, which had no outstanding balance at
March 31, 1996, and (ii) a $4.8 million equipment revolving line of credit and
standby letter of credit facility, which had an outstanding balance of $2.1
million at March 31, 1996. Loans under the working capital line bear interest
at Bank of America's reference rate and mature on May 1, 1997, while loans
under the equipment line bear interest at Bank of America's reference rate
plus 0.25% and are repayable in sixty equal monthly installments of principal
and interest commencing in the first month after issuance of each loan.
Availability of advances under the revolving credit facility expires on May 1,
1997.
The Company also has a non-revolving, $1.0 million line of credit (as
amended to date, the "Non-Revolving Line of Credit") with Bank of America for
purposes of leasehold improvements and facility expansion. Availability of
advances under this line of credit expired on October 31, 1994, at which time
the line of credit was fully drawn. As of March 31, 1996, the outstanding
principal balance under such facility was $0.8 million. The Non-Revolving Line
of Credit bears interest at Bank of America's reference rate plus 0.5% and is
repayable in 72 equal monthly installments that commenced on December 1, 1994.
In the event the Revolving Credit Facility is terminated for any reason
(including Bank of America's determination not to renew such facility upon its
expiration), all amounts outstanding under the Non-Revolving Line of Credit
become immediately due and payable.
The Revolving Credit Facility and the Non-Revolving Line of Credit contain
various covenants that are customary in agreements of this nature, including
certain financial ratios and covenants, and are collateralized by the
equipment financed by the Bank of America. Under certain circumstances,
covenants contained in such facilities may limit the Company's ability to pay
dividends. See "Dividend Policy."
Management believes that income from operations, coupled with borrowings
under the Company's bank facilities and proceeds from this Offering, will be
sufficient to fund the Company's capital expenditure and working capital
requirements for the foreseeable future.
27
<PAGE>
BUSINESS
GENERAL
The Company is a leading designer, manufacturer and marketer of precision-
molded thermoplastic enclosures used by CATV operators and local telephone
companies worldwide. The Company believes it was the first to design,
manufacture and market thermoplastic enclosure products for use in the
communications industry on a wide scale, and the Company believes it currently
supplies a substantial portion of the enclosure product requirements of a
number of major CATV and telephone company operators. The Company's products
house, protect and provide access to advanced telecommunications electronics
and transmission media, including coaxial cable, copper wire and optical
fibers, used in the delivery of CATV and telephone services. The products are
deployed within the portion of the local signal delivery network, commonly
known as the "outside plant," that connects the network provider's signal
origination office with residences and businesses. The Company also markets a
variety of complementary products manufactured by third parties, including
grade level boxes and cable-in-conduit, in order to provide a full system
solution to meet its customers' outside plant requirements. For a definition
of certain terms used herein, see "Glossary of Terms" on page G-1 hereof.
INDUSTRY
For more than five years, the communications industry has experienced rapid
expansion, both domestically and internationally, in response to a number of
factors, including developments in high-speed communications technologies, the
convergence occurring within the CATV and telecommunications industries,
consumer demand for enhanced communications services, and a changing
regulatory and competitive environment leading to the deregulation or
privatization of signal delivery operations in many markets. For numerous
countries throughout the world, the implementation or improvement of advanced
communications systems has become a national priority in order to enable such
countries to participate in the information-based global economy.
CATV and local telephone operators are responding to these changes in the
industry by expanding, rebuilding and upgrading their signal delivery networks
in order to deliver enhanced communications services to their customers. These
networks are designed to deliver video, voice and data transmissions and
provide internet access to individual residences and businesses. The networks
employ a variety of signal delivery technologies and architectures, including
HFC, DLC, FTTC and ADSL (see "Glossary of Terms"), which generally carry
broadband and narrowband signals over a combination of electronic hardware,
coaxial cable, copper wire and optical fibers. The outside plants of such
networks include various access devices, fiber optic trunks, nodes and feeders
and other signal transmission electronics. These devices are required to be
housed in secure, protective enclosures, such as those manufactured by the
Company. The diagram below depicts a typical signal delivery network,
consisting of a signal origination office, the outside plant and the end user:
[Diagram depicting signal origination office, the outside plant and the end
user]
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<PAGE>
Enclosure products are critical components of the outside plants of CATV
operators and local telephone companies, providing protection against weather
and vandalism, access for technicians who maintain and manage the outside
plant and, in some cases, dissipation of heat created by active electronic
hardware. CATV operators and local telephone companies rely significantly on
manufacturers of protective enclosures because any material damage to the
signal delivery networks is likely to disrupt communication services.
Demand for enclosures in the communications industry depends primarily on
the construction, rebuilding, upgrading and maintenance of signal delivery
networks by CATV operators and local telephone companies. In particular,
technological developments in the communications industry are resulting in
significant increases in system upgrades. For example, within the CATV segment
of the industry, networks are being upgraded to support new advanced two-way
services, including internet access via cable modems, telephony and PCS
transport. Within the local telephone company segment of the industry, local
telephone operators are employing new advanced technologies, such as HDSL and
ADSL, which utilize traditional copper wires for broadband services and which
are expected to increase the need for fully sealed outside plant facilities in
order to improve network reliability and longevity. In addition, as local
telephone companies build broadband HFC networks for the delivery of video
services competitive with CATV, they are expected to require products
traditionally used by CATV operators. These and other technological,
regulatory and competitive factors are expected to result in continued growth
of the market for enclosure products designed for the communications industry.
BUSINESS STRATEGY
The Company's strategy is to capitalize on opportunities in the growing and
changing global communications industry by providing enclosures and
complementary products to meet the needs of its customers' evolving
communications networks. The Company's wide range of products, manufacturing
expertise, application-based sales and marketing approach and reputation for
high quality products address key requirements of its customers. Principal
elements of the Company's strategy include the following:
CONTINUE TO FOCUS ON CORE CATV BUSINESS. The Company intends to capitalize
on its position as a leading designer, manufacturer and marketer of broadband
enclosures for the CATV industry in the United States and Canada through new
product development for both domestic and international market applications.
The Company believes it currently supplies a substantial portion of the
enclosure product requirements of a number of major CATV and telephone company
operators. The Company has positioned itself to participate in continued CATV
network construction and upgrades that are designed to improve service quality
and expand network capacity in order to prepare CATV operators for new
competition in the broadband services market. These expansions and upgrades
will enable CATV operators to accommodate increased consumer demand for
internet access via cable modem, telephony and enhanced video services. From
1993 to 1995, the Company's net sales to the CATV industry increased from
$20.4 million to $35.4 million, representing a compounded annual growth rate
of 31.7%.
INCREASE SALES TO LOCAL TELEPHONE COMPANIES. The Company seeks to leverage
its in-depth knowledge of, and expertise in, the broadband telecommunications
and telephone markets to provide innovative enclosure solutions for the
telephone industry. From 1993 to 1995, the Company's net sales to local
telephone companies increased from $3.3 million to $5.6 million, representing
a compounded annual growth rate of 29.7%. The Company intends to continue to
invest in the development of a broader range of products designed specifically
for telephone market applications. The Company has already achieved
significant success in marketing its traditional CATV/broadband products to
local telephone companies which have been designing and deploying broadband
networks to deliver competitive video and data services. The Company will
continue to target this market for growth.
EXPAND INTERNATIONAL PRESENCE. Management believes that international
markets offer significant opportunities for increased sales in both the CATV
and telephone segments. The Company's principal international markets
currently consist of Canada, South America, the Pacific Rim, the Middle East
and Europe. From 1993 to 1995, the Company's international net sales increased
from $3.4 million to $6.1 million, representing a compounded annual growth
rate of 34.4%. Trends expected to result in international growth
29
<PAGE>
opportunities include the deregulation and privatization of telecommunications
in many international markets, the focus of numerous countries on building,
expanding and enhancing their communications systems in order to participate
fully in the information-based global economy, and multi-national expansion by
many U.S.-based network carriers. The Company will concentrate on expansion in
international markets that are characterized by deregulation or privatization
of telecommunications and the availability of capital for the construction of
signal delivery networks. See note M of the notes to the Company's Financial
Statements included elsewhere in this Prospectus for financial data of the
Company by geographic region of operation.
DEVELOP NEW PRODUCTS AND ENTER NEW BUSINESS SEGMENTS. The Company continues
to leverage its core capabilities by developing innovative products that meet
the changing needs of its customers. Examples of innovative products developed
by the Company include its low profile (i.e., close to the ground) enclosures
that permit 360 degree access by technicians and pedestals that provide for
mechanical sealing that is maintained without the need for gels, compounds or
heat shrinkage. Such features, in addition to other product improvements
developed by the Company over many years, received U.S. patent protection and
improve the performance and ease of use of the Company's products in its
customers' outside plant systems. The Company has a proven record in
designing, developing and manufacturing "next generation" products that
provide solutions for its customers and offer differential advantages over
other suppliers to the industry. In addition, the Company will seek to
diversify its customer base by developing new products for customers outside
the communications industry that require enclosure products, such as the
utility industry.
PRODUCTS
The Company manufactures precision-molded, highly engineered thermoplastic
enclosures that are considered state-of-the-industry for many applications,
having received field testing and other approvals and standardization
certifications from major CATV and telephone company operators. The majority
of the Company's products are specifically designed for buried and underground
network architectures, including enclosures that provide technicians with
access to these networks for maintenance, upgrades and installation of new
services. These types of networks and enclosures are generally preferred by
the Company's customers due to increased network reliability, lower
maintenance requirements, improved security, utility right of way issues and
aesthetic appeal. Enclosure products for these networks must be secure,
durable and aesthetically pleasing and often provide advanced heat dissipation
characteristics required for active electronics. The Company also manufactures
products that are flush-to-grade and buried, requiring environmental sealing
and load-bearing capabilities. The majority of the Company's products are
constructed of thermoplastic and fitted with metal frameworks, fasteners and
locking mechanisms. The Company also designs and manufactures a series of
termination blocks, brackets and cable management devices that are mounted
inside its enclosure products. The Company is recognized for its
differentiated product designs and the functionality, field performance and
service life of its products as compared with alternative products.
In order to position itself as a full-line product supplier, the Company
also offers a variety of complementary products, including grade level boxes
and cable-in-conduit. These products are typically purchased by customers as
part of a system package and are sold by the Company through marketing
arrangements with original equipment manufacturers ("OEMs"). The Company seeks
strategic alliances with these OEMs that generally include technical
information exchanges that are used by the Company in the development of new
products and enhancements to existing designs. The Company has established
additional relationships with system integrators and innovative end users.
30
<PAGE>
The Company currently markets 35 enclosure product families, with numerous
options that result in several thousand product configurations. The diagram
below depicts the location of the Company's products in typical outside plants
of CATV operators and local telephone companies:
[Diagram depicting the location of the Company's products
in typical outside plants of CATV and local telephone operators]
The primary functions of the Company's products designed for the CATV
industry are cable routing and management, equipment access, heat dissipation
and security. The Company believes that it offers the broadest line of
enclosure products for use in the CATV industry. In addition to being widely
deployed by CATV operators, these products are also now being approved for use
by a number of telephone companies that are adding fiber optic and broadband
functionality to their networks. The Company anticipates demands for the CATV
product line to result from continued construction of broadband networks and
upgrades of existing CATV networks to accommodate enhanced video services,
internet access via cable modems and wireless PCS transport.
The Company also specializes in the manufacture of products designed to meet
the needs of its local telephone company customers, including sealed plant
products. These products include a sealed chamber to provide environmental
protection for copper wires, coaxial cable and optical fibers that have been
exposed for purposes of splicing and termination. The Company's sealed plant
products feature a mechanical sealing system which, unlike many competitors'
products, does not require gels, compounds or heat shrink to create and
maintain the required seal. This system provides significant value to users in
terms of faster installations, repeat access and elimination of excessive
components and the need for special tools.
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<PAGE>
Historically, the Company's sealed plant products have been deployed in
areas characterized by severe flooding, moisture and corrosion problems.
Recently, some telephone companies have adopted a complete sealed plant
strategy designed to enhance the reliability of their networks, reduce
maintenance costs and extend the service life of their copper-based systems.
In addition, management expects that demand for sealed plant products may
result from new transmission technologies that enhance the capabilities and
capacity of existing copper networks, such as HDSL and ADSL, which support
high-speed data, video and internet access over existing copper wires. As a
result of these technologies, it is anticipated that network operators may
seek to upgrade their copper wire facilities in order to improve reliability
and performance. The Company's sealed plant products are well suited for such
applications.
The Company continues to review new products to complement its existing
product line and marketing strengths. New product development initiatives
being studied by the Company include additional products for the CATV and
local telephone markets as well as new products for customers in industries
outside of the communications industry, such as the utility industry. See
"Business Strategy" and "Product Development and Engineering."
MARKETING AND SALES
The Company markets its products primarily through a direct sales force of
21 technically trained salespeople and over 25 independent sales distributors
and manufacturers representatives as of March 31, 1996. The Company's sales
force is based in North America and select international markets and is
divided into three groups covering domestic CATV customers, domestic
telecommunications customers and international customers. The Company employs
an application-based, system approach to marketing its products, offering the
customer, where appropriate, a complete, cost-effective system solution to
meet its enclosure and other outside plant requirements. All sales personnel
have technical expertise in the products they market and are assisted by the
Company's engineering and technical marketing specialists in designing these
system solutions.
The Company's direct sales force is supported by a sales/customer service
department that administers and schedules incoming orders, requests for
product enhancements and service inquiries. This department has locations in
Temecula, California, Canada and the United Kingdom, and maintains direct
communications with customers and the Company's field sales and operations
personnel. As of March 31, 1996, the Company employed eight people in its
sales/customer service department.
The sales force receives additional support from the Company's technical and
product marketing department. The field technical service personnel within
this department work closely with the sales staff and customers to develop
system solutions and provide a full range of technical support, training and
certification for users of the Company's products. The product marketing
personnel within this department perform a variety of functions, including
product line management and general marketing services. These individuals also
provide the Company with strategic plans for product development, new market
access, acquisitions and strategic alliances and work closely with the
Company's sales, engineering and manufacturing departments to implement such
strategic plans. As of March 31, 1996, the Company employed ten people in its
technical and product marketing department.
The marketing department also promotes and positions the Company both
domestically and internationally by performing functions relating to public
relations, product literature, market research and advertising. The Company
participates regularly in industry trade shows and exhibits for the CATV and
local telephone markets.
MANUFACTURING OPERATIONS
The Company's products are manufactured at its facility in Temecula,
California. The Company's vertically integrated and modern manufacturing
processes enable the Company to control each step in the manufacturing
process, including product design and engineering; design and development of
its own dies, tools and molds; and wiring, assembly and packaging. The
Company's manufacturing expertise enables it to tailor its products to
32
<PAGE>
satisfy customer demands, rapidly and efficiently produce large volumes of
products, control expenses and ensure product quality. Management considers
the Company's manufacturing expertise a significant competitive advantage,
providing it with the ability to satisfy the requirements of major customers
with relatively short lead-times and reduce backlog by promptly booking and
shipping orders.
The Company's Temecula facility contains approximately 160,000 square feet
of manufacturing, warehouse and office space designed and constructed
specifically to the Company's requirements. An adjacent 100,000 square foot
building is also being constructed and is expected to be completed in July,
1996 and will be leased by the Company. This building is intended to enhance
manufacturing efficiency, increase warehouse space and enable the Company to
increase manufacturing capacity as required. In 1996, the Company is expected
to be awarded ISO 9000 certification, a worldwide industry standards
certification, with respect to its manufacturing facility. Management has
followed a long-term capacity plan, adding the equipment, facilities and
trained personnel required to support anticipated growth of the Company's
business. As a result, management believes that the Company's manufacturing
facility is adequate to meet anticipated product demand for the foreseeable
future.
The Company owns its manufacturing equipment, which is generally state-of-
the-industry, and all manufacturing processes are performed by trained Company
personnel. The Company's broad range of manufacturing processes includes
injection molding, structural foam molding, rotational molding, metal
fabrication, rubber injection, transfer and compression molding, and
termination block fabrication. The Company has implemented several quality and
process assurance programs, including continuous monitoring of key processes
and regular product inspection and testing. The Company is committed to the
production of the highest quality products.
PRODUCT DEVELOPMENT AND ENGINEERING
The Company believes it was the first to design, manufacture and market
thermoplastic enclosure products for use in the communications industry on a
wide scale. Since the original introduction of its products, the Company has
continued to design all of its own products and develop core capabilities in
product engineering and development. As a result, in response to demands of
the communications industry for increasingly sophisticated enclosure products,
the Company has been able to develop a series of products with effective heat
dissipation qualities; a superior environmental sealing and protection system
that, unlike many competitors' products, does not require gels, compounds or
heat shrink to maintain the required seal; easy access for technicians through
circular covers that can be removed to fully expose the enclosed electronics;
compatibility with a variety of signal delivery network architectures; and
versatility to accommodate network growth through custom hardware and
universal mounting systems that adapt to a variety of new electronic hardware.
Many of the Company's thermoplastic enclosure products are now considered
state-of-the-industry, having received field testing and other approvals and
standardization certifications from major CATV and telephone company
operators.
The Company's new product development philosophy is applications based and
customer driven, focusing on the complete design cycle from product concept
through tooling and high-volume manufacturing. A team comprised of
engineering, marketing, manufacturing and direct sales personnel work together
to define, develop and deliver complete system solutions to customers. The
Company is equipped to conduct many of its own product testing procedures for
performance qualification purposes, enabling it to accelerate the product
development process.
As of March 31, 1996, the Company employed 13 people in its product
development and engineering department. In each of 1993, 1994 and 1995, the
Company spent approximately $0.5 million on research and development. The
Company intends to continue to invest in new product development, including
plans to use approximately $7.0 million to $10.0 million of the net proceeds
of the Offering for this purpose.
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<PAGE>
CUSTOMERS
The Company sells its products directly to CATV operators and telephone
companies throughout the United States, Canada and certain other international
markets, principally developed nations. During 1995, the Company shipped
products to more than 4,000 customer locations, and its five largest customers
accounted for 47.9% of total net sales. In 1995, the Company's five largest
customers (by sales volume) were, in the United States, BellSouth, Comcast,
Continental Cablevision, TCI and Time Warner, and in international markets,
Bricast/VisionStream (Australia), Cablenet (Canada), Cable Systems Media
(Israel), Rogers Communications (Canada) and Shaw Cable (Canada). Two
customers, TCI and Time Warner, accounted for 17.5% and 15.6%, respectively,
of the Company's net sales in 1995.
The Company's customers generally do not enter into long-term supply
contracts providing for future purchase commitments for the Company's
products. Further, the Company believes that many of its customers
periodically review their supply relationships and alter buying patterns based
upon their current assessment of the products and pricing available in the
marketplace. This periodic review can and does result in significant changes
from fiscal period to fiscal period in the level of purchases of the Company's
products by specific customers. The Company understands that TCI is currently
conducting such a review. See "Risk Factors--Concentration of Customers;
Limited Backlog" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
INTELLECTUAL PROPERTY
Following consummation of the Offering, the Company will own all of the
patents and other technology employed by it in the manufacture and design of
its products. See "Reorganization and Termination of S Corporation Status."
The Company's patents, which expire between 1996 and 2010, cover various
aspects of the Company's products. In addition, the Company has certain trade
secrets, know-how and trademarks related to its technology and products.
Management does not believe that any single patent or other intellectual
property right is material to the Company's success as a whole. The Company
intends to maintain an intellectual property protection program designed to
preserve its intellectual property assets.
COMPETITION
The industries in which the Company operates are highly competitive. See
"Risk Factors--Competition." The Company believes, however, that several
factors, including its ability to service national and multi-national
customers, direct sales force, focus on enclosure products, specialized
engineering resources and vertically integrated manufacturing operations,
provide the Company with a competitive advantage. Management believes that the
principal competitive factors in the communications equipment market are
product availability, customer service, product performance, new product
capabilities and price. Competitive price pressures are common in the
industry. In the past, the Company has responded to these pressures
effectively with cost control through vertical integration utilizing advanced
manufacturing techniques, cost-effective product designs and material
selection and an aggressive procurement philosophy. In addition, in the past,
certain of the Company's telecommunications customers have required relatively
lengthy field testing of new products prior to purchasing such products in
quantity. In connection with the deregulation of the telecommunications
segment and the related convergence occurring within the CATV and
telecommunications industries, it is uncertain whether and the extent to which
such field testing will continue to be required. While field testing can delay
the introduction of new products, it can also act as a competitive advantage
in that it makes new product introduction and sales by competitors more
difficult.
RAW MATERIALS; AVAILABILITY OF COMPLEMENTARY PRODUCTS
The principal raw materials used by the Company are thermoplastic resins,
neoprene rubbers, hot and cold rolled steel, stainless steel and copper. The
Company also uses certain other raw materials, such as fasteners, packaging
materials and communications cable. Management believes the Company has
adequate sources of
34
<PAGE>
supply for the raw materials used in its manufacturing processes and attempts
to develop and maintain multiple sources of supply for raw materials in order
to help ensure the availability and competitive pricing of these materials.
Most plastic resins are purchased under annual and multi-year contracts to
help stabilize cost and improve supplier delivery performance. Neoprene
rubbers are manufactured by multiple custom compounders using the Company's
proprietary formulas. Metal products are supplied in standard stock shapes,
coils and custom rollforms. All hot and cold rolled steels are either hot
dipped galvanized or zinc or cadmium electro-plated, which coating operations
are conducted by local outside processors.
In addition, in order to position itself as a full-line product supplier,
the Company also relies on certain manufacturers to supply products that
complement the Company's own product line, such as grade level boxes and
cable-in-conduit. The Company believes there are multiple sources of supply
for these products.
EMPLOYEES
As of March 31, 1996, the Company employed 245 people (including 29
temporary employees), of whom 40 were in sales, 189 were in manufacturing
operations (including the 29 temporary employees) and 16 were in finance and
administration. The Company considers its employee relations to be good, and
it recognizes that its ability to attract and retain qualified employees is an
important factor in its growth and development. None of the Company's
employees is subject to a collective bargaining agreement, and the Company has
not experienced any material business interruption as a result of labor
disputes within the past five years.
PROPERTIES
The Company occupies approximately 160,000 square feet of space in Temecula,
California, of which approximately 55%, 30% and 15% is used for manufacturing,
warehouse and office space, respectively. This facility is leased from William
H. Channell, Sr., the Company's Chairman of the Board and Chief Executive
Officer. See "Certain Transactions" and "Risk Factors--Disruptions at the
Company's Manufacturing Facilities; Lease With Related Party." The lease term
for this facility extends through 2005, and the Company has two five-year
renewal options to extend the term to 2015. An adjacent 100,000 square foot
building is also being constructed and is expected to be completed in July,
1996. This building, which will be used primarily for warehouse space, is also
being leased from Mr. Channell, Sr. through 2005, with two five-year renewal
options to extend the term to 2015. See "Manufacturing Operations." Rental
expense in 1996 under the Company's existing facility in Temecula, California
is expected to be $650,000. Rental expense on the addition is expected to
commence upon completion of construction at an annual rate of $420,000. The
Company also leases an aggregate of approximately 40,000 square feet of
warehouse and regional sales office space in California, North Carolina,
Canada and the United Kingdom. The Company considers its current facilities to
be adequate for its operations.
REGULATION
The communications industry is subject to regulation in the United States
and other countries. Federal and state regulatory agencies regulate most of
the Company's domestic customers. On February 1, 1996, the United States
Congress passed the Telecommunications Act, which the President signed into
law on February 8, 1996. The Telecommunications Act lifts certain restrictions
on the ability of companies, including RBOCs and other customers of the
Company, to compete with one another and generally reduces the regulation of
the communications industry. Although the Company believes that the
deregulation of the communications industry may increase the Company's
opportunities to provide solutions for its customers' signal transmission
network needs, the effect of the Telecommunications Act on the market for the
Company's products is difficult to predict at this time.
35
<PAGE>
The Company is also subject to a wide variety of federal, state and local
environmental laws and regulations. The Company utilizes, principally in
connection with its thermoplastic manufacturing processes, a limited number of
chemicals which are classified as hazardous or similar substances. It is
difficult to predict what impact these environmental laws and regulations may
have on the Company in the future. Restrictions on chemical uses or certain
manufacturing processes could restrict the ability of the Company to operate
in the manner that it currently operates or is permitted to operate.
Management believes that the Company's operations are in compliance in all
material respects with current environmental laws and regulations.
Nevertheless, it is possible that the Company may experience releases of
certain chemicals to environmental media which could constitute violations of
environmental law (and have an impact on its operations) or which could cause
the incurrence of material cleanup costs or other damages. For these reasons,
the Company might become involved in legal proceedings involving exposure to
chemicals or the remediation of environmental contamination from past or
present operations. Because certain environmental laws impose joint, several,
strict and retrospective liability upon current owners or operators of
facilities from which there have been releases of hazardous substances, the
Company could be held liable for remedial measures or other damages (such as
liability for personal injury actions) at properties it owns or utilizes in
its operations, even if the contamination was not caused by the Company's
operations. See "Risk Factors--Environmental Matters."
LITIGATION
The Company is from time to time involved in ordinary routine litigation
incidental to the conduct of its business. The Company regularly reviews all
pending litigation matters in which it is involved and establishes reserves
deemed appropriate for such litigation matters. Management believes that no
presently pending litigation matters will have a material adverse effect on
the Company's financial statements taken as a whole or on its results of
operations.
BACKGROUND
The Company was incorporated in Delaware on April 23, 1996, as the successor
to the Predecessor. The Company's executive offices are located at 26040 Ynez
Road, Temecula, California 92591-9022, and its telephone number at that
address is (909) 694-9160.
36
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to the Company's
executive officers and directors and their ages as of March 31, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<C> <C> <S>
William H. Channell, Sr. ........... 68 Chairman of the Board and Chief
Executive Officer
William H. Channell, Jr. ........... 38 President and Director
Gary W. Baker....................... 52 Chief Financial Officer
Andrew M. Zogby..................... 35 Vice President, Marketing
Edward J. Burke..................... 40 Vice President, Engineering
Dale C. Wooding..................... 45 Vice President, Manufacturing
John B. Kaiser...................... 44 Vice President, Broadband Sales
George R. Bell...................... 42 Vice President, Telecommunications
Sales
Gary D. Williams.................... 49 Vice President, International Sales
Jacqueline M. Channell.............. 64 Secretary and Director
Arthur L. Addis..................... 76 Director
</TABLE>
In addition, the Company is currently evaluating other director candidates
and anticipates that two additional independent, non-management directors will
be added to the Board of Directors upon the closing of the Offering or as soon
thereafter as practicable. The Company's independent, non-management directors
will represent a majority on each of the Company's three-member Audit
Committee and Compensation Committee.
The directors of the Company are staggered into three classes, with the
directors in a single class elected at each annual meeting of stockholders to
serve for a term of three years or until their successors have been elected
and qualified. The authorized number of members of the Board of Directors is
currently seven. The executive officers of the Company serve at the pleasure
of the Board of Directors. In 1996, the Company changed the title of several
executive officers to more accurately reflect their roles and
responsibilities.
William H. Channell, Sr., the son of the Company's founder, James W.
Channell, will assume the position of Chairman of the Board in connection with
the Offering. Prior to the Offering, he had held the position of President and
Chief Executive Officer since 1966. Mr. Channell, Sr. is a co-trustee of the
Channell Family Trust, which is a principal stockholder of the Company, and is
the husband of Jacqueline M. Channell and the father of William H. Channell,
Jr. His initial term as a director expires in 1999.
William H. Channell, Jr. will assume the position of President in connection
with the Offering. He has been a Director of the Company since 1984. Since
joining the Company in 1979, Mr. Channell, Jr. has held the positions of
Executive Vice President, Director of Marketing and National Sales Manager.
Mr. Channell, Jr. is a principal stockholder of the Company and is the son of
William H. Channell, Sr. and Jacqueline M. Channell. His initial term as a
director expires in 1997.
Gary W. Baker has been the Company's Chief Financial Officer since 1985.
From 1983 to 1985, Mr. Baker was the corporate controller of Symbolics, Inc.,
a publicly traded manufacturer of computer products.
Andrew M. Zogby has been the Company's Vice President, Marketing since
March, 1996. Prior to joining the Company, Mr. Zogby was Director of Strategic
Marketing, Broadband Connectivity Group for ADC Telecommunications, a publicly
traded, telecommunications equipment supplier to both telephone and CATV
37
<PAGE>
network providers worldwide. He had been with ADC Telecommunications since
1990. Mr. Zogby has held various technical marketing positions in the
telecommunications equipment industry since 1984.
Edward J. Burke has been the Company's Vice President, Engineering since May
1996 and has served in various similar and other capacities with the Company
since 1984. Mr. Burke has held various technical positions in the
thermoplastic product engineering and tooling design field since 1978.
Dale C. Wooding has been the Company's Vice President, Manufacturing since
May 1996 and has served in various similar and other capacities with the
Company since 1985. Mr. Wooding has held various positions in the
manufacturing management field since 1976.
John B. Kaiser has been the Company's Vice President, Broadband Sales since
May, 1996. He held the position of Director of Marketing for the Company from
1987 to 1991. Between 1991 and his return to the Company, Mr. Kaiser held the
position of District Manager, Southern California, for the General Polymers
Division of Ashland Chemical, a thermoplastics distributor, where his
responsibilities included general management of district operations, including
sales, warehousing, procurement and logistics.
George R. Bell has been the Company's Vice President, Telecommunications
Sales since May 1996 and has served in various similar and other capacities
with the Company since 1989. Mr. Bell has held various sales and marketing
positions in the telecommunications and CATV equipment industry since 1981.
Gary D. Williams has been the Company's Vice President, International Sales
since May 1996 and has served in various similar and other capacities since
1988. Mr. Williams has held various positions in the CATV operations and
equipment field for over 20 years.
Jacqueline M. Channell has been the Company's Secretary and a Director since
1966. She is a co-trustee of the Channell Family Trust, which is a principal
stockholder of the Company, and is the wife of William H. Channell, Sr. and
the mother of William H. Channell, Jr. Mrs. Channell's term as a director
expires in 1998.
Arthur L. Addis has been a Director of the Company since 1981. Since 1974,
Mr. Addis has been the President of Arthur Addis & Associates, a business
consulting firm, and in such capacity has provided consulting services to the
Company since 1981. Mr. Addis has been a member of the boards of directors of
numerous other domestic and international companies in a variety of
industries. Mr. Addis's initial term as a director expires in 1998.
COMPENSATION OF DIRECTORS
Directors who are also officers of the Company (except as indicated below)
receive no additional compensation for their services as directors. The
Company's non-management directors receive compensation consisting of an
annual retainer fee of $15,000 plus $1,000 for attendance at any meeting of
the Board of Directors or any committee thereof, plus direct out-of-pocket
costs related to such attendance. Mrs. Channell also receives non-management
director retainer and attendance fees. Mrs. Channell does not receive separate
compensation for serving as the Company's Secretary. In addition, pursuant to
the Company's 1996 Incentive Stock Plan (as described below), (i) effective
upon consummation of the Offering, each non-management director (including
Mrs. Channell) will receive options to acquire 1,000 shares of the Company's
Common Stock with an exercise price equal to the initial public offering
price, and (ii) on the date of each of the Company's annual stockholder
meetings after the Offering, each non-management director (including non-
executive officers who serve as directors) serving on the Board of Directors
immediately following such meeting will receive options to acquire 1,000
shares of the Company's Common Stock with an exercise price equal to the
market value of the Common Stock on the date such options are granted. These
options will become exercisable at a rate of 33 1/3% per year commencing on
the first anniversary of the date of issuance and will have a term of 10
years.
38
<PAGE>
The Company also engages Arthur Addis & Associates, of which Mr. Addis is
the president, to perform management consulting services for the Company, for
which such firm receives certain fees. See "Certain Transactions."
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the annual and
long-term compensation of the Company's Chief Executive Officer and four
additional most highly compensated executive officers for the year ended
December 31, 1995 (collectively, the "Named Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------
AWARDS PAYOUTS
--------------------- ----------
SECURITIES
ANNUAL COMPENSATION OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND POSITIONS -------------------- COMPENSATION STOCK OPTIONS/ LTIP COMPENSATION
HELD WITH THE COMPANY SALARY($) BONUS($) ($)(1) AWARDS($) SARS(#) PAYOUTS($) ($)(2)
--------------------- ---------- --------- ------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
William H. Channell, $ 225,000 $ -- $-- $-- -- $-- $4,020
Sr.....................
Chairman of the Board
and Chief Executive
Officer(3)
William H. Channell, 350,000 542,000 -- -- -- -- 4,020
Jr.....................
President
Gary W. Baker........... 118,657 45,000 -- -- -- -- 4,020
Chief Financial Officer
Edward J. Burke......... 108,486 45,000 -- -- -- -- 4,020
Vice President,
Engineering
Dale C. Wooding......... 95,092 45,000 -- -- -- -- 4,020
Vice President,
Manufacturing
</TABLE>
- --------
(1) For each individual named, compensation excludes perquisites and other
personal benefits, that did not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus reported for such individual.
(2) Amounts reflect payments under the Company's Profit Sharing Plan (as
described below).
(3) The amounts set forth with respect to Mr. Channell, Sr. do not reflect (i)
license fees in the amount of $2.0 million paid to Mr. Channell, Sr. with
respect to 1995 sales of products relating to the Channell Patents or (ii)
payment of premiums by the Company on a life insurance policy for Mr.
Channell, Sr. under which the Company was previously the beneficiary. See
"Employment Contracts" and "Certain Transactions."
In connection with the Offering, each of Mr. Channell, Sr.'s and Mr.
Channell, Jr.'s annual base salary will be increased to $500,000. See
"Employment Contracts." Upon consummation of the Offering, Mr. Channell, Jr.
will also receive options to acquire 100,000 shares of Common Stock with an
exercise price equal to the initial public offering price per share, which
options will become exercisable in three equal annual installments beginning
on the first anniversary of the date of issuance. In addition, as an incentive
for continued services, the Company currently intends to grant a cash bonus of
$200,000 to each of Messrs. Baker, Wooding and Burke, which bonus will be
earned and payable in three equal installments on each of December 31, 1997,
1998 and 1999, provided such executive officer remains employed by the Company
and subject to continued payment in the event of the death of the executive
officer. The average tenure of these executive officers with the Company is 11
years.
1996 INCENTIVE STOCK PLAN
The Company's 1996 Incentive Stock Plan (the "Stock Plan") currently permits
the granting to the Company's key employees, directors and other service
providers of (i) options to purchase shares of the Company's Common Stock and
(ii) shares of the Company's Common Stock that are subject to certain vesting
and other restrictions ("Restricted Stock"). A maximum of 750,000 shares of
Common Stock have been reserved for issuance under the Stock Plan.
Approximately 525,000 "non-qualified" options to acquire shares of
39
<PAGE>
Common Stock will be granted to approximately 70 of the Company's employees
and directors (including 100,000 stock options being issued to William H.
Channell, Jr., the Company's President) at the time of the Offering with an
exercise price equal to the public offering price. These options will vest at
a rate of 33 1/3% per year beginning on the first anniversary of the date of
issuance and will have a term of 10 years.
The Stock Plan is administered by the Compensation Committee of the Board of
Directors, which will be composed entirely of two or more directors who are
"disinterested" within the meaning of Rule 16b-3 under the Exchange Act and
"outside directors" within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"). The aggregate number of stock
options or shares of Restricted Stock that may be granted to any single
participant under the Stock Plan during any fiscal year of the Company is
100,000. The purpose of the Stock Plan is to secure for the Company and its
stockholders the benefits arising from stock ownership by key employees,
directors and other service providers selected by the Compensation Committee.
All options granted under the Stock Plan are non-transferable and
exercisable in installments determined by the Compensation Committee, except
that each option is to be exercisable in minimum annual installments of 20%
commencing with the first anniversary of the option's grant date. Each option
granted has a term specified in the option agreement, but all options expire
no later than ten years from the date of grant. Options under the Stock Plan
may be designated as "incentive stock options" for federal income tax purposes
or as options which are not qualified for such treatment, or "non-qualified
stock options." In the case of incentive stock options, the exercise price
must be at least equal to the fair market value of the stock on the date the
option is granted. The exercise price of a non-qualified option need not be
equal to the fair market value of the stock at the date of grant, but may be
granted with any exercise price which is not less than 85% of the fair market
value at the time the option is granted, as the Compensation Committee may
determine. The aggregate fair market value (determined at the time the options
are granted) of the shares covered by incentive stock options granted to any
employee under the Stock Plan (or any other plan of the Company) which may
become exercisable for the first time in any one calendar year may not exceed
$100,000.
Upon exercise of any option, the purchase price must generally be paid in
full either in cash or by certified or cashier's check. However, in the
discretion of the Compensation Committee, the terms of a stock option grant
may permit payment of the purchase price by means of (i) cancellation of
indebtedness owed by the Company, (ii) delivery of shares of Common Stock
already owned by the optionee (valued at fair market value as of the date of
exercise), (iii) delivery of a promissory note secured by the shares issued,
(iv) delivery of a portion of the shares issuable upon exercise (i.e.,
exercise for the "spread" on the option payable in shares), or (v) any
combination of the foregoing or any other means permitted by the Compensation
Committee.
Any grants of Restricted Stock will be made pursuant to Restricted Stock
Agreements, which will provide for vesting of shares at a rate to be
determined by the Compensation Committee with respect to each grant of
Restricted Stock. Until vested, shares of Restricted Stock are generally non-
transferable and are forfeited upon termination of employment.
PROFIT SHARING AND SAVINGS PLANS
The Company maintains a qualified Profit Sharing Plan. Any employee who has
completed two years of employment with the Company is eligible to participate
in such plan. A participating employee is fully vested at all times in his or
her account, including any interest credited to the account. However, a
participating employee may not withdraw all of any portion of his or her
account prior to the date that he or she either (i) incurs total and permanent
disability or (ii) terminates employment with the Company. Annual
contributions by the Company to the Profit Sharing Plan are discretionary and
do not exceed the amount allowable for federal income tax purposes.
The Company also maintains a qualified "savings plan" pursuant to Section
401(k) of the Code. This plan allows any employee who has completed three
months of employment with the Company to contribute each pay period up to 15%
of his or her earnings (but not more than $9,500 annually) for investment in
annuity contracts
40
<PAGE>
and mutual funds. A participating employee is fully vested at all times in his
or her account, including any interest credited to the account. However, a
participating employee may not withdraw all of any portion of his or her
account prior to the date that he or she either (i) incurs total and permanent
disability or (ii) terminates employment with the Company. The Company is
under no obligation to make, and has not made, any contributions on behalf of
employees participating in this plan.
EMPLOYMENT CONTRACTS
The Company has entered into employment agreements with each of William H.
Channell, Sr. and William H. Channell, Jr., engaging them as the Chairman of
the Board and Chief Executive Officer and President of the Company,
respectively. For their service, each of Messrs. Channell, Sr. and Channell,
Jr. is entitled to receive an annual salary of $500,000, subject to cost of
living increases. In addition, each executive is entitled to participate in
the Stock Plan, the Profit Sharing Plan and the Incentive Plan (described
below). The employment agreements provide that each executive is entitled to
certain other benefits paid for by the Company, including an automobile
allowance, health insurance and sick leave, in accordance with the Company's
customary practices for senior executive officers. In the case of Mr.
Channell, Sr., such benefits also include (i) during the term of the
agreement, the payment of premiums for a term disability policy providing for
$250,000 in annual benefits in the case of his temporary or permanent
disability, and (ii) during the lifetime of Mr. Channell, Sr. and his wife,
Jacqueline M. Channell, medical insurance for each of Mr. and Mrs. Channell
comparable to that provided to the Company's senior executive officers,
subject to a premium reimbursement obligation in the case of the medical
insurance provided to Mrs. Channell. Each of the employment agreements has a
term of five years. In the event either executive is terminated without cause
(as defined in the employment agreements), he is entitled to receive, as a
severance benefit, an amount equal to three times his annual base salary, and
any options or Restricted Stock previously granted to such executive will
become immediately vested.
In addition, prior to the Offering, the Company maintained and paid the
premiums with respect to a $1.5 million whole life insurance policy for Mr.
Channell, Sr., under which the Company was named as the beneficiary. In
connection with the Offering, this policy will be transferred to Mr. Channell,
Sr. in consideration of the payment by Mr. Channell, Sr. to the Company of an
amount equal to the estimated $328,000 cash surrender value of this policy as
of the closing of the Offering, and the beneficiary under this policy will be
redesignated as Mrs. Channell. Thereafter, the Company will continue to pay a
portion of the premiums with respect to this policy during Mr. Channell, Sr.'s
lifetime.
INCENTIVE COMPENSATION PLAN
Effective beginning in the Company's 1996 fiscal year, the Board of
Directors adopted the Company's 1996 Performance-Based Annual Incentive
Compensation Plan (the "Incentive Plan"). Eligible participants consist of key
employees of and other service providers to the Company. The Incentive Plan is
administered by the Compensation Committee of the Board of Directors. The
amount of awards granted under the Incentive Plan are determined based on an
objective computation of the actual performance of the Company relative to
pre-established performance goals. Measures of performance may include level
of sales, EBITDA, net income, income from operations, earnings per share,
return on sales, expense reductions, return on capital, stock appreciation,
return on equity, invention, design or development of proprietary products or
improvements thereto (patented or otherwise), or sales of such proprietary
products or improvements or profitability achieved from sales of proprietary
products or improvements. Awards under the Incentive Plan are payable in cash
or, at the election of the Compensation Committee, Common Stock of the
Company. The Compensation Committee may establish a bonus pool from which all
awards under the Incentive Plan may be granted as well as individual, non-
bonus pool awards. No participant in the Incentive Plan may receive awards
under such plan during any fiscal year of the Company in excess of $1,000,000
or 100,000 shares of Common Stock.
41
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of the date of this
Prospectus, including beneficial ownership by the Selling Stockholder, each
person (or group of affiliated persons) who is known by the Company to own
beneficially more than 5% of the Common Stock, each of the Company's
directors, each of the Named Officers, and all directors and executive
officers as a group. Except as otherwise noted, the Company believes that the
persons named in the table have sole voting and investment power with respect
to all shares of Common Stock shown as beneficially owned by them. Information
regarding percentage ownership after the Offering assumes no exercise of the
Underwriters' over-allotment option.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(2) SHARES AFTER OFFERING(2)
----------------------- BEING --------------------
NAME(1) SHARES PERCENT OFFERED(3) SHARES PERCENT(3)
------- ------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
William H. Channell, Sr.
and Jacqueline M.
Channell,
as co-trustees of the
Channell Family
Trust(4)............... 3,620,830 59.0% 400,000 3,220,830 36.4%
William H. Channell,
Jr..................... 1,534,250 25.0 -- 1,534,250 17.4
Carrie S. Rouveyrol(5).. 490,960 8.0 -- 490,960 5.6
The Taylor Family
Trust(5)............... 490,960 8.0 -- 490,960 5.6
Gary W. Baker........... -- -- -- -- --
Edward J. Burke......... -- -- -- -- --
Dale C. Wooding......... -- -- -- -- --
Arthur L. Addis......... -- -- -- -- --
All current executive
officers and directors
as a group (11
persons)............... 5,155,080 84.0% 400,000 4,755,080 53.8%
</TABLE>
- --------
(1) The address for each stockholder is 26040 Ynez Road, Temecula, California
92591-9022.
(2) Upon the consummation of the Offering, the Company will issue to certain
employees and directors options to acquire approximately 525,000 shares of
Common Stock (including 100,000 stock options being issued to William H.
Channell, Jr., the Company's President) with an exercise price equal to
the initial public offering price. These options will become exercisable
in three equal annual installments beginning on the first anniversary of
the date of issuance. This chart does not reflect any of the portion of
these options that will be issued to certain individuals listed in the
chart.
(3) In the event the Underwriters' over-allotment option is exercised in full,
the Channell Family Trust will sell an additional 465,000 shares of Common
Stock, thereby reducing its percentage ownership after the Offering to
31.2% and reducing the percentage ownership of the Company's current
executive officers and directors as a group to 48.5%.
(4) William H. Channell, Sr., the Company's Chairman of the Board and Chief
Executive Officer, and Jacqueline M. Channell, the secretary and a
director of the Company, are the sole trustees of the Channell Family
Trust and together have sole voting and dispositive power over the shares
of Common Stock owned by such trust.
(5) Ms. Rouveyrol and Michele Taylor, who is a co-trustee of the Taylor Family
Trust, are daughters of William H. Channell, Sr. and Jacqueline M.
Channell. Ms. Taylor and her husband, Roy Taylor, are the sole trustees of
the Taylor Family Trust and together have sole voting and dispositive
power over the shares of Common Stock owned by such trust.
42
<PAGE>
CERTAIN TRANSACTIONS
The Company leases approximately 160,000 square feet of manufacturing,
warehouse and office space in Temecula, California, from William H. Channell,
Sr., a principal stockholder and the Chairman of the Board and Chief Executive
Officer of the Company. The term of the lease is through December 31, 2005,
with two five-year renewal options. The original monthly rental payment
(commencing in 1990) is $54,182, and the lease provides for annual cost of
living increases beginning in 1993. For the 1993-1996 period, the lease was
amended to waive the cost of living increases. An adjacent 100,000 square foot
building is also being constructed and is expected to be completed in July,
1996. This building is also being leased from Mr. Channell, Sr. through 2005,
with two five-year renewal options, requiring monthly rental payments of
$35,000. The Company believes that the terms of these leases are no less
favorable to the Company than could be obtained from an independent third
party.
Prior to the Offering, Mr. Channell, Sr. received from the Company a 10%
license fee on the sale of certain products utilizing the Channell Patents.
For 1993, 1994 and 1995, the expense for these license fees totaled
$1.0 million, $1.6 million and $2.0 million, respectively. Prior to the
consummation of the Offering, the Channell Patents will be sold to the
Company, the license fee arrangement between the Company and Mr. Channell, Sr.
will be terminated and, thereafter, no license fees will be paid to Mr.
Channell, Sr. or any other person with respect to the Channell Patents. See
"Reorganization and Termination of S Corporation Status" and "Use of
Proceeds."
Prior to the consummation of the Offering, the Company maintained and paid
the premiums with respect to a $1.5 million whole life insurance policy for
Mr. Channell, Sr., under which the Company was named as the beneficiary. In
connection with the Offering, this policy will be transferred to Mr. Channell,
Sr. in consideration of the payment by Mr. Channell, Sr. to the Company of an
amount equal to the estimated $328,000 cash surrender value of this policy as
of the closing of the Offering, and the beneficiary under this policy will be
redesignated as Mr. Channell, Sr.'s wife, Jacqueline M. Channell. Thereafter,
the Company will continue to pay a portion of the premiums with respect to
this policy during Mr. Channell, Sr.'s lifetime.
During 1994, Mr. Channell, Sr. made a non-interest bearing loan of $100,000
to the Company, which loan was repaid in full as of March 31, 1996.
The Company engages Arthur Addis & Associates, the President of which is
Arthur L. Addis, a director of the Company, to provide management consulting
services to the Company. For these services, the Company paid this firm a fee
of $91,000, $92,000 and $60,000 in 1993, 1994 and 1995, respectively. The
Company currently pays this firm an annual retainer fee of $60,000, payable
monthly. The Company believes that the fees paid to Arthur Addis & Associates
are fair and reasonable to the Company.
43
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Pursuant to the terms of the Company's Restated Certificate of
Incorporation, the Company's authorized capital stock consists of 19,000,000
shares of Common Stock, $.01 par value per share, and 1,000,000 shares of
Preferred Stock, $.01 par value per share. The following description of the
Company's capital stock does not purport to be complete or to give full effect
to the provisions of statutory or common law and is in all respects qualified
by reference to the applicable provisions of the Company's Restated
Certificate of Incorporation.
COMMON STOCK
Immediately prior to the closing of the Offering, the Company's issued and
outstanding capital stock will consist of 6,137,000 shares of Common Stock
owned by four stockholders, all of whom are members of, or are controlled by
members of, the Channell family.
The holders of Common Stock are entitled to one vote for each share held.
Shares of Common Stock may not be voted cumulatively. All holders of Common
Stock are entitled to receive such dividends, if any, as may be declared from
time to time by the Company's Board of Directors in its discretion from funds
legally available therefor, and upon liquidation or dissolution are entitled
to receive all assets available for distribution to the stockholders, in each
case subject to the preferences that may be applicable to any outstanding
Preferred Stock. The Common Stock has no preemptive, redemption, sinking fund,
conversion or other subscription rights. All of the outstanding shares of
Common Stock are, and the shares of Common Stock offered by the Company in the
Offering will be, when issued and paid for, fully paid and nonassessable. The
rights, preferences and privileges of holders of Common Stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of Preferred Stock that the Company may designate and issue in the
future.
PREFERRED STOCK
There are currently no shares of the Company's Preferred Stock outstanding.
The Company's Board of Directors is authorized to issue from time to time up
to 1,000,000 shares of Preferred Stock in one or more series, to determine the
rights, preferences, privileges and restrictions with respect thereto and to
fix the number and designation of shares constituting any series, in each case
without further stockholder approval. The issuance of shares of Preferred
Stock, while potentially providing desirable flexibility in connection with
possible acquisitions or other corporate purposes, could have the effect of
making it more difficult for a third party to acquire control of the Company.
The Company has no present intention to issues shares of Preferred Stock.
ELECTION OF DIRECTORS; STAGGERED BOARD
Pursuant to the Company's Restated Certificate of Incorporation, the
Company's Board of Directors is staggered into three classes. At each annual
meeting of stockholders, the directors in a single class will be elected to
serve as directors for a term of three years. Following the closing of the
Offering, the Company expects that the Board of Directors will be comprised of
six members. The initial assignment of existing and prospective directors to
classes is indicated above under "Management--Executive Officers and
Directors."
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law (the "Delaware Law"), an anti-takeover law.
In general, Section 203 of the Delaware Law prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder, subject to
certain exceptions such as the approval of the board of directors and of the
holders of at least two-thirds of the outstanding shares of voting stock not
owned by the interested stockholder. The existence of this provision would be
expected to have the effect of discouraging takeover attempts, including
attempts that might result in a premium over the market price for the shares
of Common Stock held by stockholders.
44
<PAGE>
In addition, pursuant to the Company's Restated Certificate of Incorporation
and Bylaws, (i) any action required or permitted to be taken by the Company's
stockholders may be taken only at a duly called annual or special meeting of
the stockholders, rather than by written consent of the stockholders, (ii) a
special meeting of the Company's stockholders may only be called by the
Company's Board of Directors, Chairman of the Board or Chief Executive
Officer, (iii) the Company's stockholders must comply with certain advance
notice procedures with regard to the nomination of candidates for election as
directors or for stockholder proposals to be submitted at stockholder
meetings, and (iv) directors of the Company may only be removed for cause and
only by the affirmative vote of 75% of the voting power of the Company or a
majority of the Board of Directors. Such provisions could have the effect of
making it more difficult for a third party to effect a change in the control
of the Board of Directors and therefore may discourage another person or
entity from making a tender offer for the Company's Common Stock, including
offers at a premium over the market price of the Common Stock, and might
result in a delay in changes in control of management. In addition, these
provisions could have the effect of making it more difficult for proposals
favored by the stockholders to be presented for stockholder consideration.
The Company has also included in its Restated Certificate of Incorporation
provisions to eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty to the extent
permitted by the Delaware Law and to indemnify its directors and officers to
the fullest extent permitted by Section 145 of the Delaware Law. The Company
has also entered into indemnity agreements with each of its executive officers
and directors providing, among other things, that the executive officer or
director shall be indemnified to the fullest extent permitted by applicable
law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Boston
Equiserve L.P., a joint venture of the First National Bank of Boston, N.A. and
State Street Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 8,837,000 shares of
Common Stock outstanding. Of these shares, the 3,100,000 shares being offered
hereby (3,565,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable under the Securities Act, subject
to observance of the volume limitations described below in the case of shares
beneficially owned by "affiliates" of the Company.
The remaining 5,737,000 shares of Common Stock outstanding (5,272,000 shares
if the Underwriters' over-allotment option is exercised in full) are
"restricted securities" within the meaning of Rule 144 under the Securities
Act ("Restricted Shares"). Restricted Shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
the Securities Act, including Rule 144 promulgated thereunder, which is
summarized below. Sales of unrestricted shares or the Restricted Shares in the
public market could adversely affect the market price of the Common Stock.
The Company and each of the Channell Family Trust, William H. Channell, Jr.,
Carrie S. Rouveyrol and the Taylor Family Trust have entered into contractual
"lock-up" agreements with the Representatives of the Underwriters providing
that, except for shares sold pursuant to the Offering, they will not offer,
sell, contract to sell or otherwise dispose of the shares of Common Stock of
the Company owned by them for a period of 180 days after the effective date of
the Offering without the prior written consent of Schroder Wertheim & Co.
Incorporated, subject to certain exceptions. Following the 180-day lock-up
period, 5,737,000 shares (5,272,000 shares if the Underwriters' over-allotment
option is exercised in full) will be eligible for sale in the public market
pursuant to Rule 144 or other exemptions from the registration requirements of
the Securities Act. Shares eligible to be sold by affiliates pursuant to Rule
144 are subject to the volume restrictions described below. In general, under
Rule 144, a holder who is an "affiliate" of the Company will be able sell,
without registration under the Securities Act, within any three-month period,
a number of shares of Common Stock that does not exceed the greater of 1% of
the total number of outstanding shares of Common Stock or the average weekly
trading volume
45
<PAGE>
during the four calendar weeks preceding the sale. These volume limits will
not apply to a sale by a non-affiliate who has held his or her stock for more
than three years or to any sale that is registered under the Securities Act.
Ms. Rouveyrol and the Taylor Family Trust have agreed that, during the two-
year period following the date of this Prospectus, unless otherwise permitted
by the Representatives, any sales of shares of Common Stock by them will be
subject to the volume limitations of Rule 144 of the Securities Act, without
regard to whether they are otherwise legally obligated to comply with such
limitations. See "Underwriting."
46
<PAGE>
UNDERWRITING
The Underwriters named below have severally agreed, subject to certain
conditions, to purchase from the Company and the Selling Stockholder the
aggregate number of shares of Common Stock set forth opposite their respective
names.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Schroder Wertheim & Co. Incorporated............................
Smith Barney Inc. ..............................................
-------
Total.........................................................
=======
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all the 3,100,000 shares of Common Stock offered hereby, if any are
purchased. Schroder Wertheim & Co. Incorporated and Smith Barney Inc., as
representatives (the "Representatives") of the several Underwriters, have
advised the Company and the Selling Stockholder that the Underwriters propose
to offer the shares to the public initially at the public offering price set
forth on the cover page of this Prospectus; that the Underwriters propose
initially to offer a concession not in excess of $ per share to certain
dealers, including the Underwriters; that the Underwriters and such dealers
may initially allow a discount not in excess of $ per share to other
dealers; and that the initial public offering price and the concession and
discount to dealers may be changed by the Representatives after the Offering.
The Selling Stockholder has granted to the Underwriters an option, expiring
at the close of business on the 30th day after the date of the Underwriting
Agreement, to purchase up to an additional 465,000 shares of Common Stock, at
the initial public offering price less underwriting discounts and commissions,
all as set forth on the cover page of this Prospectus. The Underwriters may
exercise the option only to cover over-allotments, if any, in the sale of
shares of Common Stock in the Offering. To the extent that the Underwriters
exercise this option, each Underwriter will be committed, subject to certain
conditions, to purchase a number of the additional shares proportionate to
such Underwriter's initial commitment.
The Company and each of the Channell Family Trust, William H. Channell, Jr.,
Carrie S. Rouveyrol and the Taylor Family Trust have agreed not to offer to
sell, grant any option to purchase or otherwise dispose of any shares of
Common Stock held by them for a period of 180 days after the date of this
Prospectus without the prior written consent of Schroder Wertheim & Co.
Incorporated, subject to certain exceptions. In addition, Ms. Rouveyrol and
the Taylor Family Trust have agreed that, during the two-year period following
the date of this Prospectus, unless otherwise permitted by the
Representatives, any sales of shares of Common Stock by them will be subject
to the volume limitations of Rule 144 of the Securities Act, without regard to
whether they are otherwise legally obligated to comply with such limitations.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority.
The Common Stock has been approved for quotation and trading on the Nasdaq
National Market under the symbol "CHNL."
Prior to the Offering, there has been no public market for the Company's
Common Stock. The initial public offering price will be negotiated between the
Company and the Representatives. Among the factors to be considered in
determining the initial public offering price, in addition to prevailing
market conditions, will be
47
<PAGE>
the Company's historical performance, estimates of the business potential and
earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
The Company, the Selling Stockholder and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by the law firm of Irell & Manella LLP, Los Angeles, California, and
certain legal matters will be passed upon for the Underwriters by the law firm
of Troop Meisinger Steuber & Pasich LLP, Los Angeles, California.
EXPERTS
The financial statements of the Company as of December 31, 1994 and December
31, 1995, and for each of the three years in the period ended December 31,
1995, have been included herein and in the Registration Statement of which
this Prospectus is a part in reliance upon the reports of Grant Thornton LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants
and quarterly reports containing unaudited financial information for each of
the first three quarters of each fiscal year.
48
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants........................ F-2
Balance Sheets as of December 31, 1994, December 31, 1995 and March 31,
1996 (unaudited)......................................................... F-3
Statements of Income for the years ended December 31, 1993, December 31,
1994 and December 31, 1995 and for the three months ended March 31, 1995
and 1996 (unaudited)..................................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1993,
December 31, 1994 and December 31, 1995 and for the three months ended
March 31, 1996 (unaudited)............................................... F-5
Statements of Cash Flows for the years ended December 31, 1993, December
31, 1994 and December 31, 1995 and for the three months ended March 31,
1995 and 1996 (unaudited)................................................ F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Channell Commercial Corporation
We have audited the accompanying balance sheets of Channell Commercial
Corporation as of December 31, 1994 and 1995, and the related statements of
income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1995. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Channell Commercial
Corporation as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Los Angeles, California
May 9, 1996 (except for Notes N and O as to
which the date is June 14, 1996)
F-2
<PAGE>
CHANNELL COMMERCIAL CORPORATION
BALANCE SHEETS
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, MARCH 31, 1996
--------------- ------------------
PRO
FORMA
(NOTE
1994 1995 HISTORICAL B)
------- ------- ---------- -------
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash..................................... $ 797 $ 1,375 $ 390 $ 390
Accounts receivable (Note F)............. 4,358 4,122 6,688 6,688
Accounts receivable--related party....... -- -- -- 56
Inventories (Notes C and F).............. 2,605 2,609 2,584 2,584
Deferred income taxes.................... -- -- -- 146
Prepaid expenses......................... 333 396 342 342
------- ------- ------- -------
Total current assets................... 8,093 8,502 10,004 10,206
PROPERTY AND EQUIPMENT, at cost, net
(Notes D and F)........................... 9,314 10,062 10,132 10,132
DEFERRED INCOME TAXES...................... -- -- -- 672
OTHER ASSETS............................... 544 539 519 519
------- ------- ------- -------
TOTAL ASSETS............................. $17,951 $19,103 $20,655 $21,529
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES
Accounts payable......................... $ 1,303 $ 1,251 $ 2,555 $ 2,555
Accrued expenses......................... 1,046 972 773 773
Accrued license fees--related party
(Note J)................................ 394 471 475 --
Current maturities of long-term
obligations (Note F).................... 848 860 832 832
Distributions payable to stockholders.... 1,795 674 706 16,306
Income taxes payable..................... 312 49 -- --
------- ------- ------- -------
Total current liabilities.............. 5,698 4,277 5,341 20,466
LONG-TERM OBLIGATIONS (Note F)............. 2,836 2,353 2,051 2,051
STOCKHOLDERS' EQUITY (DEFICIT) (Note N)
Preferred stock, par value $.01 per
share, authorized--1,000,000 shares,
none issued and outstanding............. -- -- -- --
Common stock, par value $.01 per share,
authorized--19,000,000 shares; issued
and outstanding--
6,137,000 shares........................ 61 61 61 61
Additional paid-in capital............... 26 26 26 (2,543)
Retained earnings........................ 9,330 12,386 13,176 1,494
------- ------- ------- -------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)..... 9,417 12,473 13,263 (988)
------- ------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................. $17,951 $19,103 $20,655 $21,529
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CHANNELL COMMERCIAL CORPORATION
STATEMENTS OF INCOME
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS
YEARS ENDED DECEMBER ENDED
31, MARCH 31,
----------------------- --------------
1993 1994 1995 1995 1996
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Net sales............................... $23,713 $34,504 $40,972 $9,225 $10,279
Cost of goods sold...................... 14,834 19,750 23,059 5,487 5,738
------- ------- ------- ------ -------
Gross profit........................ 8,879 14,754 17,913 3,738 4,541
Commission income....................... 686 904 1,098 262 230
------- ------- ------- ------ -------
9,565 15,658 19,011 4,000 4,771
Operating expenses
Selling................................ 3,767 4,952 5,600 1,339 1,553
General and administrative............. 1,100 1,445 1,707 448 370
License fees--related party (Note J)... 1,039 1,560 2,035 458 531
Research and development............... 486 518 498 122 128
------- ------- ------- ------ -------
6,392 8,475 9,840 2,367 2,582
------- ------- ------- ------ -------
Income from operations.............. 3,173 7,183 9,171 1,633 2,189
Interest expense........................ 166 156 339 90 65
------- ------- ------- ------ -------
Income before income taxes.......... 3,007 7,027 8,832 1,543 2,124
Income taxes (Note G)................... 69 429 349 61 122
------- ------- ------- ------ -------
Net income.......................... $ 2,938 $ 6,598 $ 8,483 $1,482 $ 2,002
======= ======= ======= ====== =======
PRO FORMA INFORMATION (UNAUDITED) (Note
B):
Historical income before income taxes.. $ 3,007 $ 7,027 $ 8,832 $1,543 $ 2,124
Pro forma income taxes................. 1,191 2,898 3,455 616 845
------- ------- ------- ------ -------
Pro forma net income................... $ 1,816 $ 4,129 $ 5,377 $ 927 $ 1,279
======= ======= ======= ====== =======
Pro forma net income per share......... $ 0.72 $ 0.17
======= =======
Pro forma weighted average shares
outstanding........................... 7,451 7,451
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CHANNELL COMMERCIAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------ ---------- --------
<S> <C> <C> <C>
Balance, January 1, 1993............................ $61 $26 $ 4,904
Net income.......................................... -- -- 2,938
Dividends declared ($0.17 per share)................ -- -- (1,048)
--- --- -------
Balance, December 31, 1993.......................... 61 26 6,794
Net income.......................................... -- -- 6,598
Liquidating dividend--Canadian corporation.......... -- -- (298)
Dividends declared ($0.61 per share)................ -- -- (3,764)
--- --- -------
Balance, December 31, 1994.......................... 61 26 9,330
Net income.......................................... -- -- 8,483
Dividends declared ($0.88 per share)................ -- -- (5,427)
--- --- -------
Balance, December 31, 1995.......................... 61 26 12,386
Dividends declared ($0.20 per share)................ -- -- (1,212)
Net income (unaudited).............................. -- -- 2,002
--- --- -------
Balance, March 31, 1996 (unaudited)................. $61 $26 $13,176
=== === =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CHANNELL COMMERCIAL CORPORATION
STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS
YEARS ENDED DECEMBER ENDED
31, MARCH 31,
------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income...................... $ 2,938 $ 6,598 $ 8,483 $ 1,482 $ 2,002
Non-cash items included in net
income:
Depreciation and amortization.. 776 1,072 1,412 415 402
Disposal of unproductive
assets........................ 376 80 -- -- --
(Increase) decrease in assets:
Accounts receivable............ (596) (1,527) 236 (873) (2,566)
Inventories.................... (163) (709) (4) (710) 25
Prepaid expenses............... (43) (70) (63) 155 54
Other.......................... -- (8) 6 1 (80)
Increase (decrease) in
liabilities:
Accounts payable............... 385 25 (52) 1,120 1,304
Accrued expenses............... 550 436 3 (512) (195)
Income taxes payable........... (42) 304 (263) (353) (49)
------- ------- ------- ------- -------
Net cash provided by operating
activities....................... 4,181 6,201 9,758 725 897
------- ------- ------- ------- -------
INVESTING ACTIVITIES:
Acquisition of property and
equipment...................... (1,480) (5,851) (2,160) (1,030) (472)
Other........................... 5 (29) (1) -- --
------- ------- ------- ------- -------
Net cash used in investing
activities....................... (1,475) (5,880) (2,161) (1,030) (472)
------- ------- ------- ------- -------
FINANCING ACTIVITIES:
Liquidating dividend--Canadian
corporation.................... -- (298) -- -- --
Repayment of long-term
obligations.................... (1,691) (614) (877) (205) (230)
Dividends paid.................. (1,604) (1,969) (6,547) (515) (1,180)
Proceeds from issuance of long-
term debt...................... 194 3,279 405 800 --
------- ------- ------- ------- -------
Net cash (used in) provided by
financing activities............. (3,101) 398 (7,019) 80 (1,410)
------- ------- ------- ------- -------
(Decrease) increase in cash....... (395) 719 578 (225) (985)
Cash, beginning of period......... 473 78 797 797 1,375
------- ------- ------- ------- -------
Cash, end of period............... $ 78 $ 797 $ 1,375 $ 572 $ 390
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
NOTE A--DESCRIPTION OF BUSINESS
The Company is a designer, manufacturer and marketer of precision-molded
thermoplastic enclosures used by cable television operators and local
telephone companies.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition--The Company recognizes revenue from product sales and
commission income at the time of shipment.
Cash--For purposes of reporting cash flows, cash and its equivalents include
cash on hand, cash in banks and short-term investments with original
maturities of 90 days or less.
Combination--The Company purchased substantially all of the assets of
Channell Commercial Canada Ltd. (CCCL) as of December 31, 1993. CCCL was
liquidated in 1994. The Canadian operations are continued by the Company as a
separate division. Prior to the combination, CCCL was owned by the majority
stockholder of the Company. For periods prior to the combination, the accounts
of CCCL have been included in the accompanying financial statements in a
manner similar to a pooling of interests.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method of accounting.
Depreciation and amortization--Property, equipment and improvements are
stated at cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Capital lease assets are amortized
using the straight-line method over the useful life of the asset. Expenditures
for all maintenance and repairs are charged against income. Additions, major
renewals and replacements that increase the useful lives of assets are
capitalized. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the lease term or the estimated
useful life of the leasehold improvements.
Compensation for paid absences--The Company accrues its liability for
estimated employee compensation for future absences which are related to
services already provided. An estimated liability for future absences in the
amount of $351 and $450 is included with accrued expenses at December 31, 1994
and 1995, respectively.
Fair value of financial instruments--The carrying value of financial
instruments potentially subject to valuation risk (principally consisting of
cash, accounts receivable, accounts payable and long-term obligations)
approximate fair value.
Income taxes--Effective February 1, 1990, the Company and its stockholder
elected to be taxed under Section 1361 of the Internal Revenue Code as an "S"
Corporation. Under these provisions, the Company does not pay federal
corporate income taxes on its taxable income. Instead, the stockholders are
individually liable for federal income taxes based on the Company's taxable
income. This election is also valid for state income tax reporting; however, a
provision for state income taxes is required based on a 1.5% tax rate.
Estimates--In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except per share data)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
New Accounting Standards--In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." Statement No. 121 provides specific guidance regarding when
impairment of long-lived assets such as plant, equipment and certain
intangibles, including goodwill, should be recognized and how impairment
losses of such assets should be measured. Statement No. 121 is effective for
fiscal years beginning after December 15, 1995. The Company has adopted
Statement No. 121 for 1996 and expects that the impact on its statements of
operations and financial position will not be material.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation." Statement No. 123 permits
a company to choose either a new fair value based method of accounting for its
stock based compensation arrangements or to comply with the current APB
Opinion 25 intrinsic value based method, adding pro forma disclosures of net
income and income per share computed as if the fair valued based method had
been applied in the financial statements. Statement No. 123 is effective for
fiscal years beginning after December 15, 1995. The Company has chosen to
retain APB Opinion 25 and in 1996 will provide pro forma disclosures of net
income and income per share.
Unaudited financial statements--The balance sheet as of March 31, 1996 and
the related statements of income, stockholders' equity and cash flows for the
three months ended March 31, 1995 and 1996 were prepared from the Company's
books and records without audit. However, in the opinion of management, such
information includes all adjustments (consisting of normal accruals), which
are necessary to properly reflect the financial position at March 31, 1996 and
the results of operations and cash flows for the three months ended March 31,
1995 and 1996. The results of operations for the three months ended March 31,
1996 are not necessarily indicative of the results to be expected for the
year.
Pro forma financial information (unaudited)--The pro forma income statement
presentation reflects a provision for income taxes as if the Company had
always been a C corporation using an assumed effective tax rate of
approximately 41% less tax credits. The pro forma March 31, 1996 balance sheet
presentation gives effect to (i) the termination of the Company's S
Corporation status, (ii) the effects of $12,500 of planned distributions to
stockholders, (iii) the acquisition by the Company of certain patents (the
"Channell Patents") previously owned by William H. Channell, Sr., Chairman of
the Board and Chief Executive Officer, and other stockholders for an aggregate
consideration of $3.1 million, which will be paid initially through borrowings
under the Company's bank line and then repaid from the net proceeds of the
Company's proposed public offering of common stock, and (iv) the contribution
by Mr. Channell, Sr. of license fees attributable to product sales in 1996
relating to the Channell Patents.
Pro forma net income per share has been computed by dividing pro forma net
income by the pro forma weighted average shares outstanding. Pro forma
weighted average shares outstanding includes 1,314 shares to be offered in the
contemplated public offering at an assumed price of $13.00 per share, the net
proceeds of which will be used to fund the distributions to existing
stockholders in connection with the termination of the Company's S Corporation
status and to acquire the Channell Patents.
The effect of the Company's use of a portion of the net proceeds of the
contemplated public offering to repay approximately $2.9 million of bank
indebtedness outstanding as of March 31, 1996 has not been reflected in pro
forma net income or pro forma net income per share because the impact is not
material.
F-8
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except per share data)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
A reconciliation of pro forma income taxes to the Federal statutory rate is
as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... 34% 34% 34%
State income taxes, net of Federal tax benefit.............. 6 6 6
Other....................................................... -- 1 (1)
--- --- ---
40% 41% 39%
=== === ===
</TABLE>
Pro forma deferred income taxes as of March 31, 1996 result from temporary
differences in the financial statement and income tax basis of assets and
liabilities. The sources of these differences and the tax effect of each is as
follows:
<TABLE>
<S> <C>
Patents............................................................ $1,209
Accounts receivable................................................ 46
Inventory.......................................................... 100
Depreciation....................................................... (537)
------
$ 818
======
</TABLE>
The breakdown of such pro forma deferred income taxes between current and
non-current is as follows:
<TABLE>
<S> <C>
Current............................................................... $146
Non-current........................................................... 672
----
$818
====
</TABLE>
NOTE C--INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1994 1995 1996
------ ------ ---------
<S> <C> <C> <C>
Raw materials...................................... $ 513 $1,111 $1,094
Work-in-process.................................... 1,064 744 732
Finished goods..................................... 1,028 754 758
------ ------ ------
$2,605 $2,609 $2,584
====== ====== ======
</TABLE>
F-9
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except per share data)
NOTE D--PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
---------------- USEFUL
1994 1995 LIVES
------- ------- -----------
<S> <C> <C> <C>
Machinery and equipment..................... $11,167 $12,889 3-10 years
Office furniture and equipment.............. 925 1,059 3- 7 years
Leasehold improvements...................... 1,866 1,893 15-20 years
Construction in progress.................... 714 930 --
------- -------
14,672 16,771
Less accumulated depreciation and amortiza-
tion....................................... (5,358) (6,709)
------- -------
$ 9,314 $10,062
======= =======
</TABLE>
NOTE E--LINE OF CREDIT
The Company has in place a $3,250 line of credit with a bank for working
capital purposes. This line of credit bears interest at the bank's reference
rate, payable monthly. The line of credit expires on May 31, 1996. The Company
is subject to various covenants identical to those described in Note F. No
balances were outstanding at December 31, 1994 and 1995. This line of credit is
collateralized by the equipment financed by the bank. The Company has
renegotiated its line of credit. See Note O.
NOTE F--LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ ------
<S> <C> <C>
Equipment line of credit with a bank, for equipment
acquisitions, collateralized by accounts receivable,
inventory, the equipment financed by the bank and
certain other items of personal property, with interest
at the bank's reference rate plus 0.5% (effective rate
at December 31, 1995 of 9.0%) payable $61 per month,
through 2000. This line allows borrowings up to $4,300
including standby letters of credit up to $500 (See
Note O)................................................ $2,564 $2,282
Non-revolving line of credit with a bank, allowing
borrowings up to $1,000, collateralized by accounts
receivable, inventory, the equipment financed by the
bank and certain other items of personal property, with
interest at the bank's reference rate plus 0.5%
(effective rate at December 31, 1995 of 9.0%) payable
$13 per month, due through 2000........................ 972 806
Notes payable to stockholder, due on demand............ 120 120
Other.................................................. 28 5
------ ------
3,684 3,213
Less current maturities................................ (848) (860)
------ ------
$2,836 $2,353
====== ======
</TABLE>
F-10
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except per share data)
NOTE F--LONG-TERM OBLIGATIONS--CONTINUED
Maturities of long-term obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996........................................................... $ 860
1997........................................................... 798
1998........................................................... 732
1999........................................................... 516
2000........................................................... 187
Thereafter...................................................... 120
------
$3,213
======
</TABLE>
The lines of credit contain various financial and operating covenants which,
among other things, impose certain limitations on the Company's ability to
incur additional indebtedness, merge or consolidate, sell its assets, make
certain investments or, under certain circumstances, pay dividends. The
Company is also required to comply with covenants related to tangible net
worth and other financial ratios.
NOTE G--INCOME TAXES
The Company and its stockholders have elected to be taxed as an "S"
Corporation. Accordingly, the Company does not pay federal corporate income
taxes.
The components of income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
State.................................................... $ 68 $116 $130
Research and development credit......................... (3) (9) (8)
Manufacturer's credit................................... -- -- (86)
---- ---- ----
Total state taxes....................................... 65 107 36
Canadian................................................. 4 322 313
---- ---- ----
$ 69 $429 $349
==== ==== ====
</TABLE>
Income taxes include the state corporate franchise tax for California and
the Canadian tax imposed on the taxable income of the Company's Canadian
operations. The actual state tax provision differs from the expected statutory
tax due to non-deductible entertainment expense and officers' life insurance
premiums.
Temporary differences between financial statement and income tax reporting
are due to the accounting for doubtful accounts, accrued license fees and
depreciation. The effect of these temporary differences on the Company's
balance sheet is not material.
F-11
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except per share data)
NOTE H--RETIREMENT PLANS
Eligible employees of the Company are included in a profit-sharing plan.
Annual contributions by the Company to this plan are discretionary and will
not exceed that allowable for Federal income tax purposes. The accompanying
statements of income include expenses of $150, $150 and $198 which have been
accrued for the plan for the years ended December 31, 1993, December 31, 1994
and December 31, 1995, respectively.
During 1993, the Company established an additional retirement plan in
accordance with section 401(k) of the Internal Revenue Code. Under the terms
of this plan, eligible employees may make voluntary contributions to the
extent allowable by law. The Company is under no obligation and has not made
contributions on behalf of employees to this plan.
NOTE I--CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
THREE
MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
-------------- ---------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest paid..................................... $151 $191 $352 $94 $69
Income taxes paid................................. 128 100 957 387 171
</TABLE>
NOTE J--RELATED PARTY TRANSACTIONS
Under the terms of exclusive licensing agreements, Mr. Channell, Sr.
received payments for the use of certain patents or pending patents. These
payments are based on the sale of products. Operations have been charged with
$1,039, $1,560 and $2,035 for the years ended December 31, 1993, 1994 and
1995, respectively. See note B concerning contemplated transactions to
terminate these agreements in connection with the contemplated public offering
of the Company's Common Stock.
The Company leases its facilities under an operating lease with Mr.
Channell, Sr. Rentals paid for the years ended December 31, 1993, 1994 and
1995 were $650 each year.
The following is a schedule of future minimum rental payments, exclusive of
property taxes and insurance:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996............................................................... $ 650
1997............................................................... 650
1998............................................................... 650
1999............................................................... 650
2000............................................................... 650
Thereafter.......................................................... 3,250
------
$6,500
======
</TABLE>
F-12
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except per share data)
NOTE K--COMMITMENTS
The Company is obligated under the terms of several non-cancelable operating
leases with third parties for its facilities, sales fleet and shipping
trailer. Expense for the periods ended December 31, 1993, 1994 and 1995 was
$118, $194 and $227, respectively.
The following is a schedule of future minimum rental payments:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996............................................................ $100
1997............................................................ 58
1998............................................................ 16
----
$174
====
</TABLE>
In March, 1996 the Company entered into an agreement to lease certain
computer equipment and software in an amount up to $988. Lease terms commence
in April 1996 and will extend for a three year period. The leases will be
accounted for as capital leases.
NOTE L--CREDIT CONCENTRATIONS AND MAJOR CUSTOMERS
The Company maintains the majority of its cash balances in one financial
institution located in California which, at times, may exceed federally
insured limits. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk on cash and cash
equivalents.
One customer made up 15.5%, 18.1% and 17.5% of sales in 1993, 1994 and 1995,
respectively. In 1995, another customer made up 15.6% of sales. Credit risk
with respect to accounts receivable is generally diversified due to the large
number of entities comprising the Company's base and their geographic
dispersion. The Company controls credit risk through credit approvals, credit
limits and monitoring procedures.
NOTE M--EXPORT NET SALES
The Company's export net sales are as follows:
<TABLE>
<CAPTION>
YEARS
ENDED DECEMBER 31,
--------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Canada.............................................. $1,712 $3,799 $3,717
Other............................................... 1,692 758 2,354
------ ------ ------
$3,404 $4,557 $6,071
====== ====== ======
</TABLE>
F-13
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except per share data)
NOTE N--REORGANIZATION
Effective June 14, 1996, as part of a proposed public offering of the
Company's common stock, the Company was merged into a newly formed
corporation, with the newly formed corporation being the surviving entity
while retaining the same name as the predecessor. As part of the merger, the
predecessor's existing stockholders will be issued 12.274 shares of the newly
formed corporation's common stock in exchange for each outstanding share of
the predecessor's common stock. This exchange has been accounted for as a
reorganization and the number of outstanding shares has been restated on a
retroactive basis similar to a stock split.
NOTE O--SUBSEQUENT EVENT
Effective May 30, 1996, the Company renegotiated its lines of credit for
working capital purposes and equipment, which now provide for advances of up
to $3,500 and $4,800, respectively, available through May 1, 1997, and
interest rates equal to the bank's reference rate in the case of the working
capital line and the bank's reference rate plus 0.25% in the case of the
equipment line. Such lines of credit are collateralized by the equipment
financed by the bank.
F-14
<PAGE>
GLOSSARY OF TERMS
ADSL (Asymmetric Digital Subscriber Line): A standard allowing digital
broadband signals and standard telephone service to be transmitted up to
12,000 feet over a twisted copper pair.
Broadband: Transmission rates in excess of 1.544 mega bits per second
typically deployed for delivery of high speed data, video and voice services.
Cable Modem: Electronic transmission device placed on the CATV network,
located at end user locations, providing two-way, high-speed data service
capability including internet access for subscribers.
CATV (Community Antenna TV, commonly called cable television): A system for
distributing television programming by a cable network rather than by
broadcasting electromagnetic radiation.
Coaxial Cable: The most commonly used means of transmitting cable television
signals. It consists of a cylindrical outer conductor (shield) surrounding a
center conductor held concentrically in place by an insulating material.
DLC (Digital Loop Carrier): Telecommunications transmission technology which
multiplexes multiple individual voice circuits onto copper or fiber cables.
Fiber Node: Refers to the equipment that terminates the fiber cables
originating from the host digital terminal. This network element converts the
optical signals to their coax electrical, RF equivalents. Synonymous with
optical network interface (ONI).
Fiber Optics: The process of transmitting infrared and visible light
frequencies through a low-loss glass fiber with a transmitting laser or LED
and a photo diode receiver.
FTTC (Fiber-To-The-Curb): In a long distance network consisting of fiber
optics, fiber-to-the-curb refers to the fiber optics running from the
distribution plant to the curb, at which point copper is used for the curb-to-
home connection.
HDSL (High bit rate Digital Subscriber Line): By using sophisticated coding
techniques, a large amount of information may be transmitted over copper. The
HDSL scheme uses such coding over four copper wires and is primarily intended
for high capacity bidirectional business services.
Headend: The primary transmission point in a cable system supplying the hubs
and trunk cables.
HFC (Hybrid Fiber Coax): A type of distribution plant that utilizes fiber
optics to carry service from a CO to the carrier serving area, then coaxial
cable within the CSA to or close to the individual residences.
ONU (Optical Network Unit): The curb mounted electronics device which
converts fiber optic signals to electrical for service delivery or copper
wires.
PCS (Personal Communications Services): Any service offered on a personal
communications network. These include basic telephone, voice mail, paging and
others. Personal communications networks operate in the 1800-2000 mHz range,
utilizing low power cells compared to traditional cellular technology.
RBOC (Regional Bell Operating Company): A term for the seven regional
holding companies created when AT&T divested the Bell operating companies.
Sealed Plant: An industry term referring to the environmental protection
devices built into access and termination products deployed in the outside
plant portion of the telecommunications network.
G-1
<PAGE>
[PHOTOS APPEAR HERE]
[LOGO OF OF CHANNEL COMMERCIAL CORPORATION]
Top left: The Company has incorporated robotic machinery to streamline its
manufacturing processes.
Top right: The Company's Telecom products are deployed in above and below
ground outside plant applications.
Middle: The Company controls each step in its vertically-integrated and modern
manufacturing processes.
Bottom Left: Historically, the Company's sealed plant products have been
deployed in outside plant hostile environments.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY
OTHER THAN THE SECURITIES COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATES AS OF WHICH INFORMATION IS FURNISHED OR THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Reorganization and Termination
of S Corporation Status.................................................. 13
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Historical, Pro Forma and Other Financial Information............ 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 28
Management................................................................ 37
Principal and Selling Stockholders........................................ 42
Certain Transactions...................................................... 43
Description of Capital Stock.............................................. 44
Shares Eligible for Future Sale........................................... 45
Underwriting.............................................................. 47
Legal Matters............................................................. 48
Experts................................................................... 48
Available Information..................................................... 48
Index to Financial Statements............................................. F-1
Glossary of Terms......................................................... G-1
</TABLE>
---------------
UNTIL (25 DAYS AFTER THE DATE HEREOF), ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,100,000 SHARES
[LOGO OF CHANNELL COMMERCIAL CORPORATION]
COMMON STOCK
($.01 PAR VALUE)
SCHRODER WERTHEIM & CO.
SMITH BARNEY INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses payable in connection with the
offering of the securities to be registered and offered hereby. All of such
expenses are estimates, other than the registration fee payable to the
Securities and Exchange Commission and to the National Association of
Securities Dealers, Inc., and all such expenses will be paid by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............. $ 17,211
NASD Fee........................................................ 5,491
Nasdaq National Market Listing Fees............................. 39,600
Blue Sky Fees................................................... 15,000
Printing and Engraving Expenses................................. 125,000
Legal Fees and Expenses......................................... 245,000
Accounting Fees and Expenses.................................... 150,000
Miscellaneous................................................... 2,698
--------
Total......................................................... $600,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of Delaware ("GCL") empowers a
corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise. Depending on the character of the proceeding, a corporation may
indemnify against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if the person indemnified acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interest of the corporation, and, with respect to any criminal action or
proceeding, had no cause to believe his or her conduct was unlawful. In the
case of any action by or in the right of the corporation, no indemnification
may be made in respect to any claim, issue or matter as to which such person
shall have been adjudged to be liable for negligence or misconduct in the
performance of his or her duty to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit
was brought shall determine that despite the adjudication of liability such
person is fairly and reasonably entitled to indemnity for such expenses which
the court shall deem proper. Section 145 further provides that to the extent a
director or officer of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith.
The Restated Certificate of Incorporation and Bylaws of the Company provide,
in effect, that to the extent and under the circumstances permitted by Section
145 of the GCL and subject to certain conditions, the Company shall indemnify
any person who was or is a party or is threatened to be made a party to or is
involved in any action, suit or proceeding of the type described above by
reason of the fact that he or she is or was a director or officer of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of the Company. The Company has also entered into
indemnity agreements with each of its directors and executive officers
providing, among other things, that the executive officer or director shall be
indemnified to the fullest extent permitted by applicable law.
The Company's Restated Certificate of Incorporation currently provides that,
to the fullest extent permitted by applicable law, a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement(1)
3.1 Restated Certificate of Incorporation of the Company(2)
3.2 Bylaws of the Company(2)
4 Form of Common Stock Certificate(1)
5 Opinion of Irell & Manella LLP(2)
10.1 Form of Tax Agreement between the Company and the Existing
Stockholders(1)
10.2 Channell Commercial Corporation 1996 Incentive Stock Plan (including
form of Stock Option Agreements and Restricted Stock Agreement)(1)
10.3 Business Loan Agreement dated as of January 21, 1994 between the
Company and Bank of America National Trust and Savings Association, as
amended ("Bank of America")(1)
10.4 Business Loan Agreement dated as of April 19, 1995 between the Company
and Bank of America, as amended(1)
10.5 The Company's Profit Sharing Plan(2)
10.6 Agreement dated as of September 30, 1982 between the Company and
Integral Corporation, as amended(2)
10.7 Telephone Sales Agreement dated as of January 23, 1991 between the
Company and Integral Corporation(1)
10.8 Form of Employment Agreement between the Company and William H.
Channell, Sr.(1)
10.9 Form of Employment Agreement between the Company and William H.
Channell, Jr.(1)
10.10 Channell Commercial Corporation 1996 Performance-Based Annual
Incentive Compensation Plan(1)
10.11 Lease dated December 22, 1989 between the Company and William H.
Channell, Sr., as amended(1)
10.12 Lease dated May 29, 1996 between the Company and the Channell Family
Trust(1)
10.13 Lease dated May 17, 1994 between the Company and the Z. Paul Akian and
Sonia Akian Family Trust(2)
10.14 Lease dated March 1, 1994 between the Company and Allstate Life
Insurance Company(2)
10.15 Lease dated November 2, 1989 between the Company and Meadowvale Court
Property Management Ltd., as amended(2)
10.16 Lease Agreement dated as of March 1, 1996 between Winthrop Resources
Corp. and the Company(1)
10.17 Form of Indemnity Agreement(1)
10.18 Form of Agreement Regarding Intellectual Property(1)
10.19 401(k) Plan of the Company(2)
21 Subsidiaries of the Registrant: None
23.1 Consent of Irell & Manella LLP (included in Exhibit 5)
23.2 Consent of Grant Thornton LLP(1)
23.3 Consent of Houlihan, Lokey, Howard & Zukin, Inc.(1)
27 Financial Data Schedule(1)
99 Opinion Letter of Houlihan, Lokey, Howard & Zukin, Inc.(1)
</TABLE>
- --------
(1) Filed herewith.
(2) Previously filed.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective;
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the items listed in item 14 hereof, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Form S-1 Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Temecula, State of California, on June 18, 1996.
CHANNELL COMMERCIAL CORPORATION,
a Delaware corporation
By /s/ William H. Channell, Sr.
__________________________________
William H. Channell, Sr.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Form S-1 Registration Statement has been signed by the following
persons in the capacities indicated below as of June 18, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
/s/ William H. Channell, Sr. Chairman of the Board and
____________________________________ Chief Executive Officer
William H. Channell, Sr. (Principal Executive
Officer)
* President and Director
____________________________________
William H. Channell, Jr.
* Chief Financial Officer
____________________________________ (Principal Financial and
Gary W. Baker Accounting Officer)
* Secretary and Director
____________________________________
Jacqueline M. Channell
* Director
____________________________________
Arthur L. Addis
*By /s/ William H. Channell, Sr. Director
____________________________________
William H. Channell, Sr.
Attorney-in-fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement
4 Form of Common Stock Certificate
10.1 Form of Tax Agreement between the Company and the
Existing Stockholders
10.2 Channell Commercial Corporation 1996 Incentive Stock
Plan (including form of Stock Option Agreements and
Restricted Stock Agreement)
10.3 Business Loan Agreement dated as of January 21, 1994
between the Company and Bank of America National Trust
and Savings Association, as amended ("Bank of America")
10.4 Business Loan Agreement dated as of April 19, 1995
between the Company and Bank of America, as amended
10.7 Telephone Sales Agreement dated as of January 23, 1991
between the Company and Integral Corporation
10.8 Form of Employment Agreement between the Company and
William H. Channell, Sr.
10.9 Form of Employment Agreement between the Company and
William H. Channell, Jr.
10.10 Channell Commercial Corporation 1996 Performance-Based
Annual Incentive Compensation Plan
10.11 Lease dated December 22, 1989 between the Company and
William H. Channell, Sr., as amended
10.12 Lease dated May 29, 1996 between the Company and the
Channell Family Trust
10.16 Lease Agreement dated as of March 1, 1996 between
Winthrop Resources Corp. and the Company
10.17 Form of Indemnity Agreement
10.18 Form of Agreement Regarding Intellectual Property
23.2 Consent of Grant Thornton LLP
23.3 Consent of Houlihan, Lokey, Howard & Zukin, Inc.
27 Financial Data Schedule
99 Opinion Letter of Houlihan, Lokey, Howard & Zukin, Inc.
</TABLE>
<PAGE>
EXHIBIT 1.1
Channell Commercial Corporation
3,100,00 Shares
Common Stock
(Par Value $0.01 Per Share)
______________
UNDERWRITING AGREEMENT
New York, New York
_____________, 1996
SCHRODER WERTHEIM & CO. INCORPORATED
SMITH BARNEY INC.
As Representatives of the several
Underwriters named in Schedule I hereto
c/o Schroder Wertheim & Co. Incorporated
Equitable Center
787 Seventh Avenue
New York, New York 10019-6016
Dear Sirs:
Channell Commercial Corporation, a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters"), an
aggregate of 2,700,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock"), and the Channell Family Trust dated June 29, 1990 (the "Selling
Stockholder"), proposes, subject to the terms and conditions stated herein, to
sell to the Underwriters an aggregate of 400,000 shares of Common Stock. The
3,100,000 shares of Common Stock to be sold by the Company and the Selling
Stockholder are herein referred to as the "Firm Securities." In addition, the
Selling Stockholder proposes to grant to the Underwriters an option to purchase
up to an additional 465,000 shares of Common Stock (the "Option Securities"), on
the terms and for the purposes set forth in Section 2 hereof. The Firm
Securities and the Option Securities are herein collectively referred to as the
"Securities." Except as may be expressly set forth below, any reference to you
in this Agreement shall be solely in your capacity as the Representatives.
1.A. The Company represents and warrants to, and agree with, each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-________),
and as a part thereof a preliminary prospectus, in respect of the
Securities, has been filed with the
<PAGE>
Securities and Exchange Commission (the "Commission") in the form
heretofore delivered to you and, with the exception of exhibits to the
registration statement, to you for each of the other Underwriters; if such
registration statement has not become effective, an amendment (the "Final
Amendment") to such registration statement, including a form of final
prospectus, necessary to permit such registration statement to become
effective, will promptly be filed by the Company with the Commission; if
such registration statement has become effective and any post-effective
amendment to such registration statement has been filed with the Commission
prior to the execution and delivery of this Agreement, which amendment or
amendments shall be in form acceptable to you, the most recent such
amendment has been declared effective by the Commission; if such
registration statement has become effective, a final prospectus (the "Rule
430A Prospectus") relating to the Securities containing information
permitted to be omitted at the time of effectiveness by Rule 430A of the
rules and regulations of the Commission under the Securities Act of 1933,
as amended (the "Act"), will promptly be filed by the Company pursuant to
Rule 424(b) of the rules and regulations of the Commission under the Act
(any preliminary prospectus filed as part of such registration statement
being herein called a "Preliminary Prospectus," such registration statement
as amended at the time that it becomes or became effective, or, if
applicable, as amended at the time the most recent post-effective amendment
to such registration statement filed with the Commission prior to the
execution and delivery of this Agreement became effective (the "Effective
Date"), including all exhibits thereto and all information deemed to be a
part thereof at such time pursuant to Rule 430A of the rules and
regulations of the Commission under the Act, and including any additional
registration statement filed in connection therewith pursuant to Rule
462(b) of the Act (the "Rule 462(b) Registration Statement"), being herein
called the "Registration Statement" and the final prospectus relating to
the Securities in the form first filed pursuant to Rule 424(b)(1) or (4) of
the rules and regulations of the Commission under the Act or, if no such
filing is required, the form of final prospectus included in the
Registration Statement, being herein called the "Prospectus");
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
--------
however, that this representation and warranty shall not apply to any
-------
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
you expressly for use therein;
(c) On the Effective Date and the date the Prospectus is filed with
the Commission, and when any further amendment or supplements thereto
become effective or are filed with the Commission, as the case may be, the
Registration Statement, the Prospectus and such amendment or supplements
did and will conform in all material
2
<PAGE>
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; provided, however, that this representation and warranty shall
-------- -------
not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through you expressly for use therein; the Company and the
Selling Stockholder hereby acknowledge for all purposes under this
Agreement that (A) the list of Underwriters, the amount of the selling
concession and the statement that no sales will be made to discretionary
accounts, set forth under the caption "Underwriting" in the Prospectus, (B)
the stabilization legends on the inside front cover page of the Prospectus
and (C) the last paragraph of the text on the cover page of the Prospectus
constitute the only written information furnished to the Company by or on
behalf of the Underwriters for use in the preparation of the Registration
Statement or the Prospectus or any amendment or supplement thereto;
(d) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware
with power and authority (corporate and other) to own its properties and to
conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction in which it owns
or leases property, or conducts any business, so as to require such
qualification (except where the failure to so qualify would not have a
material adverse effect on the condition, financial or otherwise, or the
business affairs or prospects of the Company. The Company has no
subsidiaries as of the date hereof;
(e) The Company does not own, directly or indirectly, any shares of
capital stock of any corporation or have any equity interest in any firm,
partnership, joint venture, association or other entity;
(f) The Company has all requisite power and authority to execute,
deliver and perform its obligations under this Agreement; the execution,
delivery and performance by the Company of its obligations under this
Agreement have been duly and validly authorized by all requisite corporate
action of the Company; and this Agreement constitutes the legal, valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms, except as enforceability of the same may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting creditors' rights generally, by limitations on the
availability of equitable remedies and by limitations on rights to
indemnity imposed by federal or state securities laws or principles of
public policy;
(g) The Company has not sustained since the date of the latest
audited financial statements included in the Prospectus, any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, which loss or interference
3
<PAGE>
is material to the Company; and, since the respective dates as of which
information is given in the Registration Statement and the Prospectus,
there has not been, and prior to the Time of Delivery (as defined in
Section 4 hereof) there will not be, any material change in the capital
stock or short-term debt or long-term debt of the Company, or any material
adverse change, or any development reasonably likely to result in a
prospective material adverse change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company, otherwise than as set forth or contemplated in
the Prospectus and except for the incurrence of an additional $3.1 million
in indebtedness under the Revolving Credit Facility (as defined in the
Prospectus) to fund the purchase of the Channell Patents (as defined in the
Prospectus), which indebtedness will be repaid with proceeds of this
Offering;
(h) The Company owns no real property and has good and valid title
to all personal property owned by it, free and clear of all liens,
encumbrances and defects except such as are described in or contemplated by
the Prospectus, or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made of
such property by the Company, and any real property and buildings held
under lease by the Company are held by it under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such real property
and buildings by the Company;
(i) The Company has an authorized, issued and outstanding
capitalization as set forth in the Registration Statement, and all the
issued shares of capital stock of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable, are free of any
preemptive rights, rights of first refusal or similar rights, were issued
and sold in compliance with applicable Federal and state securities laws
and conform in all material respects to the description in the Prospectus;
except as described in the Prospectus, there are no outstanding options,
warrants or other rights calling for the issuance of, and there are no
commitments, plans or arrangements to issue, any shares of capital stock of
the Company or any security convertible or exchangeable or exercisable for
capital stock of the Company; there are no holders of securities of the
Company who, by reason of the filing of the Registration Statement, have
the right (and have not waived such right) to request the Company to
include in the Registration Statement securities owned by them;
(j) The Securities to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued, fully paid and non-assessable, and will conform in
all material respects to the description thereof in the Prospectus and will
be approved for quotation on the Nasdaq National Market as of the Effective
Date;
(k) The performance of this Agreement, the consummation of the
transactions herein contemplated and as described in the Prospectus under
the captions "Reorganization and Termination of S Corporation Status" and
"Use of
4
<PAGE>
Proceeds" and the issue and sale of the Securities and the compliance by
the Company with all the provisions of this Agreement will not conflict
with or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, or result in the creation or imposition
of any lien, charge, claim, or encumbrance upon, any of the property or
assets of the Company pursuant to, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company is a
party or by which the Company is bound or to which any of the property or
assets of the Company is subject, except to the extent that such breach,
violation or default would not have a material adverse effect on the
condition, financial or otherwise, or the business affairs or prospects of
the Company, nor will such action result in any violation of the provisions
of the Certificate of Incorporation or the By-laws, in each case as amended
to the date hereof, of the Company or any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction
over the Company or any of its properties; and no consent, approval,
authorization, order, registration or qualification of or with any court or
governmental agency or body is required for the issue and sale of the
Securities or the consummation of the other transactions contemplated by
this Agreement and as described in the Prospectus under the captions
"Reorganization and Termination of S Corporation Status" and "Use of
Proceeds", except the registration under the Act and the Securities and
Exchange Act of 1934 (the "Exchange Act") of the Securities, and such
consents, approvals, authorizations, registrations or qualifications as may
be required under state or foreign securities or Blue Sky laws in
connection with the purchase and distribution of the Securities by the
Underwriters;
(l) There are no legal or governmental proceedings pending to which
the Company or any of its officers or directors is a party or of which any
property of the Company is the subject, other than litigation or
proceedings incident to the business conducted by the Company which will
not individually or in the aggregate have a material adverse effect on the
current or future financial position, stockholders' equity or results of
operations of the Company; and, to the best of the Company's knowledge, no
such proceedings are threatened or contemplated by governmental authorities
or others; and the Company is not involved in any labor dispute, nor, to
the Company's knowledge, is any labor dispute threatened;
(m) The Company has such material licenses, permits and other
approvals or authorizations of and from governmental or regulatory
authorities ("Permits") as are necessary under applicable law to own its
properties and to conduct its business in the manner now being conducted
and as described in the Prospectus; and the Company has fulfilled and
performed all of its obligations with respect to such Permits, and no event
has occurred which allows, or after notice or lapse of time or both would
allow, revocation or termination thereof or result in any other material
impairment of the rights of the holder of any such Permits;
(n) Grant Thornton LLP, who have certified certain financial
statements of the Company and delivered their report with respect to the
audited financial statements included in the Registration Statement and the
Prospectus, are independent public
5
<PAGE>
accountants as required by the Act and the rules and regulations of the
Commission thereunder;
(o) The financial statements of the Company included in the
Registration Statement and the Prospectus present fairly the financial
condition, the results of operations and the cash flows of the Company as
of the dates and for the periods therein specified in conformity with
generally accepted accounting principles consistently applied throughout
the periods involved, except as otherwise stated therein; and the other
financial and statistical information and data set forth in the
Registration Statement and the Prospectus are accurately presented and, to
the extent such information and data are derived from the financial
statements and books and records of the Company, are prepared on a basis
consistent with such financial statements and the books and records of the
Company; no other financial statements or schedules are required to be
included in the Registration Statement and the Prospectus under the Act;
(p) There are no statutes or governmental regulations, or any
contracts or other documents that are required to be described in or filed
as exhibits to the Registration Statement which are not described therein
or filed as exhibits thereto; and all such contracts to which the Company
is a party have been duly authorized, executed and delivered by the
Company, constitute valid and binding agreements of the Company and are
enforceable against the Company in accordance with the terms thereof,
except as enforceability of the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally, by limitations on the availability of equitable remedies
and by limitations on rights to indemnity imposed by federal or state
securities laws or principles of public policy;
(q) The Company owns or possesses adequate patent rights or licenses
or other rights to use patent rights, inventions, trademarks, service
marks, trade names, copyrights, technology and know-how necessary to
conduct the general business now or proposed to be operated by them as
described in the Prospectus; the Company has not received any notice of
infringement of or conflict with asserted rights of others with respect to
any patent, patent rights, inventions, trademarks, service marks, trade
names, copyrights, technology or know-how which, singly or in the
aggregate, could materially adversely affect the business, operations,
financial condition, income or business prospects of the Company; and, the
discoveries, inventions, products or processes of the Company referred to
in the Prospectus do not, to the Company's knowledge, infringe or conflict
with any patent or right of any third party, or any discovery, invention,
product or process which is the subject of a patent application filed by
any third party, known to the Company;
(r) The Company is not in violation of any term or provision of its
Certificate of Incorporation or By-Laws (or similar corporate constituent
documents), in each case as amended to the date hereof, or any material
law, ordinance, administrative or governmental rule or regulation
applicable to the Company, or of any decree of any court or governmental
agency or body having jurisdiction over the Company;
6
<PAGE>
(s) No default exists, and no event has occurred which with notice
or lapse of time, or both, would constitute a default in the due
performance and observance of any term, covenant or condition of any
indenture, mortgage, deed of trust, bank loan or credit agreement, lease or
other agreement or instrument to which the Company is a party or by which
it or its properties is bound or may be affected in any material adverse
respect with regard to the property, business or operations of the Company;
(t) The Company has timely filed all necessary tax returns and
notices and has paid all federal, state, county, local and foreign taxes of
any nature whatsoever for all tax years through December 31, 1995, to the
extent such taxes have become due and payable by the Company. The Company
has no knowledge, or any reasonable grounds to know, of any tax
deficiencies which would have a material adverse effect on the Company; the
Company has paid all taxes which have become due and payable by it, whether
pursuant to any assessments, or otherwise, and there is no further
liability (whether or not disclosed on such returns) or assessments for any
such taxes, and no interest or penalties accrued or accruing with respect
thereto, except as may be set forth or adequately reserved for in the
financial statements included in the Registration Statement; the amounts
currently set up as provisions for taxes or otherwise by the Company on its
books and records are sufficient for the payment of all its unpaid federal,
foreign, state, county and local taxes accrued through the dates as of
which they speak, and for which the Company may be liable in its own right,
or as a transferee of the assets of, or as successor to any other
corporation, association, partnership, joint venture or other entity;
(u) Neither the Company nor the Selling Stockholder will, during the
period of 180 days after the date hereof, except pursuant to this
Agreement, offer, sell, contract to sell or otherwise dispose of any
capital stock of the Company (or securities convertible into, or
exchangeable for, capital stock of the Company), directly or indirectly,
without the prior written consent of Schroder Wertheim & Co. Incorporated,
except for grants of stock options under the Company's Stock Plan (as
defined in the Prospectus), grants of capital stock pursuant to the
Company's Incentive Plan (as defined in the Prospectus) or pursuant to the
terms of convertible securities of the Company outstanding on the date
hereof;
(v) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences;
(w) The Company is not in violation of any foreign, federal, state
or local law or regulation relating to the protection of human health and
safety, the environment or
7
<PAGE>
hazardous or toxic substances or wastes, pollutants or contaminants, nor
any federal or state law relating to discrimination in the hiring,
promotion or paying of employees nor any applicable federal or state wages
and hours laws, nor any provisions of the Employee Retirement Income
Security Act of 1974, as amended, or the rules and regulations promulgated
thereunder, where such violation would have a material adverse effect on
the Company;
(x) None of the Company or its officers, directors, employees or
agents has used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expense relating to political activity, or
made any unlawful payment of funds of the Company or received or retained
any funds in violation of any law, rule or regulation;
(y) None of the Company or its officers, directors, employees or
agents have taken or will take, directly or indirectly, any action designed
to or which has constituted or that might be reasonably be expected to
cause or result in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities;
(z) The Company is not, and does not intend to conduct its business
in a manner in which it would become, an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended;
(aa) The Company maintains reasonably adequate insurance for the
conduct of its business in accordance with prudent business practices with
reputable third-party insurers; and
(bb) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Florida Statutes, Section
517.075, An Act Relating to Disclosure of Doing Business with Cuba; the
Company further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after
the date the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported in
the Prospectus, if any, concerning the Company's business with Cuba or with
any person or affiliate located in Cuba changes in any material way, the
Company will provide the Department notice of such business or change, as
appropriate, in a form acceptable to the Department.
1.B. The Selling Stockholder represents and warrants to, and agrees with,
each of the Underwriters that:
(a) The Selling Stockholder has, and at the Time of Delivery (as
defined in Section 4 hereof) will have, good and valid title to the
Securities to be sold by the
8
<PAGE>
Selling Stockholder hereunder, free and clear of any liens, encumbrances,
equities, security interests, claims and other restrictions of any nature
whatsoever, and the Selling Stockholder has the full legal right, power and
authority, and any approval required by law, to enter into this Agreement
and to sell, assign, transfer and deliver the Securities being sold by the
Selling Stockholder hereunder and to make the representations, warranties,
covenants and agreements made by it in this Agreement; and upon the
delivery of and payment for such Securities as herein provided, the several
Underwriters will acquire good and valid title thereto, free and clear of
all liens, encumbrances, equities, security interests, claims and other
restrictions of any nature whatsoever;
(b) The Selling Stockholder is a duly organized trust validly
existing under the laws of the State of California with all requisite power
and authority to hold the Securities and the other property held by it;
(c) At the Time of Delivery, all stock transfer or other taxes
(other than income taxes) which are required to be paid in connection with
the sale and transfer of the Securities to be sold by the Selling
Stockholder to the several Underwriters hereunder will have been fully paid
or provided for by the Selling Stockholder and all laws imposing such taxes
will have been fully complied with; and
(d) The sale by the Selling Stockholder of Securities pursuant
hereto is not prompted by any adverse information concerning the Company
that is not set forth in the Registration Statement or the Prospectus.
(e) The Selling Stockholder has the full legal, right, power and
authority, and any approval required by law, to enter into this Agreement
and to make the representations, warranties, covenants and agreements made
by it in this Agreement to which it is a party;
(f) Neither the execution and delivery or performance of this
Agreement or the consummation of the transactions herein or therein
contemplated and as described in the Prospectus under the captions
"Reorganization and Termination of S Corporation Status" and "Use of
Proceeds" nor the compliance with the terms hereof or thereof will conflict
with, or result in a breach or violation of any of the terms and provisions
of, or constitute a default under, or result in the creation or imposition
of any lien, charge, claim or encumbrance on any property of the Company or
any of its subsidiaries under, any indenture, mortgage, deed of trust,
lease or other agreement or instrument to which the Selling Stockholder is
a party or by which the Selling Stockholder's property is bound, or the
trust documents pursuant to which the Selling Stockholder is organized (if
applicable) or any statute, ruling, judgment, decree, order, or regulation
of any court or other governmental authority or any arbitrator applicable
to the Selling Stockholder; and no consent, approval, authorization, order,
registration or qualification of or with any governmental authority, except
such as have been obtained, such as may be required under state or foreign
securities or Blue Sky
9
<PAGE>
laws or by the by-laws and rules of the National Association of Securities
Dealers, Inc. and, if the registration statement filed with respect to the
Securities is not effective under the Act as of the time of execution
hereof, such as may be required (and shall be obtained as provided in this
Agreement) under the Act; Act];
(g) The Selling Stockholder has not taken, and will not take,
directly or indirectly, any action designed to cause or result in, or that
has constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Securities;
(h) The Selling Stockholder has reviewed the Prospectus and the
Registration Statement, and the information regarding the Selling
Stockholder set forth therein under the caption "Principal and Selling
Stockholder" is complete and accurate; and
(i) Neither the Selling Stockholder nor any trustee or beneficiary
of the Selling Stockholder is affiliated as a director, officer, partner,
stock holder or otherwise with any securities broker or dealer which is a
member of the NASD or any other organization that owns or controls any
member of the NASD.
1.C. Any certificate signed by any officer of the Company or by the
Selling Stockholder and delivered to you or to counsel for the Underwriters
shall be deemed a representation and warranty made by the Company to each
Underwriter as to the matters covered thereby and shall be deemed incorporated
herein in its entirety and shall be effective as if such representation and
warranty were made herein.
1.D. The Company and its predecessor, Channel Commercial Corporation, a
California corporation (the "Predecessor") have entered into a Merger Agreement
(the "Merger Agreement") pursuant to which the Predecessor has been merged into
the Company with the Company surviving the merger (the "Merger"). All references
herein to the Company shall, unless the context otherwise requires, mean the
Company and the Predecessor. The Selling Stockholder, the Company and the other
stockholders of the Company as of the date hereof (the "Existing Stockholders")
have entered into a Patent Assignment Agreement (the "Patent Assignment
Agreement") pursuant to which the Existing Stockholders will transfer all of
their right, title and interest in and to certain patent rights to the Company
effective as of the Time of Delivery and immediately before the sale of the Firm
Securities pursuant to this Agreement, as described in the Prospectus; The
Company and each of the Existing Stockholders have entered into a Tax
Indemnification Agreement (the "Tax Indemnification Agreement") pursuant to
which the parties thereto indemnify one another against certain tax liabilities,
as described in the Prospectus; and the Company has declared a dividend in the
initial aggregate amount of $ ___________ to be distributed to the Existing
Stockholders (the "S Corporation Distribution"), as described in the Prospectus.
The Merger Agreement, Patent Assignment Agreement and Tax Indemnification
Agreement are referred to herein as the "Reorganization Agreements." All
references herein to
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the Company shall, unless the context otherwise requires, shall mean the Company
and the Predecessor.
2. Subject to the terms and conditions herein set forth, the Company
agrees to issue and sell to the several Underwriters an aggregate of 2,700,000
Firm Securities, the Selling Stockholder agrees to sell to the several
Underwriters 400,000 Firm Securities and each of the Underwriters agrees to
purchase from the Company and the Selling Stockholder, at a purchase price of
$___________ per share, the respective aggregate number of Firm Securities
determined in the manner set forth below. The obligation of each Underwriter to
the Company and the Selling Stockholder, respectively, shall be to purchase that
portion of the number of shares of Common Stock to be sold by the Company or the
Selling Stockholder pursuant to this Agreement as the number of Firm Securities
set forth opposite the name of such Underwriter on Schedule I bears to the total
number of Firm Securities to be purchased by the Underwriters pursuant to this
Agreement, in each case adjusted by you such that no Underwriter shall be
obligated to purchase Firm Securities other than in 100 share amounts. In making
this Agreement, each Underwriter is contracting severally and not jointly.
In addition, subject to the terms and conditions herein set forth, the
Selling Stockholder agrees to issue and sell to the Underwriters, as required
(for the sole purpose of covering over-allotments in the sale of the Firm
Securities), up to 465,000 Option Securities at the purchase price per share of
the Firm Securities being sold by the Company as stated in the preceding
paragraph. The right to purchase the Option Securities may be exercised by your
giving 48 hours' prior written or telephonic notice (subsequently confirmed in
writing) to the Company and the Selling Stockholder of your determination to
purchase all or a portion of the Option Securities. Such notice may be given at
any time within a period of 30 days following the date of this Agreement. Option
Securities shall be purchased severally for the account of each Underwriter in
proportion to the number of Firm Securities set forth opposite the name of such
Underwriter in Schedule I hereto. No Option Securities shall be delivered to or
for the accounts of the Underwriters unless the Firm Securities shall be
simultaneously delivered or shall theretofore have been delivered as herein
provided. The respective purchase obligations of each Underwriter shall be
adjusted by you so that no Underwriter shall be obligated to purchase Option
Securities other than in 100 share amounts. The Underwriters may cancel any
purchase of Option Securities at any time prior to the Option Securities
Delivery Date (as defined in Section 4 hereof) by giving written notice of such
cancellation to the Company.
3. The Underwriters propose to offer the Securities for sale upon the
terms and conditions set forth in the Prospectus.
4. Certificates in definitive form for the Firm Securities to be
purchased by each Underwriter hereunder shall be delivered by or on behalf of
the Company and the Selling Stockholder to you for the account of such
Underwriter, against payment by such Underwriter or on its behalf of the
purchase price therefor by wire transfer or certified or official bank check or
checks, payable in New York Clearing House next-day funds, to the order of the
Company, for the purchase price of the Firm Securities being sold by the
Company, and to the order of the Selling Stockholder for the purchase price of
the Firm Securities being sold by the
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Selling Stockholder, at the office of Schroder Wertheim & Co. Incorporated,
Equitable Center, 787 Seventh Avenue, New York, New York, at 9:30 A.M., New York
City time, on ____________, 199__, or at such other time, date and place as you
and the Company may agree upon in writing, such time and date being herein
called the "Time of Delivery."
Certificates in definitive form for the Option Securities to be purchased
by each Underwriter hereunder shall be delivered by or on behalf of the Selling
Stockholder to you for the account of such Underwriter, against payment by such
Underwriter or on its behalf of the purchase price thereof by wire transfer or
certified or official bank check or checks, payable in New York Clearing House
next-day funds, to the order of the Selling Stockholder, for the purchase price
of the Option Securities, in New York, New York, at such time and on such date
(not earlier than the Time of Delivery nor later than ten business days after
giving of the notice delivered by you to the Company and the Selling Stockholder
with reference thereto) and in such denominations and registered in such names
as shall be specified in the notice delivered by you to the Company and the
Selling Stockholder with respect to the purchase of such Option Securities. The
date and time of such delivery and payment are herein sometimes referred to as
the "Option Securities Delivery Date." The obligations of the Underwriters shall
be subject, in their discretion, to the condition that there shall be delivered
to the Underwriters on the Option Securities Delivery Date opinions and
certificates, dated such Option Securities Delivery Date, referring to the
Option Securities, instead of the Firm Securities, but otherwise to the same
effect as those required to be delivered at the Time of Delivery pursuant to
Sections 7(d), 7(e), 7(f), and 7(i).
Certificates for the Firm Securities and the Option Securities so to be
delivered will be in good delivery form, and in such denominations and
registered in such names as you may request not less than 48 hours prior to the
Time of Delivery and the Option Securities Delivery Date, respectively. Such
certificates will be made available for checking and packaging in New York, New
York, at least 24 hours prior to the Time of Delivery and Option Securities
Delivery Date.
5. (a) The Company covenants and agrees with each of the Underwriters
as follows:
(i) If the Registration Statement has not become effective, to
file promptly the Final Amendment with the Commission and use its
best efforts to cause the Registration Statement to become effective;
if the Registration Statement has become effective, to file promptly
the Rule 430A Prospectus with the Commission; to make no further
amendment or any supplement to the Registration Statement or
Prospectus which shall be disapproved by you after reasonable notice
thereof; to advise you, promptly after it receives notice thereof of
the time when the Registration Statement, or any amendment thereto,
or any amended Registration Statement or any Rule 462(b) Registration
Statement has become effective or any supplement to the Prospectus or
any amended Prospectus has been filed, of the issuance by the
Commission of any stop order or of any order preventing or suspending
the use of any Preliminary Prospectus or the
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Prospectus, of the suspension of the qualification of the Securities
for offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request
by the Commission for the amending or supplementing of the
Registration Statement or Prospectus or for additional information;
and in the event of the issuance of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or the
Prospectus or suspending any such qualification, to use promptly its
best efforts to obtain withdrawal of such order;
(ii) Promptly from time to time to take such action as you may
request to qualify the Securities for offering and sale under the
securities laws of such jurisdictions as you may request and to
comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be
necessary to complete the distribution, provided that in connection
therewith the Company shall not be required to qualify as a foreign
corporation, or to file a general consent to service of process in
any jurisdiction;
(iii) To furnish each of the Representatives and counsel for the
Underwriters, without charge, signed copies of the registration
statement originally filed with respect to the Securities and each
amendment thereto (in each case including all exhibits thereto) and
to each other Underwriter, without charge, a conformed copy of such
registration statement and each amendment thereto (in each case
without exhibits thereto) and, so long as a prospectus relating to
the Securities is required to be delivered under the Act, as many
copies of each Preliminary Prospectus, the Prospectus and all
amendments or supplements thereto as you may from time to time
reasonably request. If at any time when the delivery of a prospectus
is required to be delivered under the Act an event shall have
occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make statements
therein, in the light of the circumstances under which they were made
when such Prospectus is delivered, not misleading, or if for any
other reason it shall be necessary to amend or supplement the
Prospectus in order to comply with the Act, the Company will
forthwith prepare and, subject to the provisions of Section 5(a)(i)
hereof, file with the Commission an appropriate supplement or
amendment thereto, and will furnish to each Underwriter and to any
dealer in securities, without charge, as many copies as you may from
time to time reasonably request of an amended Prospectus or a
supplement to the Prospectus which will correct such statement or
omission or effect such compliance in accordance with the
requirements of Section 10 of the Act;
(iv) To make generally available to its stockholders as soon as
practicable, but in any event not later than 45 days after the close
of the period covered thereby, an earnings statement in form
complying with the provisions of Section 11(a) of the Act covering a
period of 12 consecutive months beginning not
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later than the first day of the Company's fiscal quarter next
following the Effective Date;
(v) To file promptly all documents required to be filed with
the Commission pursuant to Section 13, 14 or 15(d) of the Exchange
Act subsequent to the Effective Date and during any period when the
Prospectus is required to be delivered;
(vi) For a period of five years from the Effective Date, to
furnish to its stockholders after the end of each fiscal year an
annual report (including a consolidated balance sheet and statements
of income, cash flow and stockholders' equity of the Company and its
subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters
of each fiscal year (beginning with the fiscal quarter ending after
the Effective Date), consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable
detail;
(vii) During a period of five years from the Effective Date, to
furnish to you copies of all reports or other communications
(financial or other) furnished to its stockholders, and deliver to
you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning
the business and financial condition of the Company as you may from
time to time reasonably request in connection with your obligations
hereunder;
(viii) To apply the net proceeds from the sale of the Securities
in the manner set forth in the Prospectus under the caption "Use of
Proceeds";
(ix) That it will not, and will cause its subsidiaries,
officers, directors, employees, agents and affiliates not to, take,
directly or indirectly, any action designed to cause or result in, or
that might reasonably be expected to cause or result in,
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities;
(x) That prior to the Time of Delivery there will not be any
change in the capital stock or material change in the short-term debt
or long-term debt of the Company, or any material adverse change, or
any development involving a prospective material adverse change, in
or affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company,
otherwise than as set forth or contemplated in the Prospectus [and
except for the incurrence of an additional $_____ million in
indebtedness under the Revolving Credit Facility to fund the purchase
of the Channell Patents, which indebtedness will be repaid with
proceeds of this Offering];
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(xi) That it will not, during the period of 180 days after the
date hereof (other than pursuant to this Agreement), (1) offer,
pledge, sell, contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any capital stock of the
Company (or securities convertible into, or exchangeable for, capital
stock of the Company), or (2) enter into any swap or other agreement
that transfers, in whole or in part, any of the economic consequences
of ownership of the capital stock of the Company, directly or
indirectly, without the prior written consent of Schroder Wertheim &
Co. Incorporated, except for grants of stock options under the
Company's Stock Plan, grants of capital stock pursuant to the
Company's Incentive Plan, or pursuant to the terms of convertible
securities of the Company outstanding on the date hereof. In
furtherance of the foregoing, for a period of 180 days from the date
of this Agreement, the Company will not, without the prior written
consent of Schroder Wertheim & Co. Incorporated, file a registration
statement relating to shares of capital stock or securities
convertible into or exercisable or exchangeable for capital stock or
warrants, options or rights to purchase or acquire capital stock,
with the exception of the filing of Registration Statements on Form
S-8 with respect to the Company's Stock Plan and Incentive Plan.
(xii) That it has caused the Securities to be included for
quotation on the Nasdaq National Market as of the Effective Date;
(xiii) To file with the Commission such reports on Form SR as may
be required pursuant to Rule 463 under the Act; and
(xiv) It will use its best efforts to do and perform all things
required to be done and performed under this Agreement by it prior to
or after the Time of Delivery.
(xv) To require, during at least the five years subsequent to
the date hereof, that each employee of the Company engaged in product
development or engineering, and each officer, execute, as a condition
to continued employment, an assignment to the Company of any
inventions made in the scope of his or her employment with the
Company. Such agreement shall be in a form and contain such terms as
is customary among employers in the State of California.
(b) The Selling Stockholder covenants and agrees with each of the
Underwriters that:
(i) The Selling Stockholder will not, directly or indirectly,
take any action designed to cause or result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities;
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(ii) As soon as the Selling Stockholder is advised thereof, it
will advise the Representatives and confirm such advice in writing,
(i) of receipt by it or by any of its representatives or agents, of
any communication from the Commission relating to the Registration
Statement, the Prospectus or any Preliminary Prospectus, or any
notice or order of the Commission relating to the Company or any of
the Selling Stockholder in connection with the transactions
contemplated by this Agreement and as described in the Prospectus
under the captions "Reorganization and Termination of S Corporation
Status" and "Use of Proceeds," and (ii) of the happening of any event
which makes or may make any statement made in the Registration
Statement, the Prospectus or any Preliminary Prospectus untrue or
that requires the making of any change in the Registration Statement,
Prospectus or Preliminary Prospectus, as the case may be, in order to
make such statement, in light of the circumstances in which it was
made, not misleading; and
(iii) The Selling Stockholder will deliver to the
Representatives prior to the Time of Delivery a properly completed
and executed United States Treasury Department Form W-9.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid: (i) the fees, disbursements and
expenses of counsel and accountants for the Company and the Selling Stockholder,
and all other expenses, in connection with the preparation, printing and filing
of the Registration Statement and the Prospectus and amendments and supplements
thereto and the furnishing of copies thereof, including charges for mailing, air
freight and delivery and counting and packaging thereof and of any Preliminary
Prospectus and related offering documents to the Underwriters and dealers; (ii)
the cost of printing this Agreement, the Agreement Among Underwriters, the
Selling Agreement, communications with the Underwriters and selling group and
the Preliminary and Supplemental Blue Sky Memoranda and any other documents in
connection with the offering, purchase, sale and delivery of the Securities;
(iii) all expenses in connection with the qualification of the Securities for
offering and sale under securities laws as provided in Section 5(a)(ii) hereof,
including filing and registration fees and the fees, disbursements and expenses
for counsel for the Underwriters in connection with such qualification and in
connection with Blue Sky surveys or similar advice with respect to sales; (iv)
the filing fees incident to securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of the
Securities; (v) all fees and expenses of the Company in connection with
registration of the Common Stock under the Exchage Act quotation of the
Securities on the Nasdaq National Market; and (vi) all other costs and expenses
incident to the performance of the Company's or the Selling Stockholder's
obligations hereunder which are not otherwise specifically provided for in this
Section 6, including the fees of the Company's Transfer Agent and Registrar, the
cost of any stock issue or transfer taxes on sale of the Securities to the
Underwriters, the cost of the Company's personnel and other internal costs, the
cost of printing and engraving the certificates representing the Securities and
all expenses and taxes incident to the sale and delivery of the Securities to be
sold by the Company and the Selling Stockholder to the Underwriters hereunder
and the travel and other costs incurred by the Company and the Selling
Stockholder in
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connection with the Underwriters' "road show" in connection with the offering
contemplated by the Prospectus. The Selling Stockholder will pay any transfer
taxes incident to the transfer to the Underwriters of the Securities being sold
by the Selling Stockholder.
It is understood, however, that, except as provided in this Section,
Section 8 and Section 11 hereof, the Underwriters will pay all their own costs
and expenses, including the fees of their counsel, stock transfer taxes on
resale of any of the Securities by them, and any advertising expenses connected
with any offers they may make and the travel and other expenses incurred by the
Representatives in connection with the Underwriters' "road show" in connection
with the offering contemplated by the Prospectus.
7. The obligations of the Underwriters hereunder shall be subject, in
their discretion, to the condition that all representations and warranties and
other statements of the Company and the Selling Stockholder herein are, at and
as of the Time of Delivery, true and correct, the condition that the Company and
the Selling Stockholder shall have performed all their obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Registration Statement shall have become effective, and you
shall have received notice thereof not later than 10:00 P.M., New York City
time, on the date of execution of this Agreement, or at such other time as
you and the Company may agree; if required, the Prospectus shall have been
filed with the Commission in the manner and within the time period required
by Rule 424(b); no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the Commission; and all
requests for additional information on the part of the Commission shall
have been complied with to your reasonable satisfaction;
(b) All corporate proceedings and related legal and other matters in
connection with registration, authorization, issue, sale and delivery of
the Securities shall have been reasonably satisfactory to Troop Meisinger
Steuber & Pasich LLP, counsel to the Underwriters, and Troop Meisinger
Steuber & Pasich LLP shall have been timely furnished with such papers and
information as they may reasonably have requested to enable them to pass
upon the matters referred to in this subsection;
(c) You shall not have advised the Company or the Selling
Stockholder that the Registration Statement or Prospectus, or any amendment
or supplement thereto, contains an untrue statement of fact or omits to
state a fact which in your judgment is in either case material and in the
case of an omission is required to be stated therein or is necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading;
(d) Irell & Manella LLP, counsel to the Company and the Selling
Stockholder, shall have furnished to you their written opinion, dated the
Time of Delivery, in form and substance satisfactory to you, to the effect
that:
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(i) The Company (exclusive of the Predecessor) has been duly and
validly incorporated and is validly existing as a corporation in good
standing under the laws of the State of Delaware and is qualified to do
business and is in good standing in each jurisdiction in which its
ownership or leasing of properties or the conduct of its business requires
such qualification (except where the failure to so qualify would not have a
material adverse effect on the condition, financial or otherwise, or the
business affairs or prospects of the Company); and the Company has all
necessary corporate power and all material governmental authorizations,
permits and approvals required to own, lease and operate its properties and
conduct its business as described in the Prospectus;
(ii) The Merger has been effected in accordance with applicable
California and Delaware law and the Predecessor has been merged with and
into the Company.
(iii) The Company has an authorized capitalization as set forth in
the Registration Statement and, based solely upon a review of the Company's
minute books and stock books, and certificates from the Company's officers,
all the issued shares of capital stock of the Company have been duly and
validly authorized and issued and are fully paid and non-assessable, are
free of any preemptive rights, and were issued and sold in compliance with
all applicable Federal and state securities laws; except as described in
the Prospectus, to the knowledge of such counsel based solely upon a review
of the Company's minute books and stock books, and certificates from the
Company's officers, there are no outstanding options, warrants or other
rights calling for the issuance of, and there are no commitments, plans or
arrangements to issue, any shares of capital stock of the Company; the
Securities being sold by the Company have been duly and validly authorized
and, when duly countersigned by the Company's Transfer Agent and Registrar
and issued, delivered and paid for in accordance with the provisions of the
Registration Statement and this Agreement, will be duly and validly issued,
fully paid and non-assessable; the Securities conform to the description
thereof in the Prospectus; and the certificates for the Securities are in
valid and sufficient form;
(iv) To the best of such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened to which the Company or its
officers or directors is a party or of which any property of the Company is
the subject which, if resolved against the Company or its officers or
directors, individually, or to the extent involving related claims or
issues, in the aggregate, is of a character required to be disclosed in the
Prospectus which has not been properly disclosed therein;
(v) This Agreement has been duly authorized, executed and delivered
by the Company and is a legal, valid and binding agreement of the Company
enforceable in accordance with its terms, except as enforceability of the
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same may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally, by limitations on
the availability of equitable remedies and by limitations on rights to
indemnity imposed by federal or state securities laws or principles of
public policy;
(vi) The Company has full corporate power and authority to execute,
deliver and perform this Agreement, and the execution, delivery, and
performance of this Agreement, the consummation of the transactions herein
contemplated and as described in the Prospectus under the captions
"Reorganization and Termination of S Corporation Status," and the issue and
sale of the Securities and the compliance by the Company with all the
provisions of this Agreement will not conflict with, or result in a breach
of any of the terms or provisions of, or constitute a default under, or
result in the creation or imposition of any lien, charge, claim or
encumbrance upon, any of the property or assets of the Company or any of
its subsidiaries pursuant to, the terms of any indenture, mortgage, deed of
trust, loan agreement or other material agreement or instrument filed as an
exhibit to the Registration Statement, nor will such action result in any
violation of the provisions of the Restated Certificate of Incorporation or
the By-Laws, in each case as amended, of the Company, or any statute or any
order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Company or any of
its properties;
(vii) No consent, approval, authorization, order, registration or
qualification of or with any court or any regulatory authority or other
governmental body is required for the issue and sale of the Securities or
the consummation of the transactions contemplated by this Agreement or as
described in the Prospectus under the caption "Reorganization and
Termination of S Corporation Status," except such as have been obtained,
including under the Act, and such consents, approvals, authorizations,
registrations or qualifications as may be required under state or foreign
securities or Blue Sky laws in connection with the purchase and
distribution of the Securities by the Underwriters;
(viii) To the best of such counsel's knowledge, the Company is not
currently in violation of its Restated Certificate of Incorporation or
Bylaws or in default under any indenture, mortgage, deed of trust, lease,
bank loan or credit agreement or any other agreement or instrument filed as
an exhibit to the Registration Statement (in any respect that is material
to the financial condition of the Company);
(ix) There are no preemptive or other rights to subscribe for or to
purchase, nor any restriction upon the voting or transfer of, any
Securities pursuant to (i) the Company's Restated Certificate of
Incorporation or By-Laws, in each case as amended to the date hereof, or
(ii) any such agreement or other such instrument known to such counsel;
and, to the knowledge of such counsel,
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no holders of securities of the Company have rights to the registration
thereof under the Registration Statement;
(x) To the extent summarized therein, all contracts and agreements
summarized in the Registration Statement and the Prospectus are accurately
summarized therein in all material respects, conform in all material
respects to the descriptions thereof contained therein, and, to the extent
such contracts or agreements or any other material agreements are required
under the Act or the rules and regulations thereunder to be filed as
exhibits to the Registration Statement, they have been so filed, and such
counsel does not know of any contracts or other documents required to be
summarized or disclosed in the Prospectus or to be so filed as an exhibit
to the Registration Statement, which have not been so summarized or
disclosed or so filed;
(xi) All descriptions in the Prospectus of statutes, regulations or
legal or governmental proceedings are accurate summaries thereof and
accurately present the information required to be described with respect to
such matters in all material respects;
(xii) The Registration Statement has become effective under the Act,
the Prospectus has been filed in accordance with Rule 424(b) of the rules
and regulations of the Commission under the Act, including the applicable
time periods set forth therein, or such filing is not required and, to the
best knowledge of such counsel, no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the Act,
and the Registration Statement, the Prospectus and each amendment or
supplement thereto, as of their respective effective or issue dates,
complied as to form in all material respects with the requirements of the
Act and the rules and regulations thereunder; it being understood that such
counsel need express no opinion as to the financial statements and
schedules or other financial and statistical data contained in the
Registration Statement or the Prospectus.
(xiii) The Selling Stockholder has full legal right, power and
authority to enter into this Agreement and each of the Reorganization
Agreements to which it is a party and to perform its obligations under this
Agreement including, but not limited to, sell, transfer and deliver the
Securities being sold by the Selling Stockholder hereunder in the manner
provided in this Agreement; the execution and delivery of this Agreement
and each of the Reorganization Agreements to which the Selling Stockholder
is a party have been duly authorized by all necessary corporate or trust
action of the Selling Stockholder; this Agreement and each of the
Reorganization Agreements to which the Selling Stockholder is a party, have
been duly executed and delivered by the Selling Stockholder; the Agreement
and each of the Reorganization Agreements to which the Selling Stockholder
is a Party are
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legal, valid and binding agreements of the Selling Stockholder, enforceable
in accordance with their terms, except as enforcement of the same may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law);
(xiv) Upon delivery of and payment for the Securities being sold by
the Selling Stockholder, each of Underwriters who has purchased such
Securities in good faith and without notice of any lien, encumbrance,
equity, security interest, deficit or other adverse claim within the
meaning of the Uniform Commercial Code, will receive good and valid title
to such Securities, free and clear of all liens, encumbrances, equities,
security interests, claims or other defects;
(xv) The sale of the Securities to the Underwriters by the Selling
Stockholder pursuant to this Agreement, the compliance by the Selling
Stockholder with the other provisions of this Agreement; the performance of
the transactions described in the Prospectus under the captions
"Reorganization and Termination of S Corporation Status" and the
consummation of the other transactions herein and therein contemplated do
not (i) conflict with, or result in a breach or violation of any of the
terms and provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge, claim or encumbrance on any
property of the Selling Stockholder under, any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Selling
Stockholder is a party or by which the Selling Stockholder or its property
is bound or any statute or any judgment, decree, order, rule or regulation
of any court or other governmental authority or any arbitrator applicable
to the Selling Stockholder, or (ii) require the consent, approval,
authorization, order, registration or qualification of or with any
governmental authority, except such as have been obtained and such as may
be required under state or foreign securities or Blue Sky laws;
(xvi) There are no transfer or other taxes (other than income taxes)
known to such counsel payable in connection with the sale and delivery of
the Securities by the Selling Stockholder to the several Underwriters or
all such taxes have been fully paid in connection with such sale and
delivery;
(xvii) The Company is not an "investment company" subject to
registration or regulation under the Investment Company Act or a company
controlled by an "investment company" subject to such registration or
regulation.
(xviii) Pursuant to the Patent Assignment Agreement, the entire
interests in and to the Intellectual Property (as defined in the Patent
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Assignment Agreement) has been sold, assigned and transferred to the
Company; and
(xix) The Common Stock of the Company has been registered under the
Exchange Act.
Such counsel shall also state that, although such counsel are not
passing upon and do not assume any responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement or any
amendment or supplemental thereto, or the Prospectus or any amendment or
supplement thereto, nothing has come to such counsel's attention that would lead
such counsel to believe that either the Registration Statement or any amendment
or supplement thereto, at the time such Registration Statement or amendment or
supplement became effective and as of the Time of Delivery, or the Prospectus or
any amendment or supplement thereto, as of its date and as of the Time of
Delivery, contains or contained any untrue statement of material fact or omitted
or omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading (it being understood that such counsel need express no
opinion as to the financial statements and schedules and other financial and
statistical data contained in the Registration Statement and the Prospectus).
In rendering their opinions set forth in Section 7(d) above, (a) such
counsel may rely, to the extent deemed advisable by such counsel, as to factual
matters, upon certificates of public officials and officers of the Company, and
(b) such counsel may limit their opinions to the laws of the State of
California, the corporate law of the State of Delaware and the United States
federal securities laws.
(e) Troop Meisinger Steuber & Pasich, LLP, counsel to the Underwriters,
shall have furnished to you their written opinion or opinions, dated the Time of
Delivery, in form and substance satisfactory to you, with respect to the
incorporation of the Company, the validity of the Securities, the Registration
Statement, the Prospectus and other related matters as you may reasonably
request, and such counsel shall have received such papers and information as
they may reasonably request to enable them to pass upon such matters;
(f) At the time this Agreement is executed and also at the Time of
Delivery, Grant Thornton LLP shall have furnished to you a letter or letters,
dated the date of this Agreement and the Time of Delivery, in form and substance
satisfactory to you, to the effect, that:
(i) They are independent accountants with respect to the Company
within the meaning of the Act and the applicable published rules and
regulations thereunder;
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(ii) In their opinion the financial statements of the Company
(including the related notes) included in the Registration Statement and
Prospectus and covered by their reports included therein comply as to form
in all material respects with the applicable accounting requirements of the
Act and the published rules and regulations thereunder;
(iii) On the basis of specified procedures as of a specified date
not more than five days prior to the date of their letter (which procedures
do not constitute an examination made in accordance with generally accepted
auditing standards), consisting of a reading of the latest available
unaudited interim consolidated financial statements of the Company, a
reading of the latest available minutes of any meeting of the Board of
Directors and stockholders of the Company since the date of the latest
audited financial statements included in the Prospectus, inquiries of
officials of the Company who have responsibility for financial and
accounting matters, and such other procedures or inquiries as are specified
in such letter, nothing came to their attention that caused them to believe
that:
(A) The unaudited condensed financial statements of the
Company included in the Prospectus do not comply in form in all
material respects with the applicable accounting requirements of the
Act and the rules and regulations promulgated thereunder or are not
presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
financial statements included in the Registration Statement and the
Prospectus;
(B) As of a specified date not more than five days prior to
the date of their letter, there was any change in the capital stock,
or the obligations or current liabilities of the Company on a
consolidated basis, or any decrease in total assets, total current
assets, or stockholders' equity or other items specified by the
Representatives, of the Company on a consolidated basis, each as
compared with the amounts shown on the March 31, 1996 balance sheet
included in the Registration Statement and the Prospectus, except in
each case for changes, increases or decreases which the Prospectus
discloses have occurred or may occur or such other changes, decreases
or increases which are described in their letter and which do not, in
the sole judgment of the Representatives, make it impractical or
inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement; and
(C) For the period from March 31, 1996 to a specified date
not more than five days prior to the date of such letter, there was
any decrease, as compared with the corresponding period of the
preceding fiscal year, in the following amounts; sales, income from
operations, pro forma net income or pro forma net income per share of
the Company, except in all instances for decreases which the
Registration Statement
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discloses have occurred or may occur; or such other decreases which
are described in their letter and which do not, in the sole judgment
of the Representatives, make it impractical or inadvisable to proceed
with the purchase and delivery of the Securities as contemplated by
the Registration Statement; and
(iv) In addition to the examination referred to in their reports
included in the Registration Statement and the Prospectus and the limited
procedures referred to in clause (iii) above, they have carried out certain
specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records of
the Company which appear in the Prospectus, or in Part II of, or in
exhibits and schedules to, the Registration Statement, and have compared
such amounts and financial information with the accounting records of the
Company, and have found them to be in agreement and have proved the
mathematical accuracy of certain specified percentages.
(g) The Company shall not have sustained since the date of the latest
audited financial statements included in the Prospectus, any loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree; and since the respective dates as of which
information is given in the Prospectus, there shall not have been any material
change in the capital stock (other than shares issued pursuant to the exercise
of employee shares or pursuant to the terms of convertible securities of the
Company outstanding on the date hereof) or short-term debt or long-term debt of
the Company nor any change or any development reasonably likely to result in a
prospective change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the Company,
otherwise than as set forth or contemplated in the Prospectus [and except for
the incurrence of an additional $_____ million in indebtedness under the
Revolving Credit Facility to fund the purchase of the Channell Patents, which
indebtedness will be repaid with proceeds of this Offering], the effect of
which, in any such case is in your reasonable judgment so material and adverse
as to make it impracticable or inadvisable to proceed with the public offering
or the delivery of the Securities on the terms and in the manner contemplated in
the Prospectus;
(h) Between the date hereof and the Time of Delivery there shall have
been no declaration of war by the Government of the United States; at the Time
of Delivery there shall not have occurred any material adverse change in the
financial or securities markets in the United States or in political, financial
or economic conditions in the United States or any outbreak or material
escalation of hostilities or other calamity or crisis, the effect of which is
such as to make it, in the judgment of the Representatives, impracticable to
market the Securities or to enforce contracts for the resale of Securities and
no event shall have occurred resulting in (i) trading in securities generally on
the New York Stock Exchange or in the Common Stock on the principal securities
exchange
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<PAGE>
or market in which the Common Stock is listed or quoted being suspended or
limited or minimum or maximum prices being generally established on such market,
or (ii) additional material governmental restrictions, not in force on the date
of this Agreement, being imposed upon trading in securities generally by the New
York Stock Exchange or in the Common Stock on the principal securities exchange
or market in which the Common Stock is listed or quoted or by order of the
Commission or any court or other governmental authority, or (iii) a general
banking moratorium being declared by either Federal or New York authorities;
(i) The Company and the Selling Stockholder shall have furnished or
caused to be furnished to you at the Time of Delivery certificates signed by the
chief executive officer and the chief financial officer, on behalf of the
Company, and by the Selling Stockholder satisfactory to you as to such matters
as you may reasonably request and as to (i) the accuracy of their respective
representations and warranties herein at and as of the Time of Delivery and (ii)
the performance by the Company and the Selling Stockholder of all their
respective obligations hereunder to be performed at or prior to the Time of
Delivery; the Company and the Selling Stockholder shall have furnished or caused
to be furnished to you at the Time of Delivery certificates signed by the chief
executive officer and the chief financial officer, on behalf of the Company, and
by the Selling Stockholder as to (i) the fact that they have carefully examined
the Registration Statement and Prospectus and, (a) as of the Effective Date, the
statements contained in the Registration Statement and the Prospectus were true
and correct in all material respects and neither the Registration Statement nor
the Prospectus omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (b) since the
Effective Date, no event has occurred that is required by the Act or the rules
and regulations of the Commission thereunder to be set forth in an amendment of,
or a supplement to, the Prospectus that has not been set forth in such an
amendment or supplement; and (ii) the matters set forth in subsection (a) of
this Section 7;
(j) Each director and executive officer of the Company and the Selling
Stockholder shall have delivered to you an agreement not to offer, sell,
contract to sell or otherwise dispose of any shares of capital stock of the
Company (or securities convertible into, or exchangeable for, capital stock of
the Company), directly or indirectly, for a period of 180 days after the date of
this Agreement, without the prior written consent of Schroder Wertheim & Co.
Incorporated;
(k) Each Existing Stockholder who is not required to execute an agreement
pursuant to Section 7(j) above, shall have delivered to you an agreement not to
offer, sell, contract to sell or otherwise dispose of any shares of capital
stock of the Company (or securities convertible into or exchangeable for,
capital stock of the Company), except pursuant to the provisions of Rule 144 of
the Exchange Act applicable to "Affiliates" of the Company.
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<PAGE>
(l) The Company shall have delivered to you evidence that the Securities
have been authorized for quotation on the Nasdaq National Market as of the
Effective Date;
(m) The Company and each of the other parties thereto shall have entered
into each of the Reorganization Agreements and each of the parties thereto shall
have fully performed all of their obligations thereunder. Each of the
transactions described in the Prospectus under the caption, "Reorganization and
Termination of S Corporation Status" shall have been completed (other than the
payment of the S Corporation Distribution (as defined in the Prospectus), which
will be paid immediately following the Time of Delivery) to the satisfaction of
Troop Meisinger Steuber & Pasich, LLP, counsel to the Underwriters, and Troop
Meisinger Steuber & Pasich, LLP, shall have been timely furnished with such
papers and information as they may reasonably have requested to enable them to
pass upon the matters referred to in this subsection; and
(n) The Company shall have caused at least three independent directors to
be elected to the board of directors effective immediately following the time of
Delivery.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or in any
Blue Sky application or other document executed by the Company specifically for
that purpose or based upon information furnished by the Company filed in any
state or other jurisdiction in order to qualify any or all of the Securities
under the securities laws thereof or filed with the Commission or any securities
association or securities exchange (each, an "Application"), or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements made therein not misleading, or (ii) any
untrue statement or alleged untrue statement made by the Company in Section 1A
of this Agreement, or (iii) the employment by the Company of any device, scheme
or artifice to defraud, or the engaging by the Company in any act, practice or
course of business which operates or would operate as a fraud or deceit, or any
conspiracy with respect thereto, in which the Company shall participate, in
connection with the issuance and sale of any of the Securities, and will
reimburse each Underwriter for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating, preparing to defend,
defending or appearing as a third-party witness in connection with any such
action or claim; provided, however, that (x) the Company and the Selling
-------- -------
Stockholder shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission relating
to an Underwriter made in any Preliminary Prospectus, the Registration
Statement, the Prospectus or such amendment or supplement or any Application in
reliance upon and in conformity with written information furnished to the
Company or the Selling Stockholder by such Underwriter through you expressly for
use therein.
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<PAGE>
(y) the Selling Stockholder shall be liable hereunder only to the
extent demand for indemnification is first made on the Company and the
Company fails to pay the amount due to the Underwriter within 30 days of
such demand, and (z) the liability of the Selling Stockholder pursuant to
all provisions of this Section 8 of this Agreement shall not in any event
exceed $1,000,000.
(b) The Selling Stockholder will indemnify and hold harmless each
Underwriter and the Company against any losses, claims, damages or
liabilities to which such Underwriter or the Company may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of a material fact
contained in the Preliminary Prospectus, the Registration Statement, or the
Prospectus, or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements made therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in the
Preliminary Prospectus, the Registration Statement, the Prospectus or such
amendment or supplement in reliance upon and in conformity with information
furnished in writing to such Underwriter or the Company by the Selling
Stockholder expressly for use therein, or (ii) any untrue statement or
alleged untrue statement made by the Selling Stockholder in Section 1B of
this Agreement, and will reimburse such Underwriter, or the Company for any
legal or other expenses incurred by such Underwriter or the Company in
connection with investigating, preparing to defend, defending or appearing
as a third-party witness in connection with any such action or claim.
(c) In addition to any obligations of the Company and the Selling
Stockholder under Section 8(a) and 8(b), the Company and the Selling
Stockholder agree that they shall perform their indemnification obligations
under Section 8(a) and Section 8(b) (as modified by the last paragraph of
this Section 8(c)) with respect to counsel fees and expenses and other
expenses reasonably incurred by making payments within 45 days to the
Representative in the amount of the statements of the Representative's
counsel or other statements which shall be forwarded by the Representative,
and that it shall make such payments notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
obligation to reimburse the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by
a court until such time as a court orders return of such payments.
The indemnity agreement in Section 8(a) and Section 8(b) shall
be in addition to any liability which the Company or the Selling
Stockholder may otherwise have and shall extend upon the same terms and
conditions to each person, if any, who controls any Underwriter within the
meaning of the Act or the Exchange Act.
(d) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company or
the Selling
27
<PAGE>
Stockholder may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or any Application, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement, the Prospectus or such
amendment or supplement or any Application in reliance upon and in
conformity with written information furnished to the Company or the Selling
Stockholder by such Underwriter relating to such Underwriter through you
expressly for use therein, and will reimburse the Company or the Selling
Stockholder for any legal or other expenses reasonably incurred by the
Company or the Selling Stockholder in connection with investigating or
defending any such action or claim.
The indemnity agreement in this Section 8(d) shall be in
addition to any liability which the respective Underwriters may otherwise
have and shall extend, upon the same terms and conditions, to each officer
and director of the Company and to each person, if any, who controls the
Company within the meaning of the Act or the Exchange Act.
(e) Promptly after receipt by an indemnified party under Section
8(a), 8(b) or 8(d) of notice of the commencement of any action (including
any governmental investigation), such indemnified party shall, if a claim
in respect thereof is to be made against the indemnifying party under such
subsection, notify the indemnifying party in writing of the commencement
thereof; but the omission so to notify the indemnifying party shall not
relieve it from any liability which it may have to any indemnified party
under Section 8(a), 8(b) or 8(d) or from any liability which it may have to
any indemnified party otherwise than under such Section 8(a), 8(b) or 8(d)
except to the extent it was prejudiced by such failure. In case any such
action shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than
reasonable costs of investigation. If, however, (i) the indemnifying party
has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party or (ii) an indemnified party shall have
reasonably concluded that representation of such indemnified party and the
indemnifying party by the same counsel would be inappropriate under
applicable standards of professional conduct due to actual or potential
differing interests between them and the indemnified party so notifies the
indemnifying party, then the
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indemnified party shall be entitled to employ counsel different from
counsel for the indemnifying party at the expense of the indemnifying party
and the indemnifying party shall not have the right to assume the defense
of such indemnified party. In no event shall the indemnifying parties be
liable for fees and expenses of more than one counsel (in addition to local
counsel) for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising
out of the same set of allegations or circumstances. The counsel with
respect to which fees and expenses shall be so reimbursed shall be
designated in writing by Schroder Wertheim & Co. Incorporated in the case
of parties indemnified pursuant to Section 8(a) and Section 8(b) and by the
Company in the case of parties indemnified pursuant to Section 8(d).
If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 8(c), the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected
without its written consent if (i) such settlement is entered into more
than 30 days after receipt by such indemnifying party of the aforesaid
request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or
threatened proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such proceeding.
(f) In order to provide for just and equitable contribution under
the Act in any case in which (i) any Underwriter (or any person who
controls any Underwriter within the meaning of the Act or the Exchange Act)
makes claim for indemnification pursuant to Section 8(a) or Section 8(b)
hereof, but is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such indemnification
may not be enforced in such case notwithstanding the fact that Section 8(a)
or Section 8(b) provides for indemnification in such case or (ii)
contribution under the Act may be required on the part of any Underwriter
or any such controlling person in circumstances for which indemnification
is provided under Section 8(d), then, and in each such case, each
indemnifying party shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject as an indemnifying
party hereunder (after contribution from others) in such proportion as is
appropriate to reflect the relative benefits received by the Company and
the Selling Stockholder on the one hand and the Underwriters on the other
from the offering of the Securities. If, however, the allocation provided
by the immediately preceding sentence is not permitted by applicable law,
then each indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company and the Selling Stockholder on the one hand and the Underwriters on
the other in connection with the statements or omissions which
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<PAGE>
resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling Stockholder
on the one hand and the Underwriters on the other shall be deemed to be in
the same proportion as the total net proceeds from the offering of the
Securities purchased under this Agreement (before deducting expenses)
received by the Company and the Selling Stockholder bear to the total
underwriting discounts and commissions received by the Underwriters with
respect to the Securities purchased under this Agreement, in each case as
set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied
by the Company or the Selling Stockholder on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The Company, the Selling Stockholder and the Underwriters
agree that it would not be just and equitable if contributions pursuant to
this Section 8(f) were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this Section 8(f). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages
or liabilities (or actions in respect thereof) referred to above in this
Section 8(f) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8(f), (x) no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty
of a fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations
in this Section 8(f) to contribute are several in proportion to their
respective underwriting obligations and not joint.
(g) Promptly after receipt by any party to this Agreement of notice
of the commencement of any action, suit or proceeding, such party will, if
a claim for contribution in respect thereof is to be made against another
party (the "contributing party"), notify the contributing party of the
commencement thereof; but the omission so to notify the contributing party
will not relieve it from any liability which it may have to any other party
for contribution under the Act except to the extent it was prejudiced in
any material respect by such failure or from any liability which it may
have to any other party other than for contribution under the Act. In case
any such action, suit or proceeding is brought against any party, and such
party notifies a contributing party of the commencement thereof, the
contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified.
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9. (a) If any Underwriter shall default in its obligation to purchase
the Firm Securities which it has agreed to purchase hereunder, you may in your
discretion arrange for you or another party or other parties to purchase such
Firm Securities on the terms contained herein. If the aggregate number of Firm
Securities as to which Underwriters default is more than one-eleventh of the
aggregate number of all the Firm Securities and within 36 hours after such
default by any Underwriter you do not arrange for the purchase of such Firm
Securities, then the Company and the Selling Stockholder shall be entitled to a
further period of 36 hours within which to procure another party or other
parties satisfactory to you to purchase such Firm Securities on such terms. In
the event that, within the respective prescribed periods, you notify the Company
and the Selling Stockholder that you have so arranged for the purchase of such
Firm Securities, or the Company and the Selling Stockholder notify you that they
have so arranged for the purchase of such Firm Securities, you or the Company
shall have the right to postpone the Time of Delivery, for a period of not more
than seven days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Firm Securities.
(b) If, after giving effect to any arrangements for the purchase of
the Firm Securities of such defaulting Underwriter or Underwriters by you
or the Company and the Selling Stockholder or both as provided in
subsection (a) above, the aggregate number of such Firm Securities which
remain unpurchased does not exceed one-eleventh of the aggregate number of
all the Firm Securities, then the Company and the Selling Stockholder shall
have the right to require each non-defaulting Underwriter to purchase the
number of the Firm Securities which such Underwriter agreed to purchase
hereunder and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Firm Securities which
such Underwriter agreed to purchase hereunder) of the Firm Securities of
such defaulting Underwriter or Underwriters for which such arrangements
have not been made; but nothing shall relieve a defaulting Underwriter from
liability for its default.
(c) If, after giving effect to any arrangements for the purchase of
the Firm Securities of a defaulting Underwriter or Underwriters by you or
the Company and the Selling Stockholder as provided in subsection (a)
above, the aggregate number of such Firm Securities which remain
unpurchased exceeds one-eleventh of the aggregate number of all the Firm
Securities, or if the Company and the Selling Stockholder shall not
exercise the right described in subsection (b) above to require non-
defaulting Underwriters to purchase Firm Securities of a defaulting
Underwriter or Underwriters, then this Agreement shall thereupon terminate
without liability on the part of any non-defaulting Underwriter, the
Company or the Selling Stockholder, except for the expenses to be borne by
the Company and the Selling Stockholder and the Underwriters as provided in
Section 6 hereof and the indemnity agreement in Section 8 hereof; but
nothing herein shall relieve a defaulting Underwriter from liability for
its default.
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10. The respective indemnities, agreements, representations,
warranties and other statements of the Company, the Selling Stockholder and
the several Underwriters, as set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement, shall remain in
full force and effect, regardless of any investigation (or any statement as
to the results thereof) made by or on behalf of any Underwriter or any
controlling person of any Underwriter, or the Company, or an officer or
director or controlling person of the Company, or the Selling Stockholder,
or any controlling person of the Selling Stockholder, and shall survive
delivery of and payment for the Securities.
11. This Agreement shall become effective (a) if the Registration
Statement has not heretofore become effective, at the earlier of 12:00
Noon, New York City time, on the first full business day after the
Registration Statement becomes effective, or at such earlier time after the
Registration Statement becomes effective as you may authorize the sale of
the Securities to the public by Underwriters or other securities dealers,
or (b) if the Registration Statement has heretofore become effective, at
the earlier of 24 hours after the filing of the Prospectus with the
Commission or at such time as you may authorize the sale of the Securities
to the public by Underwriters or securities dealers, unless, prior to any
such time you shall have received notice from the Company that it elects
that this Agreement shall not become effective, or you, or through you such
of the Underwriters as have agreed to purchase in the aggregate fifty
percent or more of the Firm Securities hereunder, shall have given notice
to the Company that you or such Underwriters elect that this Agreement
shall not become effective; provided, however, that the provisions of this
Section and Section 6 and Section 8 hereof shall at all times be effective.
If this Agreement shall be terminated pursuant to Section 9
hereof, or if this Agreement, by election of you or the Underwriters, shall
not become effective pursuant to the provisions of this Section, the
Company and the Selling Stockholder shall not then be under any liability
to any Underwriter except as provided in Section 6 and Section 8 hereof,
but if this Agreement becomes effective and is not so terminated but the
Securities are not delivered by or on behalf of the Company or the Selling
Stockholder as provided herein because the Company or the Selling
Stockholder has been unable for any reason to comply with the terms and
conditions hereof, the Company will reimburse the Underwriters through you
for all out-of-pocket expenses approved in writing by you, including fees
and disbursements of counsel, reasonably incurred by the Underwriters in
making preparations for the purchase, sale and delivery of the Securities,
but the Company and the Selling Stockholder shall then be under no further
liability to any Underwriter except as provided in Section 6 and Section 8
hereof.
12. The statements set forth in the last paragraph on the front
cover page of the Prospectus, the paragraphs on the inside front cover of
the Prospectus containing passive market making and stabilization language
and the statements under the caption "Underwriting" in the Prospectus
constitute the only information furnished by any Underwriter through the
Representatives to the Company and the Selling Stockholder for purposes of
this Agreement.
13. In all dealings hereunder, you shall act on behalf of each of
the Underwriters, and the parties hereto shall be entitled to act and rely
upon any statement, request, notice or agreement on behalf of any
Underwriter made or given by you jointly or by Schroder Wertheim
32
<PAGE>
& Co. Incorporated on behalf of you as the Representatives, and in all
dealings with the Selling Stockholders hereunder, you and the Company shall
be entitled to act and rely upon any statement, request, notice or
agreement furnished in writing by or on behalf of such Selling Stockholder.
All statements, requests, notices and agreements hereunder,
unless otherwise specified in this Agreement, shall be in writing and, if
to the Underwriters, shall be delivered or sent by mail, telex or facsimile
transmission (subsequently confirmed by delivery or by letter sent by mail)
to you as the Representatives in care of Schroder Wertheim & Co.
Incorporated, Equitable Center, 787 Seventh Avenue, New York, New York
10019, Attention: Syndicate Department; and if to the Company or the
Selling Stockholder, shall be delivered or sent by letter sent by mail,
telex or facsimile transmission (subsequently confirmed by delivery or by
letter sent by mail) to the address of the Company set forth in the
Registration Statement, Attention: Chief Executive Officer; provided,
--------
however, that any notice to any Underwriter pursuant to Section 8(d)
-------
hereof shall be delivered or sent by mail, telex or facsimile transmission
(subsequently confirmed by delivery or by letter sent by mail) to such
Underwriter at its address set forth in its Underwriters' Questionnaire, or
telex constituting such Questionnaire, which address will be supplied to
the Company by you upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof.
14. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and the Selling Stockholder and,
to the extent provided in Section 8 and Section 10 hereof, the officers and
directors of the Company and each person who controls the Company, the
Selling Stockholder or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. No
purchaser of any of the Securities from any Underwriter shall be deemed a
successor or assign by reason merely of such purchase.
15. Time shall be of the essence of this Agreement. As used herein,
the term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
16. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS
PRINCIPLES THEREOF.
17. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be
an original, but all such counterparts shall together constitute one and
the same instrument. If the foregoing is in accordance with your
understanding, please sign and return to us two counterparts hereof, and
upon the acceptance hereof by you, on behalf of each of the Underwriters,
this letter and such acceptance hereof shall constitute a binding agreement
among each of the Underwriters, the Company and the Selling Stockholder. It
is understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth in a form of Agreement
Among Underwriters, manually or facsimile executed counterparts of which,
to the extent
33
<PAGE>
practicable and upon request, shall be submitted to the Company for
examination, but without warranty on your part as to the authority of the
signers thereof.
Very truly yours,
CHANNELL COMMERCIAL CORPORATION
By: ____________________________
Name: ____________________________
Title: ____________________________
SELLING STOCKHOLDER
CHANNELL FAMILY TRUST
By: _________________________________
William H. Channell, Sr., trustee
By: _________________________________
Jacqueline M. Channell, trustee
34
<PAGE>
ACCEPTED AS OF THE DATE HEREOF:
SCHRODER WERTHEIM & CO. INCORPORATED
SMITH BARNEY INC
By: SCHRODER WERTHEIM & CO. INCORPORATED
By: _______________________________________
Director
By: SMITH BARNEY INC.
By: _______________________________________
Managing Director
35
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Underwriter Number of Firm Securities
----------- -------------------------
<S> <C>
Schroder Wertheim & Co. Incorporated ............
Smith Barney Inc.................................
_________________________
Total............................................
=========================
</TABLE>
36
<PAGE>
Exhibit 4
COMMON STOCK [Logo of Channell] COMMON STOCK
- ------------ ------------
NUMBER
CC-
PAR VALUE $.01 PAR VALUE $.01
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 159186 10 5
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
==============CHANNELL COMMERCIAL CORPORATION===============
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed.
This Certificate is not valid unless duly countersigned by the
Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized Officers.
DATED:
Countersigned and Registered:
BOSTON EQUISERVE L.P. [SEAL]
Transfer Agent and Registrar
By: /s/ Gary W. Baker /s/ William H. Channell, Jr.
AUTHORIZED SIGNATURE TREASURER PRESIDENT
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right
of survivorship and not as
tenants in common
UNIF GIFT MIN ACT - ____________Custodian_______________
(Cust) (Minor)
under Uniform Gifts to Minors Act
------------------------------------
(State)
Additional abbreviations may also be used though not in the above list.
For Value received,_________________hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
- ------------------------------
_______________________________________________________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPE NAME AND ADDRESS)
_______________________________________________________________________________
________________________________________________________________________ Shares
of the Common Stock represented by this Certificate, and hereby irrevocably
constitutes and appoints
______________________________________________________________________ Attorney
to transfer this Certificate on the books of the Company with full power of
substitution in the premises.
Dated:____________________________ ___________________________________________
NOTICE The signature to this Assignment must
correspond with the name as written
upon the face of this Certificate in
every particular without alteration
or enlargement or any change
whatsoever.
SIGNATURE(S) GUARANTEED
___________________________________
NOTICE The signature(s) should be
guaranteed by an eligible
guarantor institution,
(Banks, Stockbrokers
Savings and Loan Associations
and Credit Unions) with
membership in an approved
signature guarantee
medallion program pursuant
to S.E.C. Rule 17Ad-15.
<PAGE>
EXHIBIT 10.1
================================================================================
S CORPORATION TERMINATION AND
TAX ALLOCATION AGREEMENT
by and among
CHANNELL COMMERCIAL CORPORATION
a Delaware corporation,
and
THE INDIVIDUALS LISTED ON SCHEDULE A
Dated as of ___________, 1996
================================================================================
<PAGE>
S CORPORATION TERMINATION AND
TAX ALLOCATION AGREEMENT
This S CORPORATION TERMINATION AND TAX ALLOCATION AGREEMENT made and
entered into as of this __th day of ________, 1996 by and among Channell
Commercial Corporation, a Delaware corporation, and the individuals listed on
SCHEDULE A, with reference to the following facts:
A. All capitalized terms not otherwise defined herein shall have the
meanings set forth in SCHEDULE B.
B. The Stockholders own all of the issued and outstanding capital
stock of the Company and will continue to own all of such stock until
immediately prior to the anticipated public offering of the Company's stock (the
"Public Offering").
C. The Company (i) was a C Corporation from inception through January
31, 1990, (ii) became an S Corporation on February 1, 1990, (iii) will report as
an S corporation through the day prior to the Termination Date and (iv)
thereafter will again be a C corporation.
D. The Company and the Stockholders wish to terminate the Company's S
election prior to the Public Offering.
E. The Company and the Stockholders wish to enter into an agreement
as to the method for allocating the Company's income during its S Termination
Year between the S Short Year and the C Short Year pursuant to Code Section
1362(e)(3).
F. The Company and the Stockholders wish to provide for a tax
allocation and reimbursement agreement in connection with the Company's election
and termination as an S Corporation.
NOW, THEREFORE, based on the above premises and in consideration of
the mutual covenants and agreements contained herein, the parties hereby agree
as follows:
1. The Termination; S Termination Year.
-----------------------------------
1.1 Maintenance of S Status. The Stockholders represent and warrant
-----------------------
that the Company has qualified and has had the right to be treated as an S
Corporation since its election to be treated as an S Corporation until the date
hereof.
1.2 Termination of S Status. The Company shall elect, and the
-----------------------
Stockholders shall consent, to terminate the Company's status as an S
Corporation by revocation pursuant to Code Section 1362(d)(1)(D) on a day prior
to the day of the closing of the Public Offering. Pursuant to the Revocation
Resolution, the Board of Directors of the Company shall elect to revoke the
election under section 1362(a) of the Code according
<PAGE>
to the rule set forth in Code Section 1362(d)(1), and each Stockholder shall
sign the requisite consents to said revocation on or prior to the Termination
Date.
1.3 Effective Date. Pursuant to Section 1362(d)(1)(D) of the Code,
--------------
the termination shall be effective on the date specified in the consent to
revocation.
1.4 S Termination Year. The calendar year in which the S Corporation
------------------
status of the Company is terminated will be an S Termination Year for federal
tax purposes.
1.5 S Short Year. Pursuant to Section 1362(e)(1) of the Code, the S
------------
Termination Year of the Company shall be divided into two short taxable years:
an S Short Year and a C Short Year. As defined in Section 1362(e)(1)(A) of the
Code, the S Short Year of the Company shall be that portion of the Company's S
Termination Year ending on the day immediately preceding the Termination Date.
For federal tax purposes, the Company will be treated as an S Corporation during
its S Short Year.
1.6 C Short Year. Pursuant to Section 1362(e)(1)(B) of the Code,
------------
that portion of the S Termination Year of the Company beginning on the
Termination Date and ending on the last day of the calendar year shall be the C
Short Year of the Company. For federal tax purposes, the Company will be
treated as a C Corporation during its C Short Year.
2. Allocation of Income.
--------------------
The Company shall elect, and the Stockholders shall consent, pursuant
to Section 1362(e)(3) of the Code, to allocate tax items to its S Short Year and
C Short Year pursuant to normal tax accounting rules (the "closing of the books
method") rather than by the pro rata allocation method contained in Section
1362(e)(2) of the Code. Pursuant to the Allocation Resolution, the Board of
Directors of the Company shall elect to allocate the S Termination Year income
of the Company according to the rule set forth in Code Section 1362(e)(3), and
all persons who were or become shareholders of the Company at any time during
the S Termination Year shall sign the requisite consents to said allocation on
the Termination Date.
3. Taxes.
-----
3.1 Liability For Taxes Incurred During S Corporation Taxable Years.
---------------------------------------------------------------
Each Stockholder, severally, covenants and agrees that: (i) such Stockholder has
duly included, or will duly include, in his or her own federal and state income
tax returns his or her allocable share of items of income, gain, loss,
deduction, or credit attributable (pursuant to Section 2 hereof) to the S Short
Year of the Company or any prior period (or that portion of any period) during
which the Company was an S Corporation, as required by applicable law; (ii) such
returns shall include his or her allocable share of S Corporation Taxable
Income, and (iii) such Stockholder shall pay any and all taxes attributable to S
Corporation Taxable Income that he or she is required to pay for all taxable
periods (or that portion of any period) during which the Company was an S
-2-
<PAGE>
Corporation. Each Stockholder, severally (according to the percentage of the
outstanding shares of the Company owned by each Stockholder on the day prior to
the Termination Date) and not jointly, covenants and agrees to pay any income
taxes, interest or penalties thereon assessed against the Company with respect
to taxable periods during which it was treated as an S Corporation.
3.2 Preparation of Returns. The Company covenants and agrees that:
----------------------
(i) the Company shall be responsible for and shall effect the filing of all
federal, state, foreign and local returns for the Company with respect to any
and all taxable periods; (ii) such returns shall include the Company's income
from all sources for all periods covered by the returns; and (iii) the Company
shall pay any and all taxes required to be paid by the Company for the C Short
Year and all subsequent years as required by applicable law.
3.3 The Company's Reimbursement for Tax Liabilities. The Company
-----------------------------------------------
hereby agrees to reimburse each Stockholder for any federal and state income tax
liability (including interest and penalties), if any, incurred by each such
Stockholder resulting from a final determination of an adjustment (by reason of
an amended return, claim for refund, audit or otherwise) to the Company's
taxable income (or loss) resulting in an increase in the federal or state, as
the case may be, taxable income (or decrease in tax loss) of such Stockholder
with respect to such Stockholder's allocable share of S Corporation Taxable
Income and a corresponding decrease in the taxable income (or increase in tax
loss, including carryforwards) of the Company; provided, however, that the
-------- -------
amount of payments made by the Company pursuant to this Section 3.3 to any one
of the Stockholders shall not exceed the amount of refund (including interest)
or tax liability reduction at whatever time received by the Company with respect
to taxable income allocated to such Stockholder shifted from a C Corporation to
an S Corporation. The foregoing reimbursement obligations shall be treated as a
contingent obligation of the Company, distributed as of the date of this Tax
Agreement.
3.4 Stockholder Reimbursement For Tax Liabilities. Each Stockholder,
---------------------------------------------
severally (according to the percentage of the outstanding shares of the Company
owned by each Stockholder on the day prior to the Termination Date) and not
jointly, hereby agrees to reimburse the Company for any federal and state income
tax liability (including interest and penalties), if any, resulting from a final
determination of an adjustment (by reason of an amended return, claim for
refund, audit or otherwise) to the Stockholders' taxable income resulting in a
decrease in the Stockholder's S Corporation Taxable Income (or the affirmation
of a deduction already claimed which is consistent with an increase in tax
liability with respect to the Company) and a corresponding increase in the
federal or state, as the case may be, income tax liability of the Company;
provided, however, the amount of any such reimbursable tax liability shall be
- -------- -------
reduced by an amount equal to the refund of state income tax, including
interest, received by the Company for state income taxes paid by the Company
with respect to any taxable income shifted from an S Corporation taxable year to
a C Corporation taxable year of the Company which is subject to reimbursement
hereunder and provided further, the amount of the payments made by the
----------------
Stockholders pursuant to this Section 3.4 to the Company shall not exceed the
amount of the tax benefit received by the Stockholders
-3-
<PAGE>
with respect to taxable income shifted from an S Corporation taxable year to a C
Corporation taxable year.
3.5 Notice of Certain Facts, Conditions and Events. Upon any party
----------------------------------------------
to this Tax Agreement becoming aware of a fact, condition or event which could
reasonably lead to a claim for reimbursement under Section 3.1, 3.3 or 3.4 by
another party, the discovering party shall give prompt notice of such fact,
condition or event to all other parties to this Tax Agreement.
3.6 Payments. Each Stockholder or the Company, as the case may be,
--------
shall make any payment required under this Tax Agreement within 7 days after
receipt of notice from the other party that a payment is due by such other party
to the appropriate taxing authority.
3.7 Subrogation. The Reimbursing Party shall be subrogated to all
-----------
the rights of recovery that Reimbursed Party may have against any person or
organization in respect of the tax liabilities for which the Reimbursing Party
is providing reimbursement. Such right of subrogation shall not exceed the
amount paid by the Reimbursing Party to the Reimbursed Party. The Reimbursed
Party shall execute and deliver instruments and papers and do whatever else is
reasonably necessary to secure such rights of subrogation for the Reimbursing
Party. The Reimbursed Party shall provide all reasonable assistance as
requested by the Reimbursing Party in order for the Reimbursing Party to pursue
such rights of subrogation.
4. Miscellaneous.
-------------
4.1 Complete Agreement; Modifications. This Tax Agreement
---------------------------------
constitutes the parties' entire agreement with respect to the subject matter
hereof and supersedes all agreements, representations, warranties, statements,
promises and understandings, whether oral or written, with respect to the
subject matter hereof. This Tax Agreement may not be amended, altered or
modified except by a writing signed by each of the parties.
4.2 Representations and Warranties. The representations and
------------------------------
warranties in this Tax Agreement shall survive the execution hereof and remain
in full force and effect regardless of any disclosures made to or investigations
made by a party.
4.3 Additional Documents. Each party hereto agrees to execute any
--------------------
and all further documents and writings and to perform such other actions which
may be or become necessary or expedient to effectuate and carry out this Tax
Agreement.
4.4 Notices. Unless otherwise specifically permitted by this Tax
-------
Agreement, all notices under this Tax Agreement shall be in writing and shall be
delivered by personal service, telex, facsimile, telegram or first class or
certified mail, postage
-4-
<PAGE>
prepaid, to such address as may be designated from time to time by the relevant
party, and which shall initially be as follows:
If to the Company:
26040 Ynez Road
Temecula, CA 92591
(909) 694-9160 (telephone)
(909) 694-9170 (facsimile)
Attn: President
With a copy to:
Irell & Manella
1800 Avenue of the Stars
Suite 900
Los Angeles, California 90067
(310) 277-1010 (telephone)
(310) 203-7199 (facsimile)
Attn: Edmund M. Kaufman, Esq.
If to the Stockholders:
As set forth on SCHEDULE A.
Any notice sent by first class or certified mail shall be deemed to
have been given three (3) days after the date on which it is mailed. All other
notices shall be deemed given when received. No objection may be made to the
manner of delivery of any notice actually received in writing by an authorized
agent of a party.
4.5 No Third-Party Benefits. None of the provisions of this Tax
-----------------------
Agreement shall be for the benefit of, or enforceable by, any third-party
beneficiary.
4.6 Successors and Assigns. This Tax Agreement shall be binding upon
----------------------
and inure to the benefit of the parties, their respective successors and
permitted assigns.
4.7 No Assignment. None of the parties may assign any of his or its
-------------
rights under this Tax Agreement without the prior written consent of the others
except that the Company may assign its respective rights and obligations to the
surviving entity in a merger or consolidation involving the Company.
4.8 Severability. In case any one or more of the provisions
------------
contained in this Tax Agreement shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Tax Agreement,
and this Tax Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein. No term or
-5-
<PAGE>
provision of this Tax Agreement shall be construed so as to require the
commission of any act contrary to law, and wherever there is any conflict
between any provision of this Tax Agreement and any present or future statute,
law, ordinance, or regulation contrary to which the parties have no legal right
to contract, the latter shall prevail, but in such event the provision of this
Tax Agreement so affected shall be curtailed and limited only to the extent
necessary to bring it within the requirements of the law.
4.9 Governing Law. The rights and liabilities of the parties shall
-------------
be governed by the laws of the state of Delaware, regardless of the choice of
laws provisions of such state or any other jurisdiction.
4.10 Arbitration. Any controversy, dispute, or claim of whatever
-----------
nature arising out of, in connection with, or in relation to the interpretation,
performance or breach of this Tax Agreement, including any claim based on
contract, tort, or statute, shall be resolved at the request of any party to
this Tax Agreement, by final and binding arbitration administered by and in
accordance with the then existing Rules of Practice and Procedure of Judicial
Arbitration & Mediation Services, Inc., and judgment upon any award rendered by
the arbitrator(s) may be entered by any State or Federal Court having
jurisdiction thereof.
4.11 Attorneys' Fees. Should any litigation or arbitration be
---------------
commenced (including any proceedings in a bankruptcy court) between the parties
hereto or their representatives concerning any provision of this Tax Agreement
or the rights and duties of any person or entity hereunder, the party or parties
prevailing in such proceeding shall be entitled, in addition to such other
relief as may be granted, to the reasonable attorneys' fees and court costs
incurred by reason of such litigation or arbitration.
4.12 Headings. The headings in this Tax Agreement are inserted only
--------
as a matter of convenience, and in no way define, limit, or extend or interpret
the scope of this Agreement or of any particular Section.
4.13 Construction. As used in this Agreement, the term "person"
------------
means an individual, corporation, partnership, association (incorporated or
unincorporated), trust or other legally recognized entity.
4.14 Counterparts. This Tax Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4.15 Agreement Negotiated. The parties hereto are sophisticated and
--------------------
have been (or have been given the opportunity to be) represented by lawyers
throughout this transaction who have carefully negotiated the provisions hereof.
As a consequence, the parties do not believe that any statutory or common law
presumptions relating to the interpretation of contracts against the drafter of
any particular clause should be applied in this case and therefore waive the
effects of any such presumptions.
-6-
<PAGE>
Signature Page to Tax Agreement
-------------------------------
IN WITNESS WHEREOF, the parties hereto have duly executed this Tax
Agreement as of the day and year first set forth above.
CHANNELL COMMERCIAL CORPORATION,
a Delaware Corporation
_____________________________________
,
[title]
CHANNELL FAMILY TRUST
_____________________________________
William H. Channell, Sr.,
Trustee
_____________________________________
Jacqueline M. Channell,
Trustee
TAYLOR FAMILY TRUST
_____________________________________
Michele Taylor,
Trustee
_____________________________________
Roy Taylor,
Trustee
_____________________________________
WILLIAM H. CHANNELL, JR.
-7-
<PAGE>
_____________________________________
WILLIAM H. CHANNELL, SR.
_____________________________________
JACQUELINE M. CHANNELL
_____________________________________
CARRIE S. ROUVEYROL
_____________________________________
MICHELE TAYLOR
_____________________________________
CAROLYN CHANNELL*
_____________________________________
GEORGE ROUVEYROL*
_____________________________________
ROY TAYLOR*
*To the extent of his/her community property interest in the shares
-8-
<PAGE>
SCHEDULE B
Definitions
-----------
"ALLOCATION RESOLUTION" shall mean a resolution of the Board of
Directors of the Company in the form attached hereto as EXHIBIT 2.
"C CORPORATION" shall have the meaning set forth in Section 1361(a)(1)
of the Code.
"C SHORT YEAR" shall mean that portion of the S Termination Year of
the Company as defined in Section 1362(e)(1)(B) of the Code.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMPANY" shall mean Channell Commercial Corporation, a Delaware
corporation, and its predecessor, Channell Commercial Corporation, a California
corporation.
"REIMBURSED PARTY" shall mean the party (or parties) being reimbursed
under Section 3.3 or Section 3.4, as applicable.
"REIMBURSING PARTY" shall mean the party (or parties) providing
reimbursement under either Section .33 or Section 3.4, as applicable.
"REVOCATION RESOLUTION" shall mean a resolution of the Board of
Directors of the Company in the form attached hereto as EXHIBIT 1.
"S CORPORATION" shall have the meaning set forth in Section 1361(a)(2)
of the Code.
"S CORPORATION TAXABLE INCOME" shall mean taxable income (or loss) of
the Company from all sources during the period the Company was an S Corporation
through and including the close of business on the last day of the S Short Year
of the Company.
"S SHORT YEAR" shall mean that portion of the S Termination Year of
the Company as defined in Section 1362(e)(1)(A) of the Code.
"S TERMINATION YEAR" shall have the meaning set forth in Section
1362(e)(4) of the Code.
"STOCKHOLDERS" shall mean collectively the individuals listed on
SCHEDULE A.
-10-
<PAGE>
"TAX AGREEMENT" shall mean this S Corporation Termination and Tax
Allocation Agreement.
"TERMINATION DATE" shall mean the date on which the S Corporation
status of the Company is terminated pursuant to Section 1362(d)(2) of the Code.
-11-
<PAGE>
EXHIBIT 10.2
CHANNELL COMMERCIAL CORPORATION
1996 INCENTIVE STOCK PLAN
-------------------------
1. Purpose. The purpose of this 1996 Incentive Stock Plan (this "PLAN")
-------
is to secure for the Company and its stockholders the benefits arising from
stock ownership by key employees, directors and consultants as the Committee (as
hereinafter defined) may from time to time determine.
With respect to Stock Options (as hereinafter defined), the Plan will
provide a means whereby key employees, directors and consultants of the Company
may purchase shares of Common Stock, par value $.01 per share, of the Company
("COMMON STOCK") (i) pursuant to Stock Options that will qualify as "incentive
stock options" under Section 422 of the Internal Revenue Code of 1986, as
amended (the "CODE"), and (ii) pursuant to "non-incentive" or "non-qualified"
Stock Options.
2. Administration. The Plan shall be administered by the Board of
--------------
Directors of the Company or, in the discretion of the Board, a Committee (in
either case, the "COMMITTEE") consisting of two or more directors of the Company
to whom administration of the Plan has been duly delegated. If the Committee is
not the entire Board of Directors, the Committee shall be appointed by the Board
of Directors of the Company. From and after such time as the Company is subject
to the reporting requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT"), no director shall be appointed to
or shall serve on the Committee who has been granted or awarded equity
securities of the Company pursuant to the Plan or (except any such grant or
award that does not disqualify such director as a "disinterested person" under
Rule 16b-3 promulgated under the Exchange Act) any other plan of the Company or
its affiliates during the period of one year prior to such appointment. Except
as otherwise provided in the Company's Bylaws, any action of the Committee with
respect to administration of the Plan shall be taken by a majority vote at a
meeting at which a quorum is duly constituted or by unanimous written consent of
the Committee's members.
Subject to the provisions of the Plan, the Committee shall have sole and
final authority (i) to construe and interpret the Plan, (ii) to define the terms
used herein, (iii) to prescribe, amend and rescind rules and regulations
relating to the Plan, (iv) to make awards of Restricted Shares and Stock Options
hereunder, (v) to determine the individuals to whom and the time or times at
which such awards shall be made, the number of shares of Common Stock to be
subject to such awards, the vesting of such awards and the other terms of such
awards, (vi) in the case of Stock Options, to determine
-1-
<PAGE>
whether such Stock Options shall be intended as "incentive stock options" or
"non-incentive" or "non-qualified" Stock Options under Section 422 of the Code,
and (vii) to make all other determinations necessary or advisable for the
administration of the Plan. All determinations and interpretations made by the
Committee shall be binding and conclusive on all participants in the Plan and
their legal representatives and beneficiaries.
3. Shares Subject to the Plan. The shares to be allocated under this
--------------------------
Plan shall consist of the Company's authorized but unissued Common Stock.
Subject to adjustment as provided in Section 7 hereof, the aggregate number of
shares of Common Stock that may be allocated to awards made to participants
shall not exceed seven hundred and fifty thousand (750,000) of such shares.
Shares of Common Stock issued pursuant to the Plan and subsequently reacquired
by the Company shall be available for reissuance under the Plan, and shares of
Common Stock that are subject to Stock Options that lapse or terminate without
exercise shall be available to be subject to newly issued Stock Options under
the Plan.
4. Eligibility and Participation. All key employees, directors and
-----------------------------
consultants (excluding Committee members to the extent provided in Section 2) of
the Company shall be eligible for selection to participate in the Plan (each, a
"PARTICIPANT").
5. Awards. (a) A Participant may receive one or more awards hereunder,
------
at any time and from time to time, as determined by the Committee. As
determined by the Committee, awards may be in the form of (i) grants of
restricted stock the vesting of which is subject to certain conditions to be
determined by the Committee ("RESTRICTED SHARES"), (ii) options to purchase
Common Stock ("STOCK OPTIONS"), or (iii) any combination of the foregoing. All
awards of Restricted Shares shall be pursuant to, and shall be subject to the
terms and restrictions provided in, a Restricted Stock Agreement substantially
in the form attached to this Plan as Exhibit A or such alternative form
-
(consistent with the terms of this Plan) as the Committee may choose from time
to time; and all awards of Stock Options shall be pursuant to, and shall be
subject to the terms and restrictions provided in, either (i) an Incentive Stock
Option Agreement substantially in the form attached to this Plan as Exhibit B or
-
such alternative form (consistent with the terms of this Plan) as the Committee
may choose from time to time or (ii) a Nonqualified Stock Option Agreement
substantially in the form attached to this Plan as Exhibit C or such alternative
-
form (consistent with the terms of this Plan) as the Committee may choose from
time to time. Subject to the terms of this Plan, the Committee shall determine
the exact terms and restrictions included in each of
-2-
<PAGE>
the foregoing agreements, as applicable, with respect to each award to a
Participant.
(b) In addition to awards that may be granted pursuant to paragraph 5(a)
hereof, (a) on the closing date of the Company's initial public offering (the
"IPO"), each non-management director (including non-executive officers who serve
as directors) serving on the Board of Directors on such date shall receive 1,000
non-qualified Stock Options, and (b) on the date of each of the Company's annual
stockholder meetings, each non-management director (including non-executive
officers who serve as directors) serving on the Board of Directors immediately
following such meeting shall receive 1,000 non-qualified Stock Options, which
Stock Options issued pursuant to clause (a) and (b) shall (i) have an exercise
price equal to the initial public offering price in the IPO in the case of
clause (a) and the fair market value of the Common Stock on the date such
options are granted in the case of clause (b), (ii) vest at a rate of 33-1/3%
per year commencing on the first anniversary of the date of issuance and
(iii) have a term of ten years. For purposes hereof, "fair market value" of a
share of Common Stock of the Company shall be determined for purposes of this
Plan by reference to the closing price on the principal stock exchange on which
such shares are then listed or, if such shares are not then listed on a stock
exchange, by reference to the closing price (if approved for quotation on the
NASDAQ National Market System) or the mean between the bid and asked price (if
other over-the-counter issue) of a share as supplied by the National Association
of Securities Dealers, Inc. through NASDAQ (or its successor in function), in
each case as reported by The Wall Street Journal for the business day
immediately preceding the date on which the option is exercised (or, if for any
reason no such price is available, in such other manner as the Committee may
deem appropriate to reflect the then fair market value thereof).
6. Provisions Applicable to Incentive Stock Options. No Stock Option
------------------------------------------------
intended as an "incentive stock option" within the meaning of Section 422 of the
Code shall be granted to any person who owns shares of the Company's or any of
its parent or subsidiary corporation's outstanding Common Stock or such other
capital stock as may hereinafter be issued by the Company or any of its parent
or subsidiary corporations possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any of such
corporations, unless the purchase price of such Stock Option is at least one
hundred ten percent (110%) of the per share fair market value of the Common
Stock on the date the Stock Option is granted and such Stock Option by its terms
is not exercisable after the expiration of five (5) years from the date such
Stock Option is granted. In addition, no Stock Option intended as an "incentive
stock option" shall be issued
-3-
<PAGE>
to any Participant with a purchase price of less than one hundred percent (100%)
of the per share fair market value of the Common Stock on the date the Stock
Option is granted or with a term of longer than ten (10) years from the date
such Stock Option is granted.
If a holder of an "incentive stock option" ceases to be employed by the
Company or any subsidiary of the Company for any reason other than the option
holder's death or permanent disability (within the meaning of Section 22(e)(3)
of the Code), the option holder's "incentive stock option" shall not be entitled
to incentive treatment under the Code if exercised after more than three months
after the date the option holder ceased to be an employee of one of such
corporations (unless by its terms such Stock Option sooner expires). If a holder
of an "incentive stock option" ceases to be employed by the Company or any
subsidiary of the Company on account of death or permanent disability (within
the meaning of Section 22(e)(3) of the Code), such Stock Option shall not be
entitled to incentive treatment under the Code if exercised after one year after
the date of such death or permanent disability unless by its terms it sooner
expires. During such period after death, any vested unexercised portion of the
Stock Option may be exercised by the person or persons to whom the option
holder's rights under the Stock Option shall pass by will or the laws of descent
and distribution.
To the extent that the aggregate fair market value of Common Stock or other
capital stock with respect to which "incentive stock options" are exercisable
for the first time by any individual during any calendar year (under all plans
of the Company and its parent and subsidiary corporations) exceeds $100,000,
such Stock Options shall be treated as Stock Options which are not "incentive
stock options."
7. Adjustments. If the outstanding shares of the Common Stock of the
-----------
Company are increased, decreased, changed into or exchanged for a different
number or kind of shares or securities of the Company through:
(i) a distribution or payment of a dividend on the Common stock in
shares of Common Stock;
(ii) subdivision or reclassification, in a stock split or similar
transaction, of the outstanding shares of Common Stock into a greater
number of shares;
(iii) combination or reclassification of, in a reverse stock spilt or
similar transaction, the outstanding shares of Common Stock into a smaller
number of shares; or
-4-
<PAGE>
(iv) issuance of any shares of capital stock by reclassification of
the Common Stock;
then an appropriate and proportionate adjustment shall be made in the maximum
number and kind of shares which may be awarded under this Plan.
Adjustments under this paragraph 7 shall be made by the Committee, whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive.
8. Amendment and Termination of Plan. The Committee may at any time
---------------------------------
suspend or terminate the Plan. The Committee may also at any time amend or
revise the terms of the Plan.
Notwithstanding the foregoing, no amendment, suspension or termination of
the Plan that would materially adversely affect any rights or obligations of any
Participant under any Restricted Stock Agreement or Management Stock Option and
Stockholders Agreement shall be effective as to such Participant unless there
shall have been specific action of the Committee and consent of the Participant.
9. No Employment Rights. The selection of any person to receive an award
--------------------
under this Plan shall not give such person any right to be retained in the
employment of the Company or any of its subsidiaries or any of their affiliates
and the right and the power of the Company or any of its subsidiaries or any of
their affiliates to discharge any such person shall not be affected by such
award. No person shall have any right or claim whatever, directly, indirectly
or by implication, to receive an award, nor any expectancy thereof, unless and
until an award in fact shall have been made to such person by the Committee as
provided herein. The award to any person hereunder at any time shall not create
any right or implication that any other or further award may or shall be made at
another time. Each award hereunder shall be separate and distinct from every
other award and shall not be construed as a part of any continuing series of
awards or compensation.
10. Plan Not Exclusive. The Plan is not exclusive. The Company may have
------------------
other plans, programs and arrangements for compensation or the issuance of
shares or options. The Plan does not require that Participants hereunder be
precluded from participation in such other plans, programs and arrangements.
11. Term. The term of this Plan shall commence as of _______________ and
----
shall expire on the ninetieth (90th) day after the tenth (10th) anniversary of
such date, unless earlier terminated.
-5-
<PAGE>
Exhibit A = Channell Commercial Corporation Restricted Stock Agreement
Exhibit B = Channell Commercial Corporation Incentive Stock Option Agreement
Exhibit C = Channell Commercial Corporation Nonqualified Stock Option
Agreement
-6-
<PAGE>
EXHIBIT A
CHANNELL COMMERCIAL CORPORATION
RESTRICTED STOCK AGREEMENT
THIS AGREEMENT is made as of _____________, 1996 between CHANNELL
COMMERCIAL CORPORATION, a Delaware corporation (the "Company"), and
______________ ("Participant").
WITNESSETH:
WHEREAS, the Company has adopted the Channell Commercial Corporation 1996
Incentive Stock Plan (the "Plan"), which is incorporated into this Agreement by
reference and made a part of it; and
WHEREAS, the Company regards Participant as valuable to it, and has
determined that it would be to the advantage and interest of the Company and its
stockholders to grant the Restricted Stock provided for in this Agreement to
Participant as an inducement to remain in the service of the Company and as an
incentive for increased efforts during such service;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the parties to this Agreement hereby agree as follows:
1. Grant. Contemporaneously with the execution of this Agreement,
-----
the Company will issue ______ shares of the Common Stock of the Company (the
"Restricted Stock") to the Participant. Stock certificates evidencing this
Restricted Stock will be delivered to the Secretary of the Company at the
corporate headquarters of the Company (the "Escrow Holder"), accompanied by
blank stock powers executed by the Participant, to be held by the Escrow Holder
for the periods set forth in paragraph 3 below, subject to the rights and
limitations set forth in this Agreement. The Company shall pay the costs and
charges of the Escrow Holder (if any) and any applicable stock transfer taxes.
All shares of Restricted Stock shall be deemed issued to the Participant as
fully paid and nonassessable shares. Except as otherwise provided in this
Agreement, the Participant shall have all rights of a stockholder with respect
to the Restricted Stock, including rights to vote, to receive dividends
(including stock dividends), to participate in stock splits or other
recapitalizations, and to exchange such shares in any merger, consolidation or
other reorganization or exchange of shares. The Participant hereby
acknowledges and represents that the Restricted Stock is acquired for investment
and not with a view to the distribution thereof, and that the Participant does
not intend to subdivide the Participant's interest in the Restricted Stock with
any other person.
-7-
<PAGE>
2. Restriction on Transfer. The Participant shall not have any
-----------------------
right to sell, give, pledge, hypothecate or otherwise transfer or dispose of any
Restricted Stock until the restrictions in this paragraph 2 lapse as provided in
paragraph 3 of this Agreement. Prior to the lapse of such restrictions, the
Restricted Stock shall continue to be held in escrow by the Escrow Holder.
Notwithstanding the foregoing, unless otherwise provided pursuant to the terms
of any employment agreement between the Participant and the Company, should
Participant's employment be terminated prior to the lapse of restrictions on any
Restricted Stock for any reason, including death, disability, retirement or
voluntary or involuntary termination, such unvested portion of the Restricted
Stock shall be transferred and delivered to the Company by the Escrow Holder
without payment of any consideration to Participant therefor and Participant
shall forfeit all rights with respect to such Restricted Stock. For purposes of
the Restricted Stock award, Participant's employment shall be considered to
continue so long as Participant is a bona fide employee of the Company or of any
corporation affiliated with the Company as determined by the Compensation
Committee of the Board of Directors.
3. Lapse of Restrictions. The restrictions imposed on the Restricted
---------------------
Stock under paragraph 2 of this Agreement shall lapse as to ______% of the
Shares of Restricted Stock covered hereby on each anniversary of this Agreement.
Upon lapse of restrictions on shares of Restricted Stock, the Escrow Holder
shall, upon receiving confirmation from the Company that Participant's
withholding requirements under paragraph 6 have been satisfied, transmit to
Participant the certificates evidencing such stock.
4. Acceleration of Lapse. The Compensation Committee may, in its
---------------------
sole discretion, accelerate, in whole or in part, the time set forth in
paragraph 3 above for lapsing of the restrictions on Restricted Stock in the
event a financial hardship arises with respect to Participant, including,
without limitation, an adverse change in the applicable laws, regulations or
rulings relating to treatment of the Restricted Stock for tax purposes. Upon
the occurrence of (i) the dissolution or liquidation of the Company, (ii) a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation
or, as a result of which it is the surviving corporation and its outstanding
voting securities are converted to or reclassified as cash, securities of
another corporation or other property, (iii) upon a sale of assets of the
Company or its subsidiaries having a fair market value equal to more than fifty
percent (50%) of the total fair market value of the Company's assets to an
entity which is not controlling, controlled by or under common control with the
Company, or (iv) the acquisition of a record or beneficial interest in more than
fifty percent (50%)
-8-
<PAGE>
of the then outstanding voting securities of the Company, either in a single
transaction or a series of transactions, by an entity or "group" within the
meaning of Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder which is not an affiliate of the Company, any
restrictions imposed upon and remaining applicable to shares awarded hereunder
shall automatically terminate.
5. Additional Securities as Restricted Stock. Any securities
-----------------------------------------
received as the result of ownership of Restricted Stock, including, without
limitation, warrants and securities received as a stock dividend or stock split,
or as a result of a recapitalization or reorganization (all such securities to
be considered "Restricted Stock" for all purposes under this Agreement), shall
be held by the Escrow Holder in the same manner and subject to the same
conditions as the Restricted Stock with respect to which they were issued.
Participant shall be entitled to direct the Escrow Holder to exercise any
warrant or option received and considered Restricted Stock hereunder upon
supplying the funds necessary to do so, in which event the securities so
purchased shall constitute Restricted Stock. In the event any Restricted Stock
consists of a security by its terms or otherwise convertible into or
exchangeable for another security at the election of the holder thereof,
Participant may exercise any such right of conversion or exchange in the event
the failure to exercise or delay in exercising such right would result in its
loss or diminution in value, and any securities so acquired shall be deemed
Restricted Stock. In the event of any change in certificates evidencing
Restricted Stock by reason of any recapitalization, reorganization or other
transaction which results in a creation of Restricted Stock, the Escrow Holder
is authorized to deliver to the issuer the certificates evidencing Restricted
Stock in exchange for the replacement certificates, which shall be deemed to be
Restricted Stock.
6. Withholding. Upon lapse of restrictions on Restricted Stock under
-----------
paragraph 3 above or, if Participant shall make an election pursuant to Section
83(b) of the Internal Revenue Code of 1986, as amended, on the date hereof,
Participant shall make appropriate arrangements with the Company for the
satisfaction of all applicable federal, state, and local income, employment and
other tax withholding requirements. If Participant does not make such
arrangements in a manner satisfactory to the Company, the Company shall be
authorized on behalf of Participant to sell any of Participant's Restricted
Stock held by the Escrow Holder in order to satisfy such withholding
requirements. Upon receiving payment of Participant's withholding obligation,
the Company shall inform the Escrow Holder that Participant's withholding
requirements under this paragraph 6 have been satisfied.
-9-
<PAGE>
7. Additional Securities, Etc. - Delivery into Escrow. The Company
--------------------------------------------------
shall transmit to the Escrow Holder for the account of Participant all
dividends, interest and other distributions paid or made with respect to
Restricted Stock. The Escrow Holder shall, upon receipt thereof, disburse
forthwith to Participant, less any applicable federal or state withholding
taxes, any dividends, interest or other distributions paid or made in cash or
property (other than securities) on Restricted Stock and shall hold as
Restricted Stock subject to the provisions of this Agreement, any securities so
received.
8. No Guarantee of Employment. Subject to the terms of any written
--------------------------
employment contract to the contrary, the Company (or any of its affiliates which
employs Participant) shall have the right to terminate or change the terms of
the employment of Participant at any time and for any reason whatsoever, with or
without cause. The award of the Restricted Stock hereunder to Participant shall
not create any right or implication that any other or future award may or shall
be made at another time. The awards hereunder shall be separate and distinct
from every other award and shall not be construed as a part of any continuing
series of awards or compensation.
9. Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, successors and assigns.
10. Notices. Any notice or other paper or payment required to be
-------
given or sent pursuant to the terms of this Agreement shall be sufficiently
given or served hereunder to any part when transmitted by registered or
certified mail, postage prepaid, addressed to the party to be served as follows:
a. if to the Company: Channell Commercial Corporation
26040 Ynez Road
Temecula, California 92591-9022
Attn: President
b. if to Participant: ___________________________
___________________________
___________________________
Any party, by written notice, may designate another address for notices to be
sent from time to time.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly exercised this Agreement
as of the date written above.
CHANNELL COMMERCIAL CORPORATION
By ______________________________
Its _____________________________
PARTICIPANT
_______________________________
________________________________
[Social Security Number]
-11-
<PAGE>
EXHIBIT B
CHANNELL COMMERCIAL CORPORATION
INCENTIVE STOCK OPTION AGREEMENT
--------------------------------
This INCENTIVE STOCK OPTION AGREEMENT is made as of this _____ day of
_____, between CHANNELL COMMERCIAL CORPORATION, a Delaware corporation (the
"COMPANY"), and ____________________ ("OPTIONEE"). All capitalized terms not
specifically defined herein shall have the meanings set forth in the Company's
1996 Incentive Stock Plan (the "PLAN").
R E C I T A L S
---------------
A. The Plan provides for the granting to key employees, directors and
consultants of the Company or of its subsidiary corporations (as defined in the
Plan) as the Committee may from time to time select, of options to purchase
shares of common stock of the Company.
B. Optionee is a [___________] of the Company.
C. Pursuant to the Plan, the Committee has determined that it is to the
advantage and best interests of the Company and its stockholders to grant an
incentive stock option to Optionee covering shares of the Company's common
stock, $.01 par value (or any class of stock into which such common stock is
converted or reclassified as provided in Section 7 of the Plan) (each herein
referred to as "COMMON STOCK") as an inducement to remain in the service of the
Company and as an incentive for increased effort during such service, and has
approved the execution of this Incentive Stock Option Agreement between the
Company and Optionee.
D. The option granted hereby is intended to qualify as an "INCENTIVE STOCK
OPTION" under Section 422 of the Internal Revenue Code of 1986, as amended (the
"CODE").
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant of Option. The Company grants to Optionee the right and option
---------------
("OPTION") to purchase on the terms and conditions hereinafter set forth, all or
any part of an aggregate of ____________ shares of the Common Stock at the
purchase price of $______ per share, which price is not less than the fair
market value of such stock (as determined pursuant to Section 4) on the date of
this Agreement; provided, however, that if Optionee possesses more than ten
-------- -------
percent (10%) of the total combined voting power of all classes of stock of the
Company and its affiliates (a "10% SHAREHOLDER"), such price is not less than
one hundred and ten percent (110%) of the fair market value of such stock (as
determined pursuant to Section 4) on the date of this Agreement. The Option
shall be exercisable from time to time
-12-
<PAGE>
in accordance with the provisions of this Agreement or earlier in accordance
with Section 5.
2. Vesting. Optionee may not purchase any shares by exercise of this
-------
Option between the date of this Agreement and the first anniversary date of this
Agreement. On and for a period of ______ years after the following anniversary
dates of this Agreement, this Option may be exercised up to the indicated
percentage of shares covered by this Option (the shares as to which the Option
vests herein sometimes called "VESTED OPTION SHARES"), subject to Section 5
below:
<TABLE>
<CAPTION>
Cumulative
Percentage of
Percentage of Originally
Originally Covered Shares
Covered Shares as to Which
Anniversary as to Which Option is
Date Option Vests Exercisable
- ----------- -------------- --------------
<S> <C> <C>
</TABLE>
Subject to earlier termination under Section 5, at any time after shares
covered by this Agreement become Vested Option Shares, but no later than the
fifth anniversary date of the date shares become Vested Option Shares (the
"EXPIRATION DATE" with respect to such Shares), Optionee may purchase all or any
part of the Vested Option Shares which Optionee theretofore failed to purchase.
In each case the number of shares which may be purchased shall be calculated to
the nearest full share. Unless Optionee indicates otherwise in writing when it
exercises this Option, Optionee shall be deemed to exercise Vested Option Shares
in the order in which they vested.
Upon the occurrence of (i) the dissolution or liquidation of the Company,
(ii) a reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation
or, as a result of which it is the surviving corporation and its outstanding
voting securities are converted to or reclassified as cash, securities of
another corporation or other property, (iii) upon a sale of assets of the
Company or its subsidiaries having a fair market value equal to more than fifty
percent (50%) of the total fair market value of the Company's assets to an
entity which is not controlling, controlled by or under common control with the
Company, or (iv) the acquisition of a record or beneficial interest in more than
fifty percent (50%) of the then outstanding voting securities of the Company,
either in a single transaction or a series of transactions, by an entity or
"group" within the meaning of Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder which is not an affiliate of the Company,
any
-13-
<PAGE>
restrictions imposed upon and remaining applicable to shares awarded hereunder
shall automatically terminate.
3. Manner of Exercise. Each exercise of this Option shall be by means of
------------------
a written notice of exercise delivered to the Company, specifying the number of
shares to be purchased and accompanied by payment to the Company of the full
purchase price of the shares to be purchased solely in cash or by check payable
to the order of the Company, or by such other means as the Committee may approve
in its sole and absolute discretion. This Option may not be exercised for a
fraction of a share and no partial exercise of this Option may be for less than
one hundred (100) shares.
This Option may be exercised (i) during the lifetime of Optionee only by
Optionee; (ii) to the extent permitted by the Committee or by the terms of this
Agreement, Optionee's spouse if such spouse obtained the Option pursuant to a
qualified domestic relations order as defined by the Code or Title I of ERISA,
or the rules thereunder ("QUALIFIED DOMESTIC RELATIONS ORDER"); and (iii) after
Optionee's death by his or her transferees by will or the laws of descent or
distribution.
4. Fair Market Value of Common Stock. The fair market value of a share of
---------------------------------
Common Stock of the Company shall be determined for purposes of the Plan by
reference to the closing price on the principal stock exchange on which such
shares are then listed or, if such shares are not then listed on a stock
exchange, by reference to the closing price (if approved for quotation on the
NASDAQ National Market System) or the mean between the bid and asked price (if
other over-the-counter issue) of a share as supplied by the National Association
of Securities Dealers, Inc. through NASDAQ (or its successor in function), in
each case as reported by The Wall Street Journal, for the business day
-----------------------
immediately preceding the date on which the option is exercised (or, if for any
reason no such price is available, in such other manner as the Committee may
deem appropriate to reflect the then fair market value thereof).
5. Termination of Employment; Death or Permanent Disability. Except as
--------------------------------------------------------
may otherwise be provided by the terms of any employment agreement between the
Company and Optionee, if Optionee ceases to be employed by the Company or one of
its subsidiaries for any reason other than Optionee's death or "PERMANENT
DISABILITY" (within the meaning of Section 22(e)(3) of the Code), the Option
shall be exercisable with respect to each of the Vested Option Shares until the
earlier of (i) the respective Expiration Date for such Shares, or (ii) the date
three months after the date Optionee ceases to be an employee of the Company or
any such subsidiary to the extent exercisable on the date of such cessation of
employment, and shall thereafter expire and be void and of no further force or
-14-
<PAGE>
effect. A leave of absence approved in writing by the Board of Directors or the
Committee shall not be deemed a termination of employment for the purposes of
this Section 5, but the Option may not be exercised during any such leave of
absence, except during the first three months thereof. If Optionee dies or
becomes "permanently disabled" while Optionee is employed by the Company or one
of its subsidiaries, the Option shall expire with respect to each of the Vested
Option Shares on the earlier of (i) the Expiration Date applicable to such
Shares, or (ii) a date one (1) year after the date of such death or "permanent
disability," to the extent exercisable on the date of death or "permanent
disability," and shall thereafter expire and be void and of no further force or
effect. During such period after death, the Option may, to the extent that it
remained unexercised (but exercisable by Optionee according to the Option's
terms) on the date of such death, be exercised by the person or persons to whom
Optionee's rights under the Option shall pass by Optionee's will or by the laws
of descent and distribution or by Optionee's spouse who obtained the Option
pursuant to a Qualified Domestic Relations Order.
6. Shares to be Issued in Compliance with Federal Securities Laws and
------------------------------------------------------------------
Exchange Rules. By accepting the Option, Optionee represents and agrees, for
- --------------
Optionee and his or her legal successors (by will or the laws of descent and
distribution or through a Qualified Domestic Relations Order), that none of the
shares purchased upon exercise of the option will be acquired with a view to any
sale, transfer or distribution of said shares in violation of the Securities Act
of 1933, as amended (the "SECURITIES ACT"), and the rules and regulations
promulgated thereunder, or any applicable state "blue sky" laws. If required by
the Committee at the time the Option is exercised, Optionee or any other person
entitled to exercise the Option shall furnish evidence satisfactory to the
Company (including a written and signed representation) to such effect in form
and substance satisfactory to the Company, including an indemnification of the
Company in the event of any violation of the Securities Act or state blue sky
laws by such person.
7. Withholding of Taxes. Upon any disposition by Optionee or Optionee's
--------------------
legal successor of shares of Common Stock acquired pursuant to the exercise of
this Option within two (2) years of the granting of this Option or within one
(1) year of the exercise of this Option (an "EARLY DISPOSITION"), the Company
shall have the right to require Optionee or Optionee's legal successor to pay
the Company the amount of any taxes which the Company may be required to
withhold with respect to such shares. Optionee agrees, as partial consideration
for the designation of this Option as an incentive stock option under Section
422 of the Code, to notify the Company in writing promptly, and in no event
later than thirty (30) days following, any Early Disposition.
-15-
<PAGE>
8. No Assignment. This Option and all other rights and privileges granted
-------------
hereby shall not be transferred, either voluntarily or by operation of law
otherwise than by will or the laws of descent and distribution or pursuant to a
Qualified Domestic Relations Order. Upon any attempt to so transfer or
otherwise dispose of this Option or any other right or privileges granted hereby
contrary to the provisions hereof, this Option and all rights and privileges
contained herein shall immediately become null and void and of no further force
or effect.
9. Adjustment for Reorganizations, Stock Splits, etc. If the outstanding
-------------------------------------------------
shares of Common Stock (or any other class of shares or securities which shall
have become issuable upon the exercise of this Option pursuant to this sentence)
are increased, decreased, changed into or exchanged for a different number or
kind of shares or securities of the Company through reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction, an appropriate and proportionate adjustment
shall be made in the maximum number and kind of shares receivable upon the
exercise of this Option, without change in the total price applicable to the
unexercised portion of this Option, but with a corresponding adjustment in the
price for each share or other unit of any security covered by this option.
10. Participation by Optionee in Other Company Plans. Nothing herein
------------------------------------------------
contained shall affect the right of Optionee to participate in and receive
benefits under and in accordance with the then current provisions of any
pension, insurance, profit sharing or other employee welfare plan or program of
the Company or of any subsidiary of the Company.
11. No Rights as a Stockholder Until Issuance of Stock Certificate.
--------------------------------------------------------------
Neither Optionee nor any other person legally entitled to exercise this Option
shall be entitled to any of the rights or privileges of a stockholder of the
Company in respect of any shares issuable upon any exercise of this Option
unless and until a certificate or certificates representing such shares shall
have been actually issued and delivered to Optionee.
12. Not an Employment or Service Contract. Nothing herein contained shall
-------------------------------------
be construed as an agreement by the Company or any of its subsidiaries, express
or implied, to employ Optionee or contract for Optionee's services, to restrict
the Company's or such subsidiary's right to discharge Optionee or cease
contracting for Optionee's services or to modify, extend or otherwise affect in
any manner whatsoever, the terms of any employment agreement or contract for
services which may exist between Optionee and the Company or any of its
subsidiaries.
-16-
<PAGE>
13. Agreement Subject to the Plan. The Option hereby granted is subject
-----------------------------
to, and the Company and Optionee agree to be bound by, all of the terms and
conditions of the Plan, as the same shall be amended from time to time in
accordance with the terms thereof, but no such amendment shall adversely affect
Optionee's rights under this Option without the prior written consent of
Optionee.
14. Execution. The interpretation, performance and enforcement of this
---------
Agreement shall be governed by the internal substantive laws of the State of
California.
CHANNELL COMMERCIAL CORPORATION,
a Delaware corporation
By:
------------------------
Title:
---------------------
OPTIONEE
---------------------------
-17-
<PAGE>
By his or her signature below, the spouse of Optionee agrees to be bound by
all of the terms and conditions of the foregoing Agreement.
OPTIONEE'S SPOUSE
-------------------------------
Name:
-18-
<PAGE>
EXHIBIT C
CHANNELL COMMERCIAL CORPORATION
NONQUALIFIED STOCK OPTION AGREEMENT
-----------------------------------
This NONQUALIFIED STOCK OPTION AGREEMENT is made as of this ____ day
of ____, between CHANNELL COMMERCIAL CORPORATION, a Delaware corporation (the
"COMPANY"), and __________________ ("OPTIONEE"). All capitalized terms not
specifically defined herein shall have the meanings set forth in the Company's
1996 Incentive Stock Plan (the "PLAN").
R E C I T A L S
---------------
A. The Plan provides for the granting to key employees, directors
(other than members of the Committee), and consultants of the Company or of its
subsidiary corporations (as defined in the Plan) as the Committee may from time
to time select, of options to purchase shares of common stock of the Company.
B. Optionee is a [_____________] of the Company.
C. Pursuant to the Plan, the Committee has determined that it is to
the advantage and best interests of the Company and its stockholders to grant a
nonqualified stock option to Optionee covering shares of the Company's common
stock, $.01 par value (or any class of stock into which such common stock is
converted or reclassified as provided in Section 7 of the Plan) (each herein
sometimes referred to as "COMMON STOCK") as an inducement to remain in the
service of the Company and as an incentive for increased effort during such
service, and has approved the execution of this Nonqualified Stock Option
Agreement between the Company and Optionee.
D. The option granted hereby is not intended to qualify as an
---
"INCENTIVE STOCK OPTION" under Section 422 of the Internal Revenue Code of 1986,
as amended (the "CODE").
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant of Option. The Company grants to Optionee the right and
---------------
option ("OPTION") to purchase on the terms and conditions hereinafter set forth,
all or any part of an aggregate of ______ shares of the Common Stock at the
purchase price of $________ per share, which price is equal to the fair market
value of such stock (as determined pursuant to Section 4) on the date of this
Agreement. The Option shall be exercisable from time to time in accordance with
the provisions of this Agreement or earlier in accordance with Section 5.
2. Vesting. Optionee may not purchase any shares by exercise of this
-------
Option between the date of this Agreement and the first anniversary date of this
Agreement. On and for a period of _____ years after the following anniversary
dates of this Agreement, this Option may be exercised up to the
-19-
<PAGE>
indicated percentage of shares covered by this Option (the shares as to which
the Option vests herein sometimes called "VESTED OPTION SHARES"), subject to
Section 5 below:
<TABLE>
<CAPTION>
Cumulative
Percentage of
Percentage of Originally
Originally Covered Shares
Covered Shares as to Which
Anniversary as to Which Option is
Date Option Vests Exercisable
- ----------- -------------- --------------
<S> <C> <C>
</TABLE>
Subject to earlier termination under Section 5, at any time after shares
covered by this Agreement become Vested Option Shares, but no later than the
fifth anniversary date of the date shares become Vested Option Shares (the
"EXPIRATION DATE" with respect to such Shares), Optionee may purchase all or any
part of the Vested Option Shares which Optionee theretofore failed to purchase.
In each case the number of shares which may be purchased shall be calculated to
the nearest full share. Unless Optionee indicates otherwise in writing when it
exercises this Option, Optionee shall be deemed to exercise Vested Option Shares
in the order in which they vested.
Upon the occurrence of (i) the dissolution or liquidation of the
Company, (ii) a reorganization, merger or consolidation of the Company with one
or more corporations as a result of which the Company is not the surviving
corporation or, as a result of which it is the surviving corporation and its
outstanding voting securities are converted to or reclassified as cash,
securities of another corporation or other property, (iii) upon a sale of
assets of the Company or its subsidiaries having a fair market value equal to
more than fifty percent (50%) of the total fair market value of the Company's
assets to an entity which is not controlling, controlled by or under common
control with the Company, or (iv) the acquisition of a record or beneficial
interest in more than fifty percent (50%) of the then outstanding voting
securities of the Company, either in a single transaction or a series of
transactions, by an entity or "group" within the meaning of Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder which is not
an affiliate of the Company, any restrictions imposed upon and remaining
applicable to shares awarded hereunder shall automatically terminate.
3. Manner of Exercise. Each exercise of this Option shall be by
------------------
means of a written notice of exercise delivered to the Company, specifying the
number of shares to be purchased and accompanied by payment to the Company of
the full purchase price of the shares to be purchased solely in cash or by check
payable to the order of the Company, or by such other means as
-20-
<PAGE>
the Committee may approve in its sole and absolute discretion. This Option may
not be exercised for a fraction of a share and no partial exercise of this
Option may be for less than one hundred (100) shares.
This Option may be exercised (i) during the lifetime of Optionee only
by Optionee; (ii) to the extent permitted by the Committee or by the terms of
this Agreement, Optionee's spouse if such spouse obtained the Option pursuant to
a qualified domestic relations order as defined by the Code or Title I of ERISA,
or the rules thereunder ("QUALIFIED DOMESTIC RELATIONS ORDER"); and (iii) after
Optionee's death by his or her transferees by will or the laws of descent or
distribution.
4. Fair Market Value of Common Stock. The fair market value of a
---------------------------------
share of Common Stock of the Company shall be determined for purposes of the
Plan by reference to the closing price on the principal stock exchange on which
such shares are then listed or, if such shares are not then listed on a stock
exchange, by reference to the closing price (if approved for quotation on the
NASDAQ National Market System) or the mean between the bid and asked price (if
other over-the-counter issue) of a share as supplied by the National Association
of Securities Dealers, Inc. through NASDAQ (or its successor in function), in
each case as reported by The Wall Street Journal, for the business day
-----------------------
immediately preceding the date on which the option is exercised (or, if for any
reason no such price is available, in such other manner as the Committee may
deem appropriate to reflect the then fair market value thereof).
5. Termination of Employment; Death or Permanent Disability. Except
--------------------------------------------------------
as may otherwise be provided by the terms of any employment agreement between
the Company and the Optionee, if Optionee ceases to be employed by the Company
or one of its subsidiaries for any reason other than optionee's death or
"PERMANENT DISABILITY" (within the meaning of Section 22(e)(3) of the Code), the
Option shall be exercisable with respect to each of the Vested Option Shares
until the earlier of (i) the respective Expiration Date for such Shares, or (ii)
the date three months after the date Optionee ceases to be an employee of the
Company or any such subsidiary to the extent exercisable on the date of such
cessation of employment, and shall thereafter expire and be void and of no
further force or effect. A leave of absence approved in writing by the Board of
Directors or the Committee shall not be deemed a termination of employment for
the purposes of this Section 5, but the Option may not be exercised during any
such leave of absence, except during the first three months thereof. If
Optionee dies or becomes "permanently disabled" while Optionee is employed by
the Company or one of its subsidiaries, the Option shall expire with respect to
each of the Vested Option Shares on the earlier of (i) the Expiration Date
applicable to
-21-
<PAGE>
such Shares, or (ii) a date twelve months after the date of such death or
"permanent disability," to the extent exercisable on the date of death or
"permanent disability," and shall thereafter expire and be void and of no
further force or effect. During such period after death, the Option may, to the
extent that it remained unexercised (but exercisable by Optionee according to
the Option's terms) on the date of such death, be exercised by the person or
persons to whom Optionee's rights under the Option shall pass by Optionee's will
or by the laws of descent and distribution or by Optionee's spouse who obtained
the Option pursuant to a Qualified Domestic Relations Order.
6. Shares to be Issued in Compliance with Federal Securities Laws and
------------------------------------------------------------------
Exchange Rules. By accepting the Option, Optionee represents and agrees, for
- --------------
Optionee and his or her legal successors (by will or the laws of descent and
distribution or through a Qualified Domestic Relations Order), that none of the
shares purchased upon exercise of the option will be acquired with a view to any
sale, transfer or distribution of said shares in violation of the Securities Act
of 1933, as amended (the "SECURITIES ACT"), and the rules and regulations
promulgated thereunder, or any applicable state "BLUE SKY" laws. If required by
the Committee at the time the Option is exercised, Optionee or any other person
entitled to exercise the Option shall furnish evidence satisfactory to the
Company (including a written and signed representation) to such effect in form
and substance satisfactory to the Company, including an indemnification of the
Company in the event of any violation of the Securities Act or state blue sky
laws by such person.
7. Withholding of Taxes. Upon the exercise of this Option, the
--------------------
Company shall have the right to require Optionee or Optionee's legal successor
to pay the Company the amount of any taxes which the Company may be required to
withhold with respect to such shares.
8. No Assignment. This Option and all other rights and privileges
-------------
granted hereby shall not be transferred, either voluntarily or by operation of
law otherwise than by will or the laws of descent and distribution or pursuant
to a Qualified Domestic Relations Order. Upon any attempt to so transfer or
otherwise dispose of this Option or any other right or privileges granted hereby
contrary to the provisions hereof, this Option and all rights and privileges
contained herein shall immediately become null and void and of no further force
or effect.
9. Adjustment for Reorganizations, Stock Splits, etc. If the
--------------------------------------------------
outstanding shares of Common Stock (or any other class of shares or securities
which shall have become issuable upon the exercise of this Option pursuant to
this sentence) are increased, decreased, changed into or exchanged for a
-22-
<PAGE>
different number or kind of shares or securities of the Company through
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split or other similar transaction, an appropriate and
proportionate adjustment shall be made in the maximum number and kind of shares
receivable upon the exercise of this Option, without change in the total price
applicable to the unexercised portion of this Option, but with a corresponding
adjustment in the price for each share or other unit of any security covered by
this option.
10. Participation by Optionee in Other Company Plans. Nothing herein
------------------------------------------------
contained shall affect the right of Optionee to participate in and receive
benefits under and in accordance with the then current provisions of any
pension, insurance, profit sharing or other employee welfare plan or program of
the Company or of any subsidiary of the Company.
11. No Rights as a Stockholder Until Issuance of Stock Certificate.
--------------------------------------------------------------
Neither Optionee nor any other person legally entitled to exercise this Option
shall be entitled to any of the rights or privileges of a stockholder of the
Company in respect of any shares issuable upon any exercise of this Option
unless and until a certificate or certificates representing such shares shall
have been actually issued and delivered to Optionee.
12. Not an Employment or Service Contract. Nothing herein contained
-------------------------------------
shall be construed as an agreement by the Company or any of its subsidiaries,
express or implied, to employ Optionee or contract for Optionee's services, to
restrict the Company's or such subsidiary's right to discharge Optionee or cease
contracting for Optionee's services or to modify, extend or otherwise affect in
any manner whatsoever, the terms of any employment agreement or contract for
services which may exist between Optionee and the Company or any of its
subsidiaries.
13. Agreement Subject to the Plan. The Option hereby granted is
-----------------------------
subject to, and the Company and Optionee agree to be bound by, all of the terms
and conditions of the Plan, as the same shall be amended from time to time in
accordance with the terms thereof, but no such amendment shall adversely affect
Optionee's rights under this Option without the prior written consent of
Optionee.
-23-
<PAGE>
14. Execution. The interpretation, performance and enforcement of
---------
this Agreement shall be governed by the internal substantive laws of the State
of California.
CHANNELL COMMERCIAL CORPORATION,
a Delaware corporation
By:
---------------------------
Title:
---------------------
-24-
<PAGE>
By his or her signature below, the spouse of Optionee agrees to be bound by
all of the terms and conditions of the foregoing Agreement.
OPTIONEE'S SPOUSE
------------------------------
OPTIONEE
------------------------------
-25-
<PAGE>
EXHIBIT 10.3
- --------------------------------------------------------------------------------
[Logo of Bank of America]
Bank of America
NATIONAL TRUST AND SAVINGS ASSOCIATION BUSINESS LOAN AGREEMENT
- --------------------------------------------------------------------------------
This Agreement dated as of January 21, 1994, is between Bank of America
------------
National Trust and Savings Association (the "Bank") and Channell Commercial
Corporation (the "Borrower").
1. LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Commitment") is One Million Dollars ($1,000,000).
(b) This is a non-revolving line of credit with a term repayment option. Any
amount borrowed, even if repaid before the end of the availability period,
permanently reduces the remaining available line of credit.
(c) Each advance shall be used for leasehold improvements or facility expansion
in the Borrower's business. A cost breakdown to be provided before the
first advance. The amount of each advance shall not exceed 75% of leasehold
improvements and facility expansion costs specified in the cost breakdown
provided by the Borrower.
(d) Each advance must be for at least Fifteen Thousand Dollars ($15,000), or
for the amount of the remaining available line of credit, if less.
(e) The Borrower agrees not to permit the outstanding principal balance of the
line of credit to exceed the Commitment.
(f) The first advance must be made on or before March 31, 1994.
1.2 AVAILABILITY PERIOD.
The line of credit is available between the date of this Agreement and August
31, 1994 (the "Expiration Date") unless the Borrower is in default.
1.3 INTEREST RATE.
(a) Unless the Borrower elects an optional interest rate as described below,
the interest rate is the Bank's Reference Rate plus .50 percentage points.
(b) The Reference Rate is the rate of interest publicly announced from time to
time by the Bank in San Francisco, California, as its Reference Rate. The
Reference Rate is set by the Bank based on various factors, including the
Bank's costs and desired return, general economic conditions and other
factors, and is used as a reference point for pricing some loans. The Bank
may price loans to its customers at, above, or below the Reference Rate.
Any change in the Reference Rate shall take effect at the opening of
business on the day specified in the public announcement of a change in the
Bank's Reference Rate.
- --------------------------------------------------------------------------------
LCA1CMILL (7/93) 96-SLABC05
-1-
<PAGE>
1.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on February 1, 1994, and then monthly
thereafter until payment in full of any principal outstanding under this
line of credit.
(b) Any amount bearing interest at an optional interest rate (as described
below) may be repaid at the end of the applicable interest period, which
shall be no later than the Expiration Date.
(c) The Borrower will repay the principal amount outstanding on the Expiration
Date in 72 successive equal monthly installments starting October 1, 1994.
On September 1, 2000, the Borrower will repay the remaining principal
balance plus any interest then due.
(d) The Borrower may prepay the loan in full or in part at any time. The
prepayment will be applied to the most remote installment of principal due
under this Agreement.
1.5 OPTIONAL INTEREST RATES. Instead of the interest rate based on the Bank's
Reference Rate, the Borrower may elect to have all or portions of the line of
credit (during the availability period and during the term repayment period)
bear interest at the rate(s) described below during an interest period agreed to
by the Bank and the Borrower. Each interest rate is a rate per year. Interest
will be paid on the last day of each interest period, and on the first day each
month during the interest period. At the end of any interest period, the
interest rate will revert to the rate based on the Reference Rate, unless the
Borrower has designated another optional interest rate for the portion.
1.6 LONG TERM RATE. The Borrower may elect to have all or portions of the
principal balance of the line of credit bear interest at the Long Term Rate,
subject to the following requirements:
(a) The interest period during which the Long Term Rate will be in effect in
one year or more. The interest period must begin on or after the last day
of the availability period specified above. The Borrower will immediately
begin repaying principal of the Long Term Rate portion under an
amortization schedule agreed to by the Bank and the Borrower at the time of
the designation. These payments will be separate from the payments required
by the paragraph above entitled "Repayment Terms," which will be calculated
without taking into account any Long Term Rate portions.
(b) The "Long Term Rate" means the fixed interest rate the Bank and the
Borrower agree will apply to the portion during the applicable interest
period.
(c) Each Long Term Rate portion will be for an amount not less than One Hundred
Thousand Dollars ($100,000).
(d) Any portion of the principal balance of the line of credit already bearing
interest at the Long Term Rate will not be converted to a different rate
during its interest period.
(e) The borrower may prepay the Long Term Rate portion in whole or in part in
the minimum amount of One Hundred Thousand Dollars ($100,000). The Borrower
will give the Bank irrevocable written notice of the Borrower's intention
to make the prepayment, specifying the date and amount of the prepayment.
The notice must be received by the Bank at least 5 banking days in advance
of the prepayment. All prepayments of principal on the Long Term Rate
portion will be applied on the most remote principal installments then
unpaid.
(f) Each prepayment of a Long Term Rate portion, whether voluntary, by reason
of acceleration or otherwise, will be accompanied by payment of all accrued
interest on the amount of the prepayment and the prepayment fee described
below.
(g) The prepayment fee will be the sum of fees calculated separately for each
Prepaid Installment, as follows:
- --------------------------------------------------------------------------------
LCA1CMLL (7/93) 96-SLABC05
-2-
<PAGE>
(i) The Bank will first determine the amount of interest which would
have accrued each month for the Prepaid Installment had it remained
outstanding until the applicable Original Payment Date, using the
Long Term Rate;
(ii) The Bank will then subtract from each monthly interest amount
determined in (i), above, the amount of interest which would accrue
for that Prepaid Installment if it were reinvested from the date of
prepayment through the Original Payment Date, using the following
rate:
(A) If the Original Payment Date is more than 5 years after the date
of prepayment: the Treasury Rate plus one-quarter of one
percentage point;
(B) If the Original Payment Date is 5 years or less after the date
of prepayment: the Money Market Rate.
(iii) If (i) minus (ii) for the Prepaid Installment is greater than zero,
the Bank will discount the monthly differences to the date of
prepayment by the rate used in (ii) above. The sum of the
discounted monthly differences is the prepayment fee for that
Prepaid Installment.
(h) The following definitions will apply to the calculation of the prepayment
fee:
"Money Market" means the domestic certificate of deposit market, the
eurodollar deposit market or other appropriate money market selected by
the Bank.
"Money Market Rate" means the fixed interest rate per annum which the Bank
determines could be obtained by reinvesting a specified Prepaid
Installment in the Money Market from the date of prepayment through the
Original Payment Date.
"Original Payment Dates" mean the dates on which principal of the Long Term
Rate portion would have been paid if there had been no prepayment. If a
portion of the principal would have been paid later than the end of the
interest period in effect at the time of prepayment, then the Original
Payment Date for that portion will be the last day of the interest period.
"Prepaid Installment" means the amount of the prepaid principal of the Long
Term Rate portion which would have been paid on a single Original Payment
Date.
"Treasury Rate" means the interest rate yield for U.S. Government Treasury
Securities which the Bank determines could be obtained by reinvesting a
specified Prepaid Installment in such securities from the date of
prepayment through the Original Payment Date.
(i) The Bank may adjust the Treasury Rate and Money Market Rate to reflect the
compounding, accrual basis, or other costs of the Long Term Rate portion.
Each of the rates is the Bank's estimate only and the Bank is under no
obligation to actually reinvest any prepayment. The rates will be based
on information from either the Telerate or Reuters information services,
The Wall Street Journal, or other information sources the Bank deems
-----------------------
appropriate.
2. FEES AND EXPENSES
2.1 FEES.
(a) LOAN FEE. The Borrower agrees to pay a fee equal to 1.00% per annum of the
Commitment calculated on a prorated basis and due on or before the date of
execution of this Agreement.
- --------------------------------------------------------------------------------
LCA1CMLL (7/93) 96-SLABC05
-3-
<PAGE>
2.2 EXPENSES.
(a) The Borrower agrees to immediately repay the Bank for expenses that
include, but are not limited to, filing, recording and search fees,
appraisal fees, title report fees and documentation fees.
(b) The Borrower agrees to reimburse the Bank for any expenses it incurs in the
preparation of this Agreement and any agreement or instrument required by
this Agreement. Expenses include, but are not limited to, reasonable
attorneys' fees, including any allocated costs of the Bank's in-house
counsel.
3. COLLATERAL
3.1 PERSONAL PROPERTY. The Borrowers' obligations to the Bank under this
Agreement will be secured by personal property the Borrower now owns or will own
in the future as listed below. The collateral is further defined in security
agreement(s) executed by the Borrower. In addition, all personal property
collateral securing this Agreement shall also secure all other present and
future obligations of the Borrower to the Bank (excluding any consumer credit
covered by the federal Truth in Lending law, unless the Borrower has otherwise
agreed in writing). All personal property collateral securing any other present
or future obligations of the Borrower to the Bank shall also secure this
Agreement.
(a) Inventory
(b) Receivables
4. DISBURSEMENTS, PAYMENTS AND COSTS
4.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be made
in writing in a manner acceptable to the Bank, or by another means acceptable to
the Bank.
4.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each payment
by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from time to
time;
(c) made in immediately available funds, or such other type of funds selected
by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrower to sign one or more promissory notes.
4.3 TELEPHONE AUTHORIZATION.
(a) The Bank may honor telephone instructions for advances or repayments or for
the designation of optional interest rates given by any one of the
individuals authorized to sign loan agreements on behalf of the Borrower,
or any other individual designated by any one of such authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account number 06004-12147, or such other of the Borrower's
accounts with the Bank as designated in writing by the Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss and costs in connection
with any act resulting from telephone instructions it reasonably believes
are made by any individual authorized by the Borrower to give such
instructions.
-4-
<PAGE>
4.4 DIRECT DEBIT (PRE-BILLING).
(a) The Borrower agrees that the Bank will debit the Borrower's deposit account
number 06004-12147 (the "Designated Account") on the date each payment of
principal and interest from the Borrower becomes due (the "Due Date"). If
the Due Date is not a banking day, the Designated Account will be debited
on the next banking day.
(b) Approximately 10 days prior to each Due Date, the Bank will mail to the
Borrower a statement of the amounts that will be due on that Due Date (the
"Billed Amount"). The calculation will be made on the assumption that no
new extensions of credit or payments will be made between the date of the
billing statement and the Due Date, and that there will be no changes in
the applicable interest rate.
(c) The Bank will debit the Designated Account for the Billed Amount,
regardless of the actual amount due on that date (the "Accrued Amount").
If the Billed Amount debited to the Designated Account differs from the
Accrued Amount, the discrepancy will be treated as follows:
(i) If the Billed Amount is less than the Accrued Amount, the Billed
Amount for the following Due Date will be increased by the amount
of the discrepancy. The Borrower will not be in default by reason
of any such discrepancy.
(ii) If the Billed Amount is more than the Accrued Amount, the Billed
Amount for the following Due Date will be decreased by the amount
of the discrepancy.
Regardless of any such discrepancy, interest will continue to accrue based
on the actual amount of principal outstanding without compounding. The
Bank will not pay the Borrower interest on any overpayment.
(d) The Borrower will maintain sufficient funds in the Designated Account to
cover each debit. If there are insufficient funds in the Designated
Account on the date the Bank enters any debit authorized by this
Agreement, the debit will be reversed.
4.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banking day is
a day other than a Saturday or a Sunday on which the Bank is open for business
in California. For amounts bearing interest at an offshore rate (if any), a
banking day is a day other than a Saturday or a Sunday on which the Bank is open
for business in California and dealing in offshore dollars. All payments and
disbursements which would be due on a day which is not a banking day will be due
on the next banking day. All payments received on a day which is not a banking
day will be applied to the credit on the next banking day.
4.6 TAXES. The Borrower will not deduct any taxes from any payments it makes to
the Bank. If any government authority imposes any taxes on any payments made by
the Borrower, the Borrower will pay the taxes and will also pay to the Bank, at
the time interest is paid, any additional amount which the Bank specifies as
necessary to preserve the after-tax yield the Bank would have received if such
taxes had not been imposed. Upon request by the Bank, the Borrower will confirm
that it has paid the taxes by giving the Bank official tax receipts (or
notarized copies) within 30 days after the due date. However, the Borrower will
not pay the Bank's net income taxes.
4.7 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the Bank's
costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
-5-
<PAGE>
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitment for
credit.
4.8 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used.
4.9 INTEREST ON LATE PAYMENTS. At the Bank's sole option in each instance, any
amount not paid when due under this Agreement (including interest) shall bear
interest from the due date at the Bank's Reference Rate plus 1.25 percentage
points.
4.10 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, advances under this Agreement will at the option
of the Bank bear interest at a rate per annum which is 2.00 percentage points
higher than the rate of interest otherwise proved under this Agreement. This
will not constitute a waiver of any default.
5. CONDITIONS
The Bank must receive the following items, in form and content acceptable to the
Bank, before it is required to extend any credit to the Borrower under this
Agreement:
5.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance by
the Borrower (and any guarantor) of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.
5.2 SECURITY AGREEMENTS. Signed original security agreements, assignments,
financing statements and fixture filings (together with collateral in which the
Bank requires a possessory security interest), which the Bank requires.
5.3 EVIDENCE OF PRIORITY. Evidence that security interests and liens in favor
of the Bank are valid, enforceable, and prior to all others' rights and
interests, except those the Bank consents to in writing.
5.4 INSURANCE. Evidence of insurance coverage, as required in the "Covenants"
section of this Agreement.
5.5 GOOD STANDING. Certificates of good standing for the Borrower from its state
of incorporation and from any other state in which the Borrower is required to
qualify to conduct its business.
5.6 OTHER ITEMS. Any other items that the Bank reasonably requires.
6. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation.
6.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
- --------------------------------------------------------------------------------
LCA1CMLL (7/93) 96-SLABC05
-6-
<PAGE>
6.2 AUTHORIZATION. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
6.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
6.4 GOOD STANDING. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
6.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement,
or obligation by which the Borrower is bound.
6.6 FINANCIAL INFORMATION. All financial and other information that has been
or will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrower's (and any guarantor's) financial condition.
(b) in form and content required by the Bank.
(c) in compliance with all government regulations that apply.
6.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower, which, if lost, would impair the Borrower's
financial condition or that of the Borrower's business, or would impair the
Borrower's ability to repay the loan, except as have been disclosed in writing
to the Bank.
6.8 COLLATERAL. All collateral required in this Agreement is owned by the
grantor of the security interest free of any title defects or any liens or
interests of others, except those which have been approved by the Bank in
writing.
6.9 PERMITS, FRANCHISES. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
6.10 OTHER OBLIGATIONS. The Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation, except as have been disclosed in
writing to the Bank.
6.11 INCOME TAX RETURNS. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year, except as have been
disclosed in writing to the Bank.
6.12 NO EVENT OF DEFAULT. There is no event which is, or with notice or lapse
of time or both would be, a default under this Agreement.
6.13 LOCATION OF BORROWER. The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement.
- -------------------------------------------------------------------------------
LCA1CMLL (7/93) 96-SLABC05
-7-
<PAGE>
7. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
7.1 USE OF PROCEEDS. To use the proceeds of the credit only for leasehold
improvements and facility expansion.
7.2 FINANCIAL INFORMATION. To provide the following financial information
and statements and such additional information as requested by the Bank from
time to time:
(a) Within 90 days of the Borrower's fiscal year end, the Borrower's annual
financial statements. These financial statements must be reviewed by a
Certified Public Accountant ("CPA") acceptable to the Bank. The
statements shall be prepared on a consolidate basis. For fiscal year
ending December 31, 1993, CPA is to validate inventory figures (testing
and costing), thereafter no CPA validation is necessary provided Borrower
converts to a perpetual inventory system.
(b) Within 45 days of the period's end, the Borrower's monthly financial
statements. These financial statements may be Borrower prepared. The
statements shall be prepared on a unconsolidated basis.
7.3 TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. To maintain on an
unconsolidated basis a ratio of total liabilities not subordinated to tangible
net worth plus liabilities subordinated to the Bank in a manner acceptable to
the Bank (using the Bank's standard form), not exceeding 1.10:1.0. This ratio
will be calculated at the end of each fiscal quarter.
"Total liabilities not subordinated" means the sum of current liabilities plus
long term liabilities, excluding debt subordinated to the Borrower's obligations
to the Bank in a manner acceptable to the Bank, using the Bank's standard form.
"Tangible net worth" means the gross book value of the Borrower's assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
treasury stock, unamortized debt discount and expense, deferred research and
development costs, deferred marketing expenses, and other like intangibles) less
total liabilities, including but not limited to accrued and deferred income
taxes, and any reserves against assets.
7.4 CASH FLOW TO DEBT SERVICE COVERAGE RATIO. To maintain on an
unconsolidated basis a cash flow to debt service coverage ratio of at least
1.35:1.0.
"Cash flow ratio" means the ratio of cash flow to the sum of interest expense,
the current portion of long term debt to the Bank (existing and new), current
portion of other long term debt and current portion of long term debt for lease
obligations. "Cash flow" is defined as the sum of net profit before taxes,
interest expense, depreciation/amortization, less dividends and non-financed
capital expenditures and cash taxes. This ratio will be calculated at the end
of each fiscal quarter, using the results of that quarter and each of the 3
immediately preceding quarters. The current portion of long term debt will be
measured as of the first day of the fiscal year in which the quarter falls.
7.5 OTHER DEBTS. Not to have outstanding or incur any direct or contingent
debts (other than those to the Bank), or become liable for the debts of others
without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
- -------------------------------------------------------------------------------
-8-
<PAGE>
(d) Debts and lines of credit in existence on the date of this Agreement
disclosed in writing to the Bank.
7.6 OTHER LIENS. Not to create, assume, or allow any security interest or
lien (including judicial liens) on property the Borrower now or later owns,
except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to
the Bank.
7.7 CHANGE OF OWNERSHIP. Not to cause, permit, or suffer any change, direct
or indirect, in majority stock ownership of William H. Channell, Sr.
7.8 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit over Three Hundred Thousand Dollars ($300,000) against the
Borrower (or any guarantor).
(b) any substantial dispute between the Borrower (or any guarantor) any any
government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's (or any guarantor's)
financial condition or operations.
(e) any change in the Borrower's name, legal structure, place of business, or
chief executive office if the Borrower has more than one place of
business.
7.9 BOOKS AND RECORDS. To maintain adequate books and records.
7.10 AUDITS. To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are in
the possession of a third party, the Borrower authorizes that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
7.11 COMPLIANCE WITH LAWS. To comply with the laws (including any fictitious
name statute), regulations and orders of any government body with authority over
the Borrower's business.
7.12 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges,
and franchises the Borrower now has.
7.13 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or
replacements to keep the Borrower's properties in good working condition.
7.14 PERFECTION OF LIENS. to help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect its
security interests and liens.
7.15 COOPERATION. To take any action requested by the Bank to carry out the
intent of this Agreement.
- -------------------------------------------------------------------------------
-9-
<PAGE>
7.16 INSURANCE.
(a) INSURANCE COVERING COLLATERAL. To maintain all risk property damage
insurance policies covering the tangible property comprising the
collateral. Each insurance policy must be in an amount acceptable to the
Bank. The insurance must be issued by an insurance company acceptable to
the Bank and must include a lender's loss payable endorsement in favor
of the Bank in a form acceptable to the Bank.
(b) GENERAL BUSINESS INSURANCE. To maintain insurance satisfactory to the
Bank as to amount, nature and carrier covering property damage (including
loss of use and occupancy) to any of the Borrower's properties, public
liability insurance including coverage for contractual liability, product
liability and workers' compensation, and any other insurance which is
usual for the Borrower's business.
(c) EVIDENCE OF INSURANCE. Upon the request of the Bank, to deliver to the
Bank a copy of each insurance policy, or, if permitted by the Bank, a
certificate of insurance listing all insurance in force.
7.17 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written
consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, pool, joint venture, syndicate, or
other combination.
(d) lease, or dispose of all or a substantial part of the Borrower's business
or the Borrower's assets.
(e) acquire or purchase a business or its assets.
(f) sell or otherwise dispose of any assets for less than fair market value,
or enter into any sale and leaseback agreement covering any of its fixed
or capital assets.
(g) voluntarily suspend its business for more than 7 days in any 30 day
period.
8. DEFAULT
If any of the following events occur, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If an event of default occurs under
the paragraph entitled "Bankruptcy," below, with respect to the Borrower, then
the entire debt outstanding under this Agreement will automatically be due
immediately.
8.1 FAILURE TO PAY. The Borrower fails to make a payment under this
Agreement when due.
8.2 LIEN PRIORITY. The Bank fails to have an enforceable first lien (except
for any prior liens to which the Bank has consented in writing) on or security
interest in any property given as security for this loan.
8.3 FALSE INFORMATION. The Borrower has given the Bank false or misleading
information or representations.
8.4 BANKRUPTCY. The Borrower (or any guarantor) files a bankruptcy petition,
a bankruptcy petition is filed against the Borrower (or any guarantor), or the
Borrower (or any guarantor) makes a general assignment for the benefit of
creditors.
- -------------------------------------------------------------------------------
-10-
<PAGE>
8.5 RECEIVERS. A receiver or similar official is appointed for the
Borrower's (or guarantor's) business, or the business is terminated.
8.6 LAWSUITS. Any lawsuit or lawsuits are filed on behalf of one or more
trade creditors against the Borrower in an aggregate amount of Three Hundred
Thousands Dollars ($300,000) or more.
8.7 JUDGMENTS. Any judgments or arbitration awards are entered against the
Borrower (or any guarantor), or the Borrower (or any guarantor) enters into any
settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of Three Hundred Thousand Dollars ($300,000) or more.
8.8 GOVERNMENT ACTION. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's (or guarantor's) financial
condition or ability to repay.
8.9 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the
Borrower's (or any guarantor's) financial condition, properties or prospects, or
ability to repay the loan.
8.10 CROSS-DEFAULT. Any default occurs under any agreement in connection with
any credit the Borrower (or any guarantor) has obtained from anyone else or
which the Borrower (or any guarantor) has guaranteed.
8.11 DEFAULT UNDER RELATED DOCUMENTS. Any guaranty, subordination agreement,
security agreement, deed of trust, or other document required by this Agreement
is violated or no longer in effect.
8.12 OTHER BANK AGREEMENTS. The Borrower (or any guarantor) fails to meet the
conditions of, or fails to perform any obligation under any other agreement the
Borrower (or any guarantor) has with the Bank or any affiliate of the Bank.
8.13 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article.
9. ENFORCING THIS AGREEMENT; MISCELLANEOUS
9.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
9.2 CALIFORNIA LAW. This Agreement is governed by California law.
9.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the right
of set-off against the Borrower.
9.4 ARBITRATION.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those
that arise from:
(i) This Agreement (including any renewals, extensions or
modifications of this Agreement);
(ii) Any document, agreement or procedure related to or delivered in
connection with this Agreement;
- -------------------------------------------------------------------------------
-11-
<PAGE>
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted
between the Borrower and the Bank, including claims for injury to
persons, property or business interests (torts).
(b) At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United
States Arbitration Act. The United States Arbitration Act will apply even
though this Agreement provides that it is governed by California law.
(c) Arbitration proceedings will be administered by the American Arbitration
Association and will be subject to its commercial rules of arbitration.
(d) For purposes of the application of the statute of limitations, the filing
of an arbitration pursuant to this paragraph is the equivalent of the
filing of a lawsuit, and any claim or controversy which may be arbitrated
under this paragraph is subject to any applicable statute of limitations.
The arbitrators will have the authority to decide whether any such claim
or controversy is barred by the statute of limitations and, if so, to
dismiss the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be submitted
to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or claim,
at the time of the proposed submission to arbitration, arises from or
relates to an obligation to the Bank secured by real property located in
California. In this case, both the Borrower and the Bank must consent to
submission of the claim or controversy to arbitration. If both parties do
not consent to arbitration, the controversy or claim will be settled as
follows:
(i) The Borrower and the Bank will designate a referee (or a panel of
referees) selected under the auspices of the American Arbitration
Association in the same manner as arbitrators are selected in
Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be
appointed by a court as provided in California Code of Civil
Procedure Section 638 and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be an
active attorney or a retired judge; and
(iv) The award that results from the decision of the referee (or the
panel) will be entered as a judgment in the court that appointed
the referee, in accordance with the provisions of California Code
of Civil Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property
collateral; or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
------------------------------------------------------------------------------
-12-
<PAGE>
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank, including
the suing party, to submit the controversy or claim to arbitration if the
other party contests the lawsuit. However, if the controversy or claim
arises from or relates to an obligation to the Bank which is secured by
real property located in California at the time of the proposed
submission to arbitration, this right is limited according to the
provision above requiring the consent of both the Borrower and the Bank
to seek resolution through arbitration.
(j) If the Bank forecloses against any real property securing this Agreement,
the Bank has the option to exercise the power of sale under the deed of
trust or mortgage, or to proceed by judicial foreclosure.
9.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even if
it makes a loan after default. If the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.
9.6 ADMINISTRATION COSTS. The Borrower shall pay the Bank for all reasonable
costs incurred by the Bank in connection with administering this Agreement.
9.7 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any
reasonable costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and including
any amendment, waiver, "workout" or restructuring under this Agreement. In the
event of a lawsuit or arbitration proceeding, the prevailing party is entitled
to recover costs and reasonable attorneys' fees incurred in connection with the
lawsuit or arbitration proceeding, as determined by the court or arbitrator. As
used in this paragraph, "attorneys' fees" includes the allocated costs of
in-house counsel.
9.8 ONE AGREEMENT. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank
and the Borrower concerning this credit; and
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
9.9 NOTICES. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the address on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrower may specify from time to time in writing.
9.10 HEADINGS. Article and paragraph headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.
9.11 COUNTERPARTS. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.
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-13-
<PAGE>
This Agreement is executed as of the date stated at the top of the first page.
[Logo of BA]
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION CHANNELL COMMERCIAL CORPORATION
X /s/ Curt L. McCombs X /s/ William H. Channell, Sr.
------------------------------------- ------------------------------
BY: CURT L. McCOMBS BY: WILLIAM H. CHANNELL, SR.
TITLE: VICE PRESIDENT TITLE: PRESIDENT
ADDRESS WHERE NOTICES TO THE BANK ADDRESS WHERE NOTICES TO THE
ARE TO BE SENT: BORROWER ARE TO BE SENT:
3650 14th St. 2nd Floor 26040 Ynez Road
Riverside, CA 92501 Temecula, CA 92390
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-14-
<PAGE>
- --------------------------------------------------------------------------------
[LOGO OF BANK OF AMERICA] AMENDMENT TO DOCUMENTS
- --------------------------------------------------------------------------------
AMENDMENT NO. 1 TO BUSINESS LOAN AGREEMENT
This Amendment No. 1 (the "Amendment") dated as of 1-25, 1994, is between Bank
----
of America National Trust and Savings Association (the "Bank") and Channell
Commercial Corporation (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan Agreement
dated as of January 21, 1994 (the "Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
---------
1. DEFINITIONS. Capitalized terms used but not defined in this Amendment shall
-----------
have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
----------
2.1 Paragraph 2.1(a) of the Agreement is hereby amended and restated in its
entirety as follows:
"2.l(a) LOAN FEE. The Borrower agrees to pay a fee equal to 1.00% due on
January 25, 1994."
3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the terms
-------------------
and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
Bank of America
National Trust and Savings Channell Commercial Corporation
X /s/ Curt L. McCombs X /s/ William H. Channell, Sr.
- ------------------------- -------------------------------
By: Curt L. McCombs, By: William H. Channell, Sr.
Title: Vice President Title: President
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AmendL (10/92) -1-
<PAGE>
- --------------------------------------------------------------------------------
[LOGO OF BANK OF AMERICA] AMENDMENT TO DOCUMENTS
- --------------------------------------------------------------------------------
AMENDMENT NO. 2 TO BUSINESS LOAN AGREEMENT
This Amendment No. 2 (the "Amendment") dated as of 8-15, 1994, is between Bank
----
of America National Trust and Savings Association (the "Bank") and Channell
Commercial Corporation (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan Agreement
dated as of January 21, 1994, as previously amended (the "Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
---------
1. DEFINITIONS. Capitalized terms used but not defined in this Amendment shall
-----------
have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
----------
2.1 In Paragraph 1.2 of the Agreement, the date "October 31, 1994" is
substituted for the date "August 31, 1994".
2.2 Paragraph 1.4 (c) of the Agreement is amended to read in its entirety
as follows:
"(c) The Borrower will repay the principal amount outstanding on the
Expiration Date in 72 successive equal monthly installments starting
December 1, 1994. On November 1, 2000, the Borrower will repay the
remaining principal balance plus any interest then due".
3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the terms
-------------------
and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
Bank of America
National Trust and Savings Association Channell Commercial Corporation
X /s/ Curt L. McCombs X /s/ William H. Channell, Sr.
- ------------------------- -------------------------------
By: Curt L. McCombs By: William H. Channell, Sr.
Title: Vice President Title: President
- --------------------------------------------------------------------------------
AmendL (10/92) -1-
<PAGE>
- --------------------------------------------------------------------------------
[LOGO OF BANK OF AMERICA] AMENDMENT TO DOCUMENTS
- --------------------------------------------------------------------------------
AMENDMENT NO. 4 TO BUSINESS LOAN AGREEMENT
This Amendment No. 4 (the "Amendment") Dated as of 4-19, 1995, is between Bank
----
of America National Trust and Savings Association (the "Bank") and Channell
Commercial Corporation (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan Agreement
dated as of January 21, 1994, as previously amended (the "Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
---------
1. DEFINITIONS. Capitalized terms used but not defined in this Amendment shall
have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
----------
2.1 In Paragraph 7.3 of the Agreement, the words "a consolidated basis"
are substituted for the words "an unconsolidated basis" and the ratio
"1.15:1.0" is substituted for the ratio 1.10:1.0."
2.2 In Paragraph 7.4 of the Agreement, the words "a consolidated basis"
are substituted for the words "an unconsolidated basis."
2.3 In subparagraph (a) of Paragraph 7.8 of the Agreement, the amount
"Five Hundred Thousand Dollars ($500,000)" is substituted for the
amount "Three Hundred Thousand Dollars ($300,000)."
2.4 In Paragraph 8.6 of the Agreement, the amount "Five Hundred Thousand
Dollars ($500,000)" is substituted for the amount "Three Hundred
Thousand Dollars ($300,000)."
2.5 In Paragraph 8.7 of the Agreement, the amount "Five Hundred Thousand
Dollars ($500,000)" is substituted for the amount "Three Hundred
Thousand Dollars ($300,000)."
3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the terms
-------------------
and conditions of the Agreement shall remain in full force and effect.
- --------------------------------------------------------------------------------
AmendL (10/92) -1-
<PAGE>
- --------------------------------------------------------------------------------
[LOGO OF BANK OF AMERICA] AMENDMENT TO DOCUMENTS
- --------------------------------------------------------------------------------
AMENDMENT NO. 5
TO BUSINESS LOAN AGREEMENT
This Amendment No. 5 (the "Amendment") dated as of 5-30, 1996 is between BANK
----
OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank") and CHANNELL
COMMERCIAL CORPORATION (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan Agreement
dated as of January 21, 1994, as previously amended (the "Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
---------
1. DEFINITIONS. Capitalized terms used but not defined in this Amendment
-----------
shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
----------
2.1 A new Paragraph 1.4A is added to the Agreement which reads in its
entirety as follows:
"1.4A MANDATORY PREPAYMENT; EARLY TERMINATION. Anything herein to the
contrary notwithstanding, if either Facility No. 1 or Facility No. 2,
as defined and described in that certain Business Loan Agreement dated
April 19, 1995, between the Borrower and the Bank ("1995 Agreement")
as now in effect or as hereafter renewed, amended or restated,
terminates for any reason, including, without limitation, termination
at the request of the Borrower, termination resulting from failure by
the Bank to renew either Facility No. 1 or Facility No. 2 beyond any
availability period applicable thereto, or termination as otherwise
provided or permitted under the 1995 Agreement, the entire principal
balance of the line of credit, together with all accrued interest
thereon, shall be due and payable on the effective date of such
termination."
2.2 Article 3 and Paragraphs 5.2, 5.3, 5.4, 6.8 and 8.2 of the Agreement
are deleted in their entirety.
2.3 In Paragraph 7.2(a) of the Agreement, the words "AUDITED WITH AN
UNQUALIFIED OPINION" is substituted for the word "REVIEWED".
2.4 In Paragraph 7.3 of the Agreement, the ratio "1.0:1.0" is substituted
for the ratio "1.15:1.0."
2.5 Paragraph 7.6 of the Agreement is amended to read in its entirety as
follows:
"7.6 OTHER LIENS. Not to create, assume, or allow any security
interest or lien (including judicial liens) on property the Borrower
now or later owns including but not limited to accounts receivable and
inventory, except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in
writing to the Bank."
"2.6 Paragraph 7.7 of the Agreement is amended to read in its entirety as
follows:
7.7 CHANGE OF OWNERSHIP. Not to cause, permit, or suffer any change,
direct or indirect, in majority stock ownership of Mr. and Mrs.
William Channell, Sr. and the Channell Family.
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AmendL (10/92) -1-
<PAGE>
2.7 Subparagraphs (a) and (c) of Paragraph 7.16 of the Agreement are
deleted in their entirety .
2.8 New Paragraphs 7.18 and 7.19 are added to the Agreement which read
in their entirety as follows:
"7.18 Quick Ratio. To maintain on a consolidated basis a ratio of
quick assets to current liabilities of at least 1.0:1.0.
"Quick assets" means cash, short-term cash investments, net trade
receivables and marketable securities not classified as long-term
investments. This ratio will be calculated at the end of each fiscal
quarter.
7.19 Tangible Net Worth. To maintain on a consolidated basis
tangible net worth equal to at least the sum of the following:
(a) Twelve Million Two Hundred Fifty Thousand Dollars
($12,250,000); plus
(b) the sum of 20% of net income after income taxes (without
subtracting losses) earned in each quarterly accounting period.
"Tangible net worth" means the gross book value of the Borrower's
assets (excluding goodwill, patents, trademarks, trade
names,organization expenses, treasury stock, unamortized debt
discount and expense deferred research and development costs,
deferred marketing expenses, and other like intangibles) less total
liabilities, including but not limited to accrued and deferred
income taxes, and any reserves against assets. This ratio will be
calculated at the end of each fiscal quarter."
2.9 A new Article 7A is added to the Agreement which reads in its
entirety as follows:
"7A HAZARDOUS WASTE INDEMNIFICATION.
The Borrower will indemnify and hold harmless the Bank from any loss or
liability directly or indirectly arising out of the use, generation,
manufacture, production, storage, release, threatened release,
discharge, disposal or presence of a hazardous substance. This indemnity
will apply whether the hazardous substance is on, under or about the
Borrower's property or operations or property leased to the Borrower.
The indemnity includes but is not limited to attorney's fees (including
the reasonable estimate of the allocated cost of in-house counsel and
staff). The indemnity extends to the Bank, its parent, subsidiaries and
all of their directors, officers, employees, agents, successors,
attorneys and assigns. For these purposes, the term "hazardous
substances" means any substance which is or becomes designated as
"hazardous" or "toxic" under any federal, state or local law. This
indemnity will survive repayment of the Borrower's obligation to the
Bank."
3. Effect of Amendment. Except as provided in this Amendment, all of the
-------------------
terms and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of
this Amendment.
Bank of America
National Trust and Savings Association Channell Commmerical Corporation
/s/ Curt L. McCombs /s/ William H. Channell, Sr.
- ----------------------------------- ---------------------------------------
By: Curt L. McCombs, Vice President By: William H. Channell, Sr., President
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AmendL (10/92) -2- 005922-10036
<PAGE>
EXHIBIT 10.4
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BANK OF AMERICA BUSINESS LOAN AGREEMENT
NATIONAL TRUST AND SAVINGS ASSOCIATION
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This Agreement dated as of 4-19, 1995, is between Bank of America National Trust
---- --
and Savings Association (the "Bank") and Channell Commercial Corporation (the
"Borrower").
1. FACILITY NO. 1 LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide a
line of credit ("Facility No. 1") to the Borrower. The amount of the
line of credit (the "Facility No. 1 Commitment") is Three Million Two
Hundred Fifty Thousand Dollars ($3,250,000).
(b) This is a revolving line of credit. During the availability period, the
Borrower may repay principal amounts and reborrow them.
(c) Each advance must be for at least Fifteen Thousand Dollars ($15,000), or
for the amount of the remaining available line of credit, if less.
(d) The Borrower agrees not to permit the outstanding principal balance of
the line of credit to exceed the Facility No. 1 Commitment.
1.2 AVAILABILITY PERIOD. The line of credit is available between the date of
this Agreement and May 1, 1996 (the "Expiration Date") unless the Borrower is in
default.
1.3 INTEREST RATE.
(a) Unless the Borrower elects an optional interest rate as described below,
the interest rate is the Bank's Reference Rate.
(b) The Reference Rate is the rate of interest publicly announced from time
to time by the Bank in San Francisco, California, as its Reference Rate.
The Reference Rate is set by the Bank based on various factors,
including the Bank's costs and desired return, general economic
conditions and other factors, and is used as a reference point for
pricing some loans. The Bank may price loans to its customers at, above,
or below the Reference Rate. Any change in the Reference Rate shall take
effect at the opening of business on the day specified in the public
announcement of a change in the Bank's Reference Rate.
1.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on May 1, 1995, and then monthly
thereafter until payment in full of any principal outstanding under this
line of credit.
(b) The Borrower will repay in full all principal and any unpaid interest or
other charges outstanding under this line of credit no later than the
Expiration Date.
(c) Any amount bearing interest at an optional interest rate (as described
below) may be repaid at the end of the applicable interest period, which
shall be no later than thirty (30) days after the Expiration Date.
1.5 OPTIONAL INTEREST RATES. Instead of the interest rate based on the
Bank's Reference Rate, the Borrower may elect to have all or portions of the
line of credit (during the availability period) bear interest at the rate(s)
described below during an interest period agreed to by the Bank and the
Borrower. Each interest rate is
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a rate per year. Interest will be paid on the last day of each interest period,
and on the first day each month during the interest period. At the end of any
interest period, the interest rate will revert to the rate based on the
Reference Rate, unless the Borrower has designated another optional interest
rate for the portion.
1.6 FIXED RATE. The Borrower may elect to have all or portions of the
principal balance of the line of credit bear interest at the Fixed Rate, subject
to the following requirements:
(a) The "Fixed Rate" means the fixed interest rate the Bank and the Borrower
agree will apply to the portion during the applicable interest period.
(b) The interest period during which the Fixed Rate will be in effect will
be no shorter than thirty (30) days and no longer than one hundred
eighty (180) days.
(c) Each Fixed Rate portion will be for an amount not less than Five Hundred
Thousand Dollars ($500,000).
(d) The Borrower may not elect a Fixed Rate with respect to any portion of
the principal balance of the line of credit which is scheduled to be
repaid before the last day of the applicable interest period.
(e) Any portion of the principal balance of the line of credit already
bearing interest at the Fixed Rate will not be converted to a different
rate during its interest period.
(f) Each prepayment of a Fixed Rate portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid, and a prepayment fee equal to the amount
(if any) by which:
(i) the additional interest which would have been payable on the
amount prepaid had it not been paid until the last day of the
interest period, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the certificate of
deposit market for a period starting on the date on which it was
prepaid and ending on the last day of the interest period for
such portion.
2. FACILITY NO. 2: LINE OF CREDIT AMOUNT AND TERMS
2.1 EQUIPMENT LINE.
(a) From time to time during the availability period, the Bank will make
equipment loans (the "Equipment Loans") to the Borrower as provided
herein. Each Equipment Loan must be for at least Twenty Five Thousand
Dollars ($25,000), or for the amount of the remaining available line of
credit, if less. The total of all Equipment Loans outstanding under the
Equipment Line (the "Facility No. 2") plus the outstanding amounts of
any standby letters of credit, including amounts drawn on letters of
credit and not yet reimbursed issued pursuant to Paragraph 2.4 at any
one time may not exceed Four Million Three Hundred Thousand Dollars
($4,300,000) (the "Facility No. 2 Commitment").
(b) This is a revolving line of credit with a within line facility for
standby letters of credit and the Borrower may, during the availability
period, reborrow amounts repaid or prepaid.
(c) The existing Equipment Loans to the Borrower in the principal amount
outstanding of Two Million Four Hundred Fifty Four Thousand Seven
Hundred Forty Eight and 39/100 Dollars ($2,454,748.39) shall be deemed
to be outstanding under this Agreement; provided, however, that they
shall continue to bear interest, and shall be payable, as stated in the
existing documentation concerning those loans. The outstanding principal
amount of the existing loans shall be included in calculating the
Borrower's compliance with the limit on Equipment Loans described in (a)
above.
(d) The Borrower shall use the proceeds of each Equipment Loan to purchase
equipment for use in the Borrower's business. All equipment acquired
with the proceeds of an Equipment Loan shall be free and clear of any
security interests, liens, encumbrances or rights of others except the
security interests of the
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Bank under any security agreements required under this Agreement. Each
request for an Equipment Loan shall be accompanied by (1) a copy of the
purchase order or invoice for the equipment to be purchased with the
proceeds of such Equipment Loan, (2) a security agreement executed by
the Borrower covering the equipment being purchased, and (3) such
financing statements, fixture filings or other documentation as
reasonable requested by the Bank to perfect the Bank's security interest
in such equipment. The amount of each Equipment Loan shall not exceed
80% of the purchase price including tax, license and accessories of the
equipment being purchased.
(e) The Borrower shall repay principal of each Equipment Loan in sixty (60)
approximately equal monthly installments, commencing on the first day of
the month following the date the Equipment Loan is made and continuing
on the first day of each successive month thereafter until the first day
of the sixtieth month following the month in which the Equipment Loan is
made (the "Equipment Loan Maturity Date"), on which date all remaining
principal and interest then owing with respect to the Equipment Loan
shall be due and payable.
(f) The Borrower may at any time prepay an Equipment Loan in full or in
part. Partial prepayments shall be applied to the most remote
installments of the Equipment Loan.
(g) The principal balance of each Equipment Loan shall bear interest at a
rate per annum equal to the Bank's Reference Rate plus one half (.50)
percentage point. The Borrower will pay interest monthly on the first
day of each month until the Equipment Loan Maturity Date, on which date
all accrued and unpaid interest shall be due and payable.
2.2 OPTIONAL INTEREST RATES. Instead of the interest rate based on the
Bank's Reference Rate, the Borrower may elect to have all or any portion of an
Equipment Loan bear interest at the rate(s) described below during an interest
period agreed to by the Bank and the Borrower. Each interest rate is a rate per
year. Interest will be paid on the last day of each interest period, and on the
first day each month during the interest period. At the end of any interest
period, the interest rate will revert to the rate based on the Reference Rate,
unless the Borrower has designated another optional interest rate for the
portion.
2.3 LONG TERM RATE. The Borrower may elect to have all or any portion of an
Equipment Loan bear interest at the Long Term Rate, subject to the following
requirements:
(a) The interest period during which the Long Term Rate will be in effect
will be one year or more. The Borrower will immediately begin repaying
principal of the Long Term Rate portion under an amortization schedule
agreed to by the Bank and the Borrower at the time of the designation.
These payments will be separate from the payments required by the
Paragraph 2.1(e) above which will be calculated without taking into
account any Long Term Rate portions.
(b) The "Long Term Rate" means the fixed interest rate the Bank and the
Borrower agree will apply to the portion during the applicable interest
period.
(c) Each Long Term Rate portion will be for an amount not less than One
Hundred Thousand Dollars ($100,000).
(d) Any Equipment Loan already bearing interest at the Long Term Rate will
not be converted to a different rate during its interest period.
(e) The Borrower may prepay the Long Term Rate portion in whole or in part
in the minimum amount of One Hundred Thousand Dollars ($100,000). The
Borrower will give the Bank irrevocable written notice of the Borrower's
intention to make the prepayment, specifying the date and amount of the
prepayment. The notice must be received by the Bank at least 5 banking
days in advance of the prepayment. All prepayments of principal on the
Long Term Rate portion will be applied on the most remote principal
installment or installments then unpaid.
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<PAGE>
(f) Each prepayment of a Long Term Rate portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by payment of
all accrued interest on the amount of the prepayment and the prepayment
fee described below.
(g) The prepayment fee will be the sum of fees calculated separately for
each Prepaid Installment, as follows:
(i) The Bank will first determine the amount of interest which would
have accrued each month for the Prepaid Installment had it
remained outstanding until the applicable Original Payment Date,
using the Long Term Rate;
(ii) The Bank will then subtract from each monthly interest amount
determined in (i), above, the amount of interest which would
accrue for that Prepaid Installment if it were reinvested from
the date of prepayment through the Original Payment Date, using
the following rate:
(A) If the Original Payment Date is more than 5 years after the
date of prepayment: the Treasury Rate plus one-quarter of
one percentage point;
(B) If the Original Payment Date is 5 years or less after the
date of prepayment: the Money Market Rate.
(iii) If (i) minus (ii) for the Prepaid Installment is greater than
zero, the Bank will discount the monthly differences to the date
of prepayment by the rate used in (ii) above. The sum of the
discounted monthly differences is the prepayment fee for that
Prepaid Installment.
(h) The following definitions will apply to the calculation of the
prepayment fee:
"Money Market" means the domestic certificate of deposit market, the
eurodollar deposit market or other appropriate money market selected by
the Bank.
"Money Market Rate" means the fixed interest rate per annum which the
Bank determines could be obtained by reinvesting a specified Prepaid
Installment in the Money Market from the date of prepayment through the
Original Payment Date.
"Original Payment Dates" means the dates on which principal of the Long
Term Rate portion would have been paid if there had been no prepayment.
If a portion of the principal would have been paid later than the end of
the interest period in effect at the time of prepayment, then the
Original Payment Date for that portion will be the last day of the
interest period.
"Prepaid Installment" means the amount of the prepaid principal of the
Long Term Rate portion which would have been paid on a single Original
Payment Date.
"Treasury Rate" means the interest rate yield for U.S. Government
Treasury Securities which the Bank determines could be obtained by
reinvesting a specified Prepaid Installment in such securities from the
date of prepayment through the Original Payment Date.
(i) The Bank may adjust the Treasury Rate and Money Market Rate to reflect
the compounding, accrual basis, or other costs of the Long Term Rate
portion. Each of the rates is the Bank's estimate only and the Bank is
under no obligation to actually reinvest any prepayment. The rates will
be based on information from either the Telerate or Reuters information
services, The Wall Street Journal, or other information sources the Bank
-----------------------
deems appropriate.
2.4 STANDBY LETTERS OF CREDIT UNDER FACILITY NO. 2.
(i) Facility No. 2 may be used for financing standby letters of
credit with a maximum maturity of May 1, 1996.
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<PAGE>
(ii) The amount of outstanding standby letters of credit, including
amounts drawn on letters of credit and not yet reimbursed, may
not exceed at any one time Five Hundred Thousand Dollars
($500,000).
The Borrower agrees:
(a) any sum drawn under a letter of credit may, at the option of the Bank,
be deemed an Equipment Loan outstanding under Facility No. 2 and shall
bear interest and be due as described in Paragraph 2.1 hereof.
(b) if there is a default under this Agreement, to immediately prepay and
make the Bank whole for any outstanding letters of credit.
(c) the issuance of any letter of credit and any amendment to a letter of
credit is subject to the Bank's written approval and must be in form and
content satisfactory to the Bank and in favor of a beneficiary
acceptable to the Bank.
(d) to sign the Bank's form Application and Agreement for Standby Letter of
Credit.
(e) to pay any issuance and/or other fees that the Bank notifies the
Borrower will be charged for issuing and processing letters of credit
for the Borrower.
(f) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
(g) to pay the Bank a non-refundable fee equal to one and one half percent
(1.50%) per annum of the outstanding undrawn amount of each standby
letter of credit, payable quarterly in advance, calculated on the basis
of the face amount outstanding on the day the fee is calculated.
3. FEES AND EXPENSES
3.1 FEES.
(a) LOAN FEE (FACILITY NO. 1). The Borrower agrees to pay a fee equal to
.25% per annum of the Facility No. 1 Commitment calculated on a prorated
basis and due on or before the date of execution of this Agreement.
3.2 EXPENSES.
(a) The Borrower agrees to immediately repay the Bank for expenses that
include, but are not limited to, filing, recording and search fees,
appraisal fees, title report fees, and documentation fees.
(b) The Borrower agrees to reimburse the Bank for the cost of periodic
audits and appraisals of the personal property collateral securing this
Agreement, at such intervals as the Bank may reasonably require but no
more frequently than annually. The audits and appraisals may be
performed by employees of the Bank or by independent appraisers.
4. COLLATERAL (FACILITY NO. 1)
4.1 PERSONAL PROPERTY. The Borrower's obligations to the Bank under
Facility No. 1 will be secured by personal property the Borrower now owns or
will own in the future as listed below. The collateral is further defined in
security agreement(s) executed by the Borrower. In addition, all personal
property collateral securing this Agreement shall also secure all other present
and future obligations of the Borrower to the Bank (excluding any consumer
credit covered by the federal Truth in Lending law, unless the Borrower has
otherwise agreed in writing). All personal property collateral securing any
other present or future obligations of the Borrower to the Bank shall also
secure this Agreement.
(a) Inventory.
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<PAGE>
(b) Receivables.
5. COLLATERAL (FACILITY NO. 2)
5.1 PERSONAL PROPERTY. The Borrower's obligations to the Bank under
Facility No. 2 will be secured by personal property the Borrower now owns or
will own in the future as listed below. The collateral is further defined in
security agreement(s) executed by the Borrower. In addition, all personal
property collateral securing this Agreement shall also secure all other present
and future obligations of the Borrower to the Bank (excluding any consumer
credit covered by the federal Truth in Lending law, unless the Borrower has
otherwise agreed in writing). All personal property collateral securing any
other present or future obligations of the Borrower to the Bank shall also
secure this Agreement.
(a) Specific equipment and fixtures.
6. DISBURSEMENTS, PAYMENTS AND COSTS
6.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be
made in writing in a manner acceptable to the Bank, or by another means
acceptable to the Bank.
6.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each
payment by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from time
to time;
(c) made in immediately available funds, or such other type of funds
selected by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrower to sign one or more promissory notes.
6.3 TELEPHONE AUTHORIZATION.
(a) The Bank may honor telephone instructions for advances or repayments or
for the designation of optional interest rates given by any one of the
individuals authorized to sign loan agreements on behalf of the
Borrower, or any other individual designated by any one of such
authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account number 06004-12147, or such other of the Borrower's
accounts with the Bank as designated in writing by the Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in connection
with any act resulting from telephone instructions it reasonably
believes are made by any individual authorized by the Borrower to give
such instructions. This indemnity and excuse will survive this
Agreement.
6.4 DIRECT DEBIT (PRE-BILLING).
(a) The Borrower agrees that the Bank will debit the Borrower's deposit
account number 06004-12147 (the "Designated Account") on the date each
payment of interest and any fees becomes due for Facility No. 1 and on
the date each payment of principal and interest and any fees for
Facility No. 2 from the Borrower becomes due (the "Due Date"). If the
Due Date is not a banking day, the Designated Account will be debited on
the next banking day.
(b) Approximately 10 days prior to each Due Date, the Bank will mail to the
Borrower a statement of the amounts that will be due on that Due Date
(the "Billed Amount"). The calculation will be made on the
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<PAGE>
assumption that no new extensions of credit or payments will be made
between the date of the billing statement and the Due Date, and that
there will be no changes in the applicable interest rate.
(c) The Bank will debit the Designated Account for the Billed Amount,
regardless of the actual amount due on that date (the "Accrued Amount").
If the Billed Amount debited to the Designated Account differs from the
Accrued Amount, the discrepancy will be treated as follows:
(i) If the Billed Amount is less than the Accrued Amount, the Billed
Amount for the following Due Date will be increased by the amount
of the discrepancy. The Borrower will not be in default by reason
of any such discrepancy.
(ii) If the Billed Amount is more than the Accrued Amount, the Billed
Amount for the following Due Date will be decreased by the amount
of the discrepancy.
Regardless of any such discrepancy, interest will continue to accrue
based on the actual amount of principal outstanding without compounding.
The Bank will not pay the Borrower interest on any overpayment.
(d) The Borrower will maintain sufficient funds in the Designated Account to
cover each debit. If there are insufficient funds in the Designated
Account on the date the Bank enters any debit authorized by this
Agreement, the debit will be reversed.
6.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banking day
is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. All payments and disbursements which would be due on a
day which is not a banking day will be due on the next banking day. All payments
received on a day which is not a banking day will be applied to the credit on
the next banking day.
6.6 TAXES. The Borrower will not deduct any taxes from any payments it makes
to the Bank. If any government authority imposes any taxes on any payments made
by the Borrower, the Borrower will pay the taxes and will also pay to the Bank,
at the time interest is paid, any additional amount which the Bank specifies as
necessary to preserve the after-tax yield the Bank would have received if such
taxes had not been imposed. Upon request by the Bank, the Borrower will confirm
that it has paid the taxes by giving the Bank official tax receipts (or
notarized copies) within 30 days after the due date. However, the Borrower will
not pay the Bank's net income taxes.
6.7 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the
Bank's costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments
for credit.
6.8 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used.
6.9 INTEREST ON LATE PAYMENTS. At the Bank's sole option in each instance,
any amount not paid when due under this Agreement (including interest) shall
bear interest from the due date at the Bank's Reference Rate plus one and one
quarter (1.25) percentage points. This may result in compounding of interest.
6.10 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, advances under this Agreement will at the option
of the Bank bear interest at a rate per annum which is one
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(1.0) percentage point higher than the rate of interest otherwise provided under
this Agreement. This will not constitute a waiver of any default.
7. CONDITIONS
The Bank must receive the following items, in form and content acceptable to the
Bank, before it is required to extend any credit to the Borrower under this
Agreement:
7.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance
by the Borrower of this Agreement and any instrument or agreement required under
this Agreement have been duly authorized.
7.2 SECURITY AGREEMENTS. Signed original security agreements, assignments,
financing statements and fixture filings (together with collateral in which the
Bank requires a possessory security interest), which the Bank requires.
7.3 EVIDENCE OF PRIORITY. Evidence that security interests and liens in
favor of the Bank are valid, enforceable, and prior to all others' rights and
interests, except those the Bank consents to in writing. All title documents for
motor vehicles must show the Bank's interest.
7.4 CONSENT TO REMOVAL. For any personal property collateral located on
real property which is subject to a mortgage or deed of trust or which is not
owned by the Borrower, a Consent to Removal from the owner of the real property
and the holder of any mortgage or deed of trust.
7.5 INSURANCE. Evidence of insurance coverage, as required in the
"Covenants" section of this Agreement.
7.6 OTHER ITEMS. Any other items that the Bank reasonably requires.
8. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation.
8.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
8.2 AUTHORIZATION. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
8.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
8.4 GOOD STANDING. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
8.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement,
or obligation by which the Borrower is bound.
8.6 FINANCIAL INFORMATION. All financial and other information that has
been or will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrower's financial condition.
(b) in form and content required by the Bank.
(c) in compliance with all government regulations that apply.
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8.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower, which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank.
8.8 COLLATERAL. All collateral required in this Agreement is owned by the
grantor of the security interest free of any title defects or any liens or
interests of others.
8.9 PERMITS, FRANCHISES. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
8.10 OTHER OBLIGATIONS. The Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
8.11 INCOME TAX RETURNS. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year.
8.12 NO EVENT OF DEFAULT. There is no event which is, or with notice or
lapse of time or both would be, a default under this Agreement.
8.13 LOCATION OF BORROWER. The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement.
9. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
9.1 USE OF PROCEEDS. To use the proceeds of Facility No. 1 only to support
operating cash flow needs. To use the proceeds of Facility No. 2 only to finance
the purchase of new equipment or vehicles. To use the standby letters of credit
under Facility No. 2 only for performance bonds for purchase orders on new
equipment.
9.2 FINANCIAL INFORMATION. To provide the following financial information
and statements and such additional information as requested by the Bank from
time to time:
(a) Within 90 days of the Borrower's fiscal year end, the Borrower's annual
financial statements. These financial statements must be reviewed by a
Certified Public Accountant ("CPA") acceptable to the Bank. The
statements shall be prepared on a consolidated basis. For each fiscal
year end, the CPA is to validate inventory figures (testing and
costing).
(b) Within 45 days of the period's end, the Borrower's monthly financial
statements. These financial statements may be Borrower prepared. The
statements shall be prepared on a consolidated basis. On a quarterly
basis, the Borrower is to provide the Bank with an indication of
officers' salaries, bonuses, and license fees.
(c) By January 31, 1996, the Borrower's projections prepared on a quarterly
format for the fiscal year 1996.
9.3 QUICK RATIO. To maintain on a consolidated basis a ratio of quick
assets to current liabilities of at least .7:1.0.
"Quick assets" means cash, short-term cash investments, net trade receivables
and marketable securities not classified as long-term investments. This ratio
will be calculated at the end of each fiscal quarter.
9.4 TANGIBLE NET WORTH. To maintain on a consolidated basis tangible net
worth equal to at least the sum of the following:
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<PAGE>
(a) Eight Million Seven Hundred Fifty Thousand Dollars ($8,750,000); plus
(b) the sum of 20% of net income after income taxes (without subtracting
losses) earned in each quarterly accounting period commencing with March
31, 1995.
"Tangible net worth" means the gross book value of the Borrower's assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
treasury stock, unamortized debt discount and expense, deferred research and
development costs, deferred marketing expenses, and other like intangibles) less
total liabilities, including but not limited to accrued and deferred income
taxes, and any reserves against assets. This ratio will be calculated at the end
of each fiscal quarter.
9.5 TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. To maintain on a
consolidated basis a ratio of total liabilities not subordinated to tangible net
worth plus liabilities subordinated to the Bank in a manner acceptable to the
Bank (using the Bank's standard form) not exceeding 1.15:1.0. This ratio will be
calculated at the end of each fiscal quarter.
"Total liabilities not subordinated" means the sum of current liabilities plus
long term liabilities, excluding debt subordinated to the Borrower's obligations
to the Bank in a manner acceptable to the Bank, using the Bank's standard form.
9.6 CASH FLOW TO DEBT SERVICE COVERAGE RATIO. To maintain on a consolidated
basis a cash flow to debt service coverage ratio of at least 1.3:1.0.
"Cash flow to debt service coverage ratio" means the ratio of cash flow to the
sum of interest expense, the current portion of long term debt to the Bank
(existing and new), current portion of other long term debt and current portion
of long term debt for lease obligations. "Cash flow" is defined as the sum of
net profit before tax, plus interest expense plus depreciation and amortization,
less dividends and non-financed capital expenditures and cash taxes. This ratio
will be calculated at the end of each fiscal quarter, using the results of that
quarter and each of the 3 immediately preceding quarters. The current portion of
long term debt will be measured as of the first day of the fiscal year in which
the quarter falls.
9.7 LIMITATION ON LOSSES. Not to incur on a consolidated basis a net loss
after taxes and extraordinary items in any two consecutive quarterly accounting
periods.
9.8 OTHER DEBTS. Not to have outstanding or incur any direct or contingent
debts (other than those to the Bank), or become liable for the debts of others
without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Debts and lines of credit in existence on the date of this Agreement
disclosed in writing to the Bank.
9.9 OTHER LIENS. Not to create, assume, or allow any security interest or
lien (including judicial liens) on property the Borrower now or later owns,
except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to
the Bank.
9.10 LOANS TO OFFICERS. Not to make any additional loans, advances or other
extensions of credit to any of the Borrower's executives, officers, directors or
shareholders (or any relatives of any of the foregoing) unless the
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<PAGE>
debt is subordinated to the Borrower's obligations to the Bank in a manner
acceptable to the Bank, using the Bank's standard form.
9.11 CHANGE OF OWNERSHIP. Not to cause, permit, or suffer any change, direct
or indirect, in majority stock ownership by William H. Channell, Sr.
9.12 OUT OF DEBT PERIOD. To repay any advances in full, and not to draw any
additional advances on its Facility No. 1 for a period of at least 30
consecutive days in each line-year. "Line-year" means the period from May 1,
1995 to May 1, 1996, and each subsequent one-year period (if any).
9.13 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit over Five Hundred Thousand Dollars ($500,000) against the
Borrower.
(b) any substantial dispute between the Borrower and any government
authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's financial condition or
operations.
(e) any change in the Borrower's name, legal structure, place of business,
or chief executive office if the Borrower has more than one place of
business.
9.14 BOOKS AND RECORDS. To maintain adequate books and records.
9.15 AUDITS. To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are in
the possession of a third party, the Borrower authorizes that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
9.16 COMPLIANCE WITH LAWS. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
9.17 PRESERVATION OF RIGHTS. To maintain and preserve all rights,
privileges, and franchises the Borrower now has.
9.18 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or
replacements to keep the Borrower's properties in good working condition.
9.19 PERFECTION OF LIENS. To help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect its
security interests and liens.
9.20 COOPERATION. To take any action requested by the Bank to carry out the
intent of this Agreement.
9.21 INSURANCE.
(a) INSURANCE COVERING COLLATERAL. To maintain all risk property damage
insurance policies covering the tangible property comprising the
collateral. Each insurance policy must be in an amount acceptable to the
Bank. The insurance must be issued by an insurance company acceptable to
the Bank and must include a lender's loss payable endorsement in favor
of the Bank in a form acceptable to the Bank.
(b) GENERAL BUSINESS INSURANCE. To maintain insurance satisfactory to the
Bank as to amount, nature and carrier covering property damage
(including loss of use and occupancy) to any of the Borrower's
properties, public liability insurance including coverage for
contractual liability, product liability and workers' compensation, and
any other insurance which is usual for the Borrower's business.
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<PAGE>
(c) EVIDENCE OF INSURANCE. Upon the request of the Bank, to deliver to the
Bank a copy of each insurance policy, or, if permitted by the Bank, a
certificate of insurance listing all insurance in force.
9.22 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written
consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, pool, joint venture, syndicate, or
other combination.
(d) lease, or dispose of all or a substantial part of the Borrower's
business or the Borrower's assets.
(e) acquire or purchase a business or its assets.
(f) sell or otherwise dispose of any assets for less than fair market value,
or enter into any sale and leaseback agreement covering any of its fixed
or capital assets.
(g) voluntarily suspend its business for more than 7 days in any 30 day
period.
10. DEFAULT
If any of the following events occur, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to the Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
10.1 FAILURE TO PAY. The Borrower fails to make a payment under this
Agreement when due.
10.2 LIEN PRIORITY. The Bank fails to have an enforceable first lien (except
for any prior liens to which the Bank has consented in writing) on or security
interest in any property given as security for this loan.
10.3 FALSE INFORMATION. The Borrower has given the Bank false or misleading
information or representations.
10.4 BANKRUPTCY. The Borrower files a bankruptcy petition, a bankruptcy
petition is filed against the Borrower, or the Borrower makes a general
assignment for the benefit of creditors.
10.5 RECEIVERS. A receiver or similar official is appointed for the
Borrower's business, or the business is terminated.
10.6 LAWSUITS. Any lawsuit or lawsuits are filed on behalf of one or more
trade creditors against the Borrower in an aggregate amount of Five Hundred
Thousand Dollars ($500,000) or more.
10.7 JUDGMENTS. Any judgments or arbitration awards are entered against the
Borrower, or the Borrower enters into any settlement agreements with respect to
any litigation or arbitration, in an aggregate amount of Five Hundred Thousand
Dollars ($500,000) or more.
10.8 GOVERNMENT ACTION. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's financial condition or
ability to repay.
10.9 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the
Borrower's financial condition, properties or prospects, or ability to repay the
loan.
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<PAGE>
10.10 CROSS-DEFAULT. Any default occurs under any agreement in connection
with any credit the Borrower has obtained from anyone else or which the Borrower
has guaranteed.
10.11 DEFAULT UNDER RELATED DOCUMENTS. Any subordination agreement, security
agreement, or other document required by this Agreement is violated or no longer
in effect.
10.12 OTHER BANK AGREEMENTS. The Borrower fails to meet the conditions of, or
fails to perform any obligation under any other agreement the Borrower has with
the Bank or any affiliate of the Bank.
10.13 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article.
11. ENFORCING THIS AGREEMENT; MISCELLANEOUS
11.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
11.2 CALIFORNIA LAW. This Agreement is governed by California law.
11.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the right
of set-off against the Borrower.
11.4 ARBITRATION.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those
that arise from:
(i) This Agreement (including any renewals, extensions or
modifications of this Agreement);
(ii) Any document, agreement or procedure related to or delivered in
connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted
between the Borrower and the Bank, including claims for injury to
persons, property or business interests (torts).
(b) At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United
States Arbitration Act. The United States Arbitration Act will apply
even though this Agreement provides that it is governed by California
law.
(c) Arbitration proceedings will be administered by the American Arbitration
Association and will be subject to its commercial rules of arbitration.
(d) For purposes of the application of the statute of limitations, the
filing of an arbitration pursuant to this paragraph is the equivalent of
the filing of a lawsuit, and any claim or controversy which may be
arbitrated under this paragraph is subject to any applicable statute of
limitations. The arbitrators will have the authority to decide whether
any such claim or controversy is barred by the statute of limitations
and, if so, to dismiss the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve any such dispute.
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<PAGE>
(f) The decision that results from an arbitration proceeding may be
submitted to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or
claim, at the time of the proposed submission to arbitration, arises
from or relates to an obligation to the Bank secured by real property
located in California. In this case, both the Borrower and the Bank must
consent to submission of the claim or controversy to arbitration. If
both parties do not consent to arbitration, the controversy or claim
will be settled as follows:
(i) The Borrower and the Bank will designate a referee (or a panel of
referees) selected under the auspices of the American Arbitration
Association in the same manner as arbitrators are selected in
Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be
appointed by a court as provided in California Code of Civil
Procedure Section 638 and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be an
active attorney or a retired judge; and
(iv) The award that results from the decision of the referee (or the
panel) will be entered as a judgment in the court that appointed
the referee, in accordance with the provisions of California Code
of Civil Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrower or the Bank
to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property
collateral; or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank, including
the suing party, to submit the controversy or claim to arbitration if
the other party contests the lawsuit. However, if the controversy or
claim arises from or relates to an obligation to the Bank which is
secured by real property located in California at the time of the
proposed submission to arbitration, this right is limited according to
the provision above requiring the consent of both the Borrower and the
Bank to seek resolution through arbitration.
(j) If the Bank forecloses against any real property securing this
Agreement, the Bank has the option to exercise the power of sale under
the deed of trust or mortgage, or to proceed by judicial foreclosure.
11.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes a loan after default. If the Bank waives a default, it
may enforce a later default. Any consent or waiver under this Agreement must be
in writing.
11.6 ADMINISTRATION COSTS. The Borrower shall pay the Bank for all
reasonable costs incurred by the Bank in connection with administering this
Agreement.
11.7 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any
reasonable costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and including
any amendment, waiver, "workout" or restructuring under this Agreement. In the
event of a lawsuit or arbitration
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<PAGE>
proceeding, the prevailing party is entitled to recover costs and reasonable
attorneys' fees incurred in connection with the lawsuit or arbitration
proceeding, as determined by the court or arbitrator. As used in this paragraph,
"attorneys' fees" includes the allocated costs of in-house counsel.
11.8 ONE AGREEMENT. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank
and the Borrower concerning this credit; and
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
11.9 NOTICES. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrower may specify from time to time in writing.
11.10 HEADINGS. Article and paragraph headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.
11.11 COUNTERPARTS. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.
11.12 PRIOR AGREEMENT SUPERSEDED. This Agreement supersedes the Business Loan
Agreement entered into as of May 12, 1994, between the Bank and the Borrower,
and any credit outstanding thereunder shall be deemed to be outstanding under
this Agreement.
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<PAGE>
This Agreement is executed as of the date stated at the top of the first page.
[LOGO - BA]
BANK OF AMERICA Channell Commercial Corporation
NATIONAL TRUST AND SAVINGS ASSOCIATION
X /s/ Curt L. McCombs X /s/ William H. Channell, Sr.
------------------------------------ ----------------------------
By: Curt L. McCombs By: William H. Channell, Sr.
Title: Vice President Title: President
ADDRESS WHERE NOTICES TO THE BANK ADDRESS WHERE NOTICES TO
ARE TO BE SENT: THE BORROWER
ARE TO BE SENT:
3650 14th Street, 2nd Floor 26040 Ynez Road
Riverside, CA 92501 Temecula, CA 92390
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<PAGE>
- --------------------------------------------------------------------------------
[LOGO OF BANK OF AMERICA] AMENDMENT TO DOCUMENTS
- --------------------------------------------------------------------------------
AMENDMENT NO. 1 TO BUSINESS LOAN AGREEMENT
This Amendment No. 1 (the "Amendment") dated as of 3-4, 1996, is between Bank
---
of America National Trust and Savings Association (the "Bank") and CHANNELL
COMMERCIAL CORPORATION (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan Agreement
dated as of April 19, 1995 (the "Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
---------
1. DEFINITIONS. Capitalized terms used but not defined in this Amendment shall
-----------
have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
----------
2.1 A new Article 12 is added to the Agreement, which reads in its entirety
as follows:
"12. HAZARDOUS WASTE INDEMNIFICATION
The Borrower will indemnify and hold harmless the Bank from any loss or
liability directly or indirectly arising out of the use, generation,
manufacture, production, storage, release, threatened release, discharge,
disposal or presence of a hazardous substance. This indemnity will apply
whether the hazardous substance is on, under or about the Borrower's property
or operations or property leased to the Borrower. The indemnity includes but
is not limited to attorneys' fees (including the reasonable estimate of the
allocated cost of in-house counsel and staff). The indemnity extends to the
Bank, its parent, subsidiaries and all of their directors, officers,
employees, agents, successors, attorneys and assigns. For these purposes, the
term "hazardous substances" means any substance which is or becomes
designated as "hazardous" or "toxic" under any federal, state or local law.
This indemnity will survive repayment of the Borrower's obligations to the
Bank."
3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the terms
-------------------
and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
Bank of America
National Trust and Savings Association Channell Commercial Corporation
X /s/ Curt L. McCombs X /s/ William H. Channell, Sr.
- ------------------------- -----------------------------
By: Curt L. McCombs, By: William H. Channell, Sr.,
Vice President President
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AmendL (10/92) -1-
<PAGE>
===============================================================================
[Logo of Bank of America] Amendment to Documents
- -------------------------------------------------------------------------------
AMENDMENT NO 2.
TO BUSINESS LOAN AGREEMENT
This Amendment No. 2 (the "Amendment") dated as of 5-30, 1996 is between
----
Bank of America National Trust Association (the "Bank") and Channell Commercial
Corporation (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of April 19, 1995, as previously amended (the "Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
---------
1. Definitions. Capitalized terms used but not defined in this
-----------
Amendment shall have the meaning given to them in the Agreement.
2. Amendments. The Agreement is hereby amended as follows:
----------
2.1 In Paragraph 1.1 of the Agreement, the amount "Three Million Five
Hundred Thousand Dollars ($3,500,000)" is substituted for the
amount "Three Million Two Hundred Fifty Thousand Dollars
($3,250,000)".
2.2 In Paragraph 1.2 of the Agreement, the date "May 1, 1997" is
substituted for the date "June 1, 1996".
2.3 A new Paragraph 1.7 is added to the Agreement which reads in its
entirety as follows:
Offshore Rate. The Borrower may elect to have all or portions of
the principal balance of the line of credit bear interest at the
Offshore Rate, subject to the following requirements:
(a) The "Offshore Rate" means the interest rate the Bank and the
Borrower agree will apply to the portion during the applicable
interest period.
(b) The interest period during which the Offshore Rate will be
in effect will be no shorter than 30 days and no longer than one
year. The last day of the interest period will be determined by
the Bank using the practices of the offshore dollar inter-bank
market.
(c) Each Offshore Rate portion will be for an amount not less
than Five Hundred Thousand Dollars ($500,000).
(d) The Borrower may not elect an Offshore Rate with respect
to any portion of the principal balance of the line of credit
which is scheduled to be repaid before the last day of the
applicable interest period.
(e) Any portion of the principal balance of the line of credit
already bearing interest at the Offshore Rate will not be
converted to a different rate during its interest period.
(f) Each prepayment of an Offshore Rate portion, whether
voluntary, by reason of acceleration or otherwise, will be
accompanied by the amount of accrued interest on the amount
prepaid, and a prepayment fee equal to the amount (if any) by
which
(i) the additional interest which would have been payable
on the amount prepaid had it not been paid until the last
day of the interest period, exceeds
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-1-
<PAGE>
(ii) the interest which would have been recoverable by the Bank
by placing the amount prepaid on deposit in the offshore dollar
market for a period starting on the date on which it was prepaid and
ending on the last day of the interest period for such portion.
(g) The Bank will have no obligation to accept an election for an
Offshore Rate portion if any of the following described events has
occurred and is continuing:
(i) Dollar deposits in the principal amount, and for periods
equal to the interest period, of an Offshore Rate portion are not
available in the offshore dollar inter-bank markets; or
(ii) the Offshore Rate does not accurately reflect the cost of an
Offshore Rate portion.
2.4 In Paragraph 2.1(a) of the Agreement, the amount "Four Million Eight
Hundrend Thousand Dollars ($4,800,000)" is substituted for the amount
"Four Million Three Hundred Thousand Dollars ($4,300,000)".
2.5 In Paragraph 2.1(g) of the Agreement, the rate "one-quarter (0.25)" is
substituted for the rate "one-half (0.50)".
2.6 In Paragraph 2.4(i) of the Agreement, the date "May 1, 1997" is
substitued for the date "May 1, 1996".
2.7 Paragraph 3.1(a) and Article 4 of the Agreement are deleted in their
entirety.
2.8 In Paragraph 9.2(a) of the Agreement, the words "audited with an
unqualified opinion" is substituted for the word "reviewed".
2.9 Paragraph 9.2(c) of the Agreement is amended to read in its entirety
as follows:
"(c) By January 31st of each year, the Borrower's projections prepared
on a quarterly format for that fiscal year."
2.10 In Paragraph 9.3 of the Agreement, the ratio "1.0:1.0" is substituted
for the ratio ".70:1.0".
2.11 In Paragraph 9.4(a) of the Agreement, the amount "Twelve Million Two
Hundred Fifty Thousand Dollars ($12,250,000)" is substituted for the
amount "Eight Million Seven Hundred Fifty Thousand Dollars
($8,750,000)".
2.12 In Paragraph 9.5 of the Agreement, the ratio "1.0:1.0" is substituted
for the ratio "1.15:1.0".
2.13 Paragraph 9.9 of the Agreement is amended to read in its entirety as
follows:
"9.9 Other Liens. Not to create, assume, or allow any security
interest or lien (including judicial liens) on property the Borrower
now or later owns, including but not limited to accounts receivable
and inventory, except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in
writing to the Bank."
2.14 Paragraph 9.11 of the Agreement is amended to read in its entirety as
follows:
"9.11 Change of Ownership. Not to cause, permit, or suffer any change,
direct or indirect, in majority stock ownership of Mr. and Mrs.
William Channell, Sr. and the Channell Family."
<PAGE>
3. Effect of Amendment. Except as provided in this Amendment, all of the
-------------------
terms and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
Bank of America
National Trust and Savings Association Channell Commerical Corporation
/s/ Curt L. McCombs /s/ William H. Channell
- -------------------------------------- --------------------------------------
By: Curt L. McCombs, Vice President By: William H. Channell, Sr., President
- -------------------------------------------------------------------------------
AmendL (10/92) -3- 006370-10036
<PAGE>
EXHIBIT 10.7
TELEPHONE SALES AGREEMENT
INTEGRAL CORPORATION is pleased to appoint CHANNELL COMMERCIAL
Corporation, and its agents, 27040 Ynez Road, Temecula, California 92390, as our
sales representative effective February 1, 199l covering the following
territory:
Territories - All sales to Regional Bell Operating Companies and
Independent Telephone companies as listed below.
1) All Regional Bell Operating Companies
excluding their unregulated operations.
2) All Independent Telephone Companies
(Domestic Operations)
3) Southern New England Telephone
4) Cincinnati Bell
A. This agreement covers the sale of the following products:
1) Drop-In-Duct
2) Fiber optic cable-in-conduit (C-I-C)
3) Rope-In-Conduit (R-I-D), (includes string-in-
duct: non conductor products)
4) Lubaduk (field pulling lubricant)
<PAGE>
TELEPHONE SALES AGREEMENT Page 2 of 7
Sale of Product - Continued
- ---------------
B. A commission will be paid by Integral Corporation of the Net
Sales upon invoicing of the product(s) listed above to be for
mentioned customer(s)
C. However, if payment is not received within 120 days after
invoicing, commission paid on the delinquent invoice will be
deducted from Channell Commercial Corporation's account, and
repaid upon receipt of payment to Integral Corporation.
In the event Channell Commercial Corporation services his or other
territories by operating a warehouse utilizing Integral Corporation's products
on a consigned basis, a three (3) percent warehouse commission will be paid on
the invoice amount of the individual field warehouse shipment.
Channell Commercial Corporation agrees to conduct a physical inventory
on a monthly basis of any consigned stock and report this inventory to Integral
Corporation. If consigned stock is to be moved from a Channell Commercial
Corporation's warehouse, representative agrees to give all possible assistance,
including personnel and equipment, to facilitate the transfer. The commission(s)
paid will vary according to the product(s) invoiced.
<PAGE>
TELEPHONE SALES AGREEMENT Page 3 of 7
Commission Structure - Continued
- --------------------
The commission structure by product type is as follows:
<TABLE>
<CAPTION>
Product Commission
------- ----------
<S> <C>
1) Drop-In-Duct 3%
2) Fiber-In-Duct 5%
3) R-I-D(all non conductor products) 2%
4) Lubaduk 15%
</TABLE>
Limited Liability
- -----------------
Channell Commercial Corporation is in fact and in law an independent
contractor and has no power to bind Integral Corporation in any regard to third
parties. Attachment "A" (Integral Corporation's Terms and Conditions of Sale)
contains Integral Corporation's warranty of its products and all orders accepted
by Integral Corporation neither assumes nor authorizes any other person to
assume for it any other liability in connection therewith.
Channell Commercial Corporation will be placed on Integral's insurance
rider and excluded/found harmless from any legal action taken in conjunction
with the products we will represent in this contract. Furthermore, in the
unlikely event legal representation is necessary, Integral will supply and pay
for all legal matters.
<PAGE>
TELEPHONE SALES AGREEMENT page 4 of 7
Mutually Exclusive Agreement
- ----------------------------
During the term of this Agreement, Integral Corporation agrees not to
represent, manufacture or sell any product that is competitive to any product
that Channell Commercial Corporation manufactures, represents or sells. Integral
Corporation further agrees that during the term of this Agreement, Channell
Commercial Corporation shall have the exclusive right to sell Integral
Corporation products as outlined above in the territories outlined above.
Channell Commercial Corporation agrees not to represent, manufacture
or sell any product that is competitive to any product that Integral Corporation
represents, manufactures or sells during the term of this Agreement.
Agreement Time and Restrictions
- -------------------------------
This Agreement is valid for a period of two (2) years starting the
date of execution.
At the end of this agreement, and if no continuing agreement has been
executed by bath parties prior to the expiration of this present agreement,
Integral Corporation agrees to continue paying commission(s) on product(s) that
have contract or blanket orders which extend beyond the valid term of this
agreement, provided that the before mentioned contract or blanket orders were
received by Integral corporation prior to the termination of the present
agreement and Channell Commercial Corporation does not compete, directly or
indirectly with Integral Corporation during the term in which commissions are
being paid by Integral Corporation, should there be no subsequent or continuing
agreement to the present agreement.
<PAGE>
TELEPHONE SALES AGREEMENT Page 5 of 7
Agreement Time and Restrictions - Continued
- -------------------------------
To have a new long term agreement validated within the first two years
of this trial agreement, the following actions must be completed:
A. Goals and objectives for the first two (2) year must be written
and mutually approved by each party within 90 days from the
execution date of this agreement, (See Attachment "B").
B. If all the mutual goals have been met, then Integral and Channell
will enter into a contract agreement identical to the existing
contract that is presently in force between the two companies
CATV divisions.
C. Due to the Unique nature of the telephone industry, subsection
"B" represents only the minimum conditions acceptable to either
----
party. Any contractual conditions that go beyond those outlined
in the existing CATV contract or found in this two (2) year
preliminary agreement, must be mutually agreed upon if they are
to be implemented in the long term contract.
<PAGE>
TELEPHONE SALES AGREEMENT Page 6 of 7
Non-Competition
- ---------------
During the term of this agreement, Channell Commercial Corporation
shall not compete, directly or indirectly with Integral Corporation in any
product line that is represented, manufactured or sold by Integral Corporation
or that had been represented, manufactured or sold by integral Corporation
within the territory begun during the term of this Agreement, for a period of
two (2) years after the date of termination of this Agreement.
This non-compete clause shell be construed as an Agreement independent
of any other provision of this Agreement; and the existence of any claim or
cause of action of Channell Commercial Corporation against Integral Corporation,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Integral Corporation, of this non-compete section.
Advertising and Marketing Support:
- ----------------------------------
Integral Corporation will supply Channell Commercial Corporation all
necessary technical support and samples that properly promote their Products. It
will be Channell's responsibility to sale/market Integral's products and
highlight them at any telephone show/exhibit they attend. All
advertising/creative literature will be budgeted and created by Channell
Commercial Corporation but must first be approved on an annual basis by Integral
Corporation. Integral Corporation agrees to reimburse Channell Commercial
Corporation for all approved sales tools that have been specifically developed
for the telephone market.
<PAGE>
TELEPHONE SALES AGREEMENT Page 7 of 7
Marketing Information
- ---------------------
Channell Commercial Corporation will provide, upon the execution of
this agreement, and on an annual basis, a comprehensive advertising Budget,
Goals and objectives, and Marketing/Sales Forecast as outlined on Attachment
"B".
This Agreement, signed this Twenty-Third day of January, 1991 shall
be construed under the laws of the State of Texas.
INTEGRAL CORPORATION CHANNELL COMMERCIAL CORPORATION
/s/ Dwight Berry /s/ William H. Channell, Jr.
- --------------------------------- -------------------------------
Dwight Berry William H. Channell, Jr.
Executive Vice President & C.O.O. Executive Vice President
<PAGE>
[INTEGRAL CORPORATION LOGO]
ATTACHMENT "A"
--------------
TERMS AND CONDITIONS OF SALE
1. All contracts are made subject to Purchaser's acceptance of the Terms
and Conditions of Sale contained herein. Any purchase orders or offers to
purchase which contain terms or conditions which conflict with or are in
addition to those stated herein shall not be binding upon Integral Corporation
unless accepted by Integral Corporation in writing. If the Purchaser has
previously submitted an offer to buy, the quotation of Integral Corporation
shall constitute an acceptance of such offer expressly conditioned upon the
Purchaser's assent to any additional or different terms contained herein.
2. Shipping promises date from receipt of Integral Corporation of complete
manufacturing details, exclusive of time required for inspection.
3. Material in stock is offered subject to prior sale.
4. Nonreturnable reels. If nonreturnable reels are used, there is no charge
for same, nor will they be accepted if returned.
5. All claims for shortages must be received by Integral Corporation, in
writing within 60 days from date of invoice.
6. Integral Corporation warrants that all cable or tubing furnished under
these specifications conform to Integral Corporation standard tolerances and
variances concerning dimension, weight, and length (subject to ten percent (10%)
plus or minus variance in length); and that products are of first class material
and workmanship throughout. In the event that a product should fail while in
normal and proper use within one (1) year from the date shipped, Integral
Corporation will, upon receipt of written notice given within thirty (30) days
of such failure repair or, at the option of Integral Corporation, replace such
failed product. All replacements shall be free of charge, F.O.B. shipping point
provided for herein.
Products which have been replaced under the provision of this warranty
shall become the property of Integral Corporation and shall be returned to
Integral Corporation by the Purchaser, F.O.B. Purchaser's city if requested.
THE ABOVE WARRANTIES ARE GIVEN EXPRESSLY AND CONSTITUTE THE ONLY WARRANTIES
MADE BY INTEGRAL CORPORATION AND ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING THOSE OF MERCHANTABILITY AND FITNESS FOR PARTICULAR PURPOSE,
WHICH ARE HEREBY EXCLUDED.
7. Purchaser's Remedies. (a) It is agreed that in the event of breach of
any warranty Integral Corporation's liability therefor shall be limited
exclusively to the repair or replacement of failing product to the extent
provided in Section 6 above.
(b) In the event of any other claim for loss or damages arising out of
or connected with this contract, Integral Corporation's liability therefor
shall be conditional upon receipt of notice of such claim within one (1) year
from the date of shipment and shall be limited to payment of damages not
exceeding the contract price of the product, or part thereof, involved in said
claim.
(c) In no event shall Integral Corporation be liable for special,
indirect, incidental or consequential damages and, Integral Corporation's
liability, whether in contract, in tort, under any warranty, or otherwise, may
not exceed the price of the product of part on which such liability is based.
8. Unless otherwise specifically provided in writing, all sales are made
F.O.B. point of shipment with freight prepaid to destinations within continental
United States (nearest freight station or common carrier delivery point), except
Alaska, provided Integral Corporation is permitted to determine the method and
routing of the shipments. If Purchaser specifies a more expensive method of
routing, all excess transportation charges will be billed to and paid by
Purchaser. In all cases title to the products shall pass upon delivery to the
carrier at the F.O.B. point and thereafter all risk of loss or damage shall be
upon the Purchaser. No freight will be allowed on shipments under 5000 lbs.
9. Shipping dates given prior to shipment are estimated only, and Integral
Corporation shall not be liable for failure to meet such dates. In addition to
and without limiting the generality of the foregoing, Integral Corporation shall
not be liable for delays nor for failure to manufacture or deliver which
results from product shortages or causes beyond its reasonable control. Causes
beyond its reasonable control include but are not limited to (whether in its own
facilities or in any other facility affecting its production, transportation or
delivery) fire, windstorm, earthquake, or other natural disaster, strikes,
lockouts, or other work stoppages; wars, civil wars, riots or civil commotion,
priorities or other Government allocations or controls; interference or
restraint of public authority (whether lawful or not), explosion or accident,
epidemics or quarantine restrictions; failure of its supplier to deliver;
shortage of raw material or labor, or any other causes (whether or not of the
same kind as those herein specified) which it cannot provide against by the
exercise of reasonable diligence. In the event of a product shortage, Integral
Corporation shall have the right to allocate its available products among its
customers on such a basis as it may determine in the exercise of its business
judgment.
10. If the financial condition of the Purchaser at any time does not, in
the judgment of Integral Corporation, justify continuance of the work, to be
performed by Integral Corporation hereunder on the terms of payment as agreed
upon, Integral Corporation may require full or partial payment in advance. If
advance payment is not received within ten (10) days following demand Integral
Corporation shall be entitled to cancel any order then outstanding and shall
receive reimbursement for its reasonable and proper cancellation charges. In the
event of bankruptcy or insolvency of the Purchaser or in the event any
proceeding is brought against the Purchaser, voluntarily or involuntarily under
the bankruptcy or insolvency laws, Integral Corporation shall be entitled to
cancel any order then outstanding at any time during the period allowed for
filing claims against the estate and shall receive reimbursement for its
reasonable and proper cancellation charges.
11. In the event Purchaser cancels his order he must give prompt written
notice and pay to Integral Corporation the amount by which the contract price of
such order exceeds the amount realized by Integral Corporation upon resale, plus
any incidental damages incurred by Integral Corporation.
12. Integral Corporation prices do not include sales, use, excise or
similar taxes. Consequently, in addition to the prices specified herein, the
amount of any present or future sales, use, excise or other similar taxes
applicable to the sale, or use of the products hereunder, shall be paid by the
Purchaser as part of said price, or in lieu thereof, the Purchaser shall provide
Integral Corporation with a tax exemption certificate acceptable to the taxing
authorities.
13. Permission must be obtained in writing from Integral Corporation before
any products are returned to Integral Corporation for any reason whatsoever. If
products are returned without such permission, Purchaser authorizes Integral
Corporation, in addition to such other remedies as it may have, to hold the
returned products at Purchaser's sole risk and expense.
14. Integral Corporation will comply with all applicable federal, state and
local laws, and specifically represents that any goods to be delivered hereunder
will be produced in compliance with the requirements of the Fair Labor Standards
Act of 1938, as amended.
15. The sale and this Agreement shall be subject to and construed in
accordance with the laws of the State of Texas.
P.O. BOX 11269/DALLAS, TEXAS 75223-0269/214-826-0590/TELEX 79-4423
INTEGRAL DAL/FAX 214-823-4845
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "AGREEMENT") is entered into as of
___________, 1996, between Channell Commercial Corporation, a Delaware
corporation (the "COMPANY"), and William H. Channell, Sr. ("EXECUTIVE") with
reference to the following facts:
A. WHEREAS, Executive is currently serving as the Company's Chairman of
the Board of Directors and Chief Executive Officer;
B. WHEREAS, the Company regards Executive as valuable to it, and has
determined that it would be to the advantage and interest of the Company and its
stockholders to provide an inducement to remain in the service of the Company
and an incentive for increased efforts during such service;
C. Based on these facts, Executive and the Company wish to enter into an
employment contract providing for the continued employment of Executive on the
terms and conditions set forth herein.
NOW THEREFORE, based on the mutual covenants contained herein, the parties
agree as follows:
1. EMPLOYMENT AND DUTIES. The Company hereby agrees to employ Executive
---------------------
and Executive hereby accepts employment with the Company under the terms and
conditions set forth in this Agreement. Executive shall be employed as Chairman
of the Board of Directors and Chief Executive Officer, with the duties and
responsibilities commensurate with his position as may be assigned by the
Company. Executive shall devote substantially all of his full working time,
attention and energies to performing his duties for the Company on an exclusive
basis (except for a limited amount of time devoted to personal financial matters
and community activities), and shall perform his duties faithfully and to the
best of his abilities.
2. TERM OF EMPLOYMENT. Subject to earlier termination as provided in
------------------
Section 5, Executive's employment under this Agreement shall commence on the
date first stated above and continue until the fifth anniversary of such date
(the "EMPLOYMENT TERM"; each year during the "Employment Term" a "TERM YEAR").
In the event that Executive continues to be employed by the Company following
the Employment Term, that employment shall be governed by this Agreement
and shall continue for successive five-year terms until terminated by either
party.
<PAGE>
3. COMPENSATION. As compensation for the performance by Executive of all
------------
of his obligations under this Agreement, the Company shall pay to Executive:
3.1 BASE SALARY. A base salary during the Employment Term, at a rate of
-----------
Five Hundred Thousand Dollars ($500,000) per Term Year, payable in accordance
with the Company's normal practices for its senior executive officers (the "BASE
SALARY"). The Base Salary may be increased from time to time in the discretion
of the Compensation Committee of the Company's Board of Directors (the "Board").
The Base Salary shall be adjusted annually commencing on ______________, 199_,
to reflect the most recently published annualized percentage increase in the
Consumer Price Index of the Bureau of Labor Statistics of the United States
Department of Labor for the Los Angeles area.
3.2 INCENTIVE COMPENSATION. In addition to Base Salary, Executive will be
----------------------
entitled to participate in cash and other bonus programs of the Company,
including, to the extent provided by the committee of the Board administering
such plan, the Company's 1996 Performance Based Annual Incentive Compensation
Plan. Participation will be pursuant and subject to the terms and conditions of
such plan(s).
4. BENEFITS.
--------
4.1 EXPENSES. The Company shall repay or reimburse Executive for ordinary
--------
and necessary business expenses to the extent compatible with the Company's
general policies for its senior executive officers. Executive shall keep
accurate and complete records of all such expenses.
4.2 INSURANCE BENEFITS. During the Employment Term, the Company shall
------------------
provide Executive with those insurance benefits generally available to its
senior executive officers, as such benefits may be modified from time to time in
the Company's sole and absolute discretion. In particular, but without limiting
the foregoing: (i) the Company shall be obligated, for the remainder of
Executive's life, to pay a portion of the premiums for a $3,000,000 face amount
whole life insurance policy currently held by Executive (or a substituted policy
therefor), under which Executive's spouse, Mrs. Jacqueline Channell ("Spouse")
shall be designated as beneficiary, and with respect to which the Company and
Executive will enter into a separate Split Dollar Agreement; and (ii) the
Company shall be obligated during the Employment Term to pay the premiums for a
term disability insurance policy providing for up to Two Hundred Fifty Thousand
Dollars ($250,000) per annum in benefits to Executive in the event of
Executive's temporary or permanent disability, as described in and subject to
the terms of the policy.
-2-
<PAGE>
4.3 MEDICAL INSURANCE. In addition to the provisions of Section 4.2 of
-----------------
this Agreement, for the remainder of Executive's life, the Company shall provide
Executive with Company-paid medical insurance to the same extent such insurance
is made generally available to its senior executive officers. In addition, the
Company shall provide Spouse, for the remainder of Spouse's life, with medical
insurance to the same extent such insurance is made generally available to its
senior executive officers, provided that Executive or Spouse reimburses the
Company for the premium expense relating to such coverage.
4.4 VACATION AND SICK LEAVE. During the Employment Term, Executive shall
-----------------------
be entitled to a paid annual vacation in accordance with the policies
established from time to time by the Company for its senior executive officers;
provided, however, that Executive shall be entitled to no less than four weeks
paid annual vacation per Term Year. Without the Company's written consent,
vacation must be taken in the year earned and Executive's vacation will be
scheduled at times convenient to the Company's business. Executive shall be
entitled to paid sick days and personal days in accordance with the policies
established from time to time by the Company for its senior executive officers.
4.5 AUTOMOBILE ALLOWANCE. During the Employment Term, the Company shall
--------------------
provide Executive with an automobile allowance in the amount of fifteen hundred
dollars ($1500.00) per calendar month, payable in accordance with the policies
established from time to time by the Company for its senior executive officers.
Executive shall secure, at his own expense, automobile insurance of a type and
in an amount and form satisfactory to the Company. Executive agrees to provide
evidence of such insurance and to promptly notify the Company if such insurance
or license is cancelled, suspended, expired or otherwise impaired.
4.6 INCENTIVE STOCK PLAN. Executive shall be eligible to participate in
--------------------
the Company's 1996 Incentive Stock Plan (the "STOCK PLAN"), or any successor or
comparable stock incentive plan, to the extent determined by the Board or its
duly authorized committee in its sole discretion.
5. TERMINATION OF EMPLOYMENT.
-------------------------
5.1 TERMINATION. The Company may terminate Executive's employment with
-----------
the Company at any time with or without "Cause" by written notice to Executive.
Cause exists if any one or more of the following should occur, as determined in
good faith by the Board: Executive's (a) failure to perform his duties under, or
breach of, this Agreement, (b) failure to comply with a reasonable direction of
the Board, (c) breach of his fiduciary duty to the Company or
-3-
<PAGE>
(d) conviction by a court of competent jurisdiction of a felony or other serious
crime. In the event of Executive's physical or mental disability (so that
Executive is not reasonably able to render full services as contemplated hereby)
for any consecutive period exceeding eight (8) months, or for shorter periods
aggregating more than eight (8) months during any twelve (12) month period, the
Company shall nevertheless continue to pay full salary up to and including the
last date of the eighth consecutive month of disability, or the day on which the
shorter periods of disability shall have equalled to a total of eight (8) months
during such twelve (12) month period, but the Company may, at any time within
six (6) weeks thereafter, at its election terminate this Agreement by delivery
of written notice thereof to Executive; provided, however, that any amount
received by Executive under the term disability insurance policy described in
Section 4.2 of this Agreement shall reduce the Company's obligation under this
Section 5.1 dollar for dollar. In the event that Executive dies during the
Employment Term, this Agreement shall terminate automatically.
5.2 PAYMENT UPON TERMINATION.
------------------------
5.2.1 GENERALLY. Upon any termination, the Company shall pay to Executive
---------
(or, if applicable, to Executive's estate) all amounts accrued and unpaid as of
the date of termination in respect of (i) Executive's salary for periods through
such date, (ii) vacation pay, and (iii) any reimbursement for expenses owing to
Executive pursuant to Section 4.1. In the event of a termination with Cause,
Executive shall only be entitled to the payments specified in this Section
5.3.1.
5.2.2 TERMINATION WITHOUT CAUSE. If the Company terminates Executive
-------------------------
other than for Cause, then in addition to amounts that Executive is entitled to
receive under Section 5.3.1, Executive shall be entitled to receive as a
severance benefit (i) three times Executive's Base Salary, payment of which
shall be accelerated and paid in one lump sum as soon as practically possible,
with an appropriate discount to reflect such acceleration, and (ii) accelerated
vesting of any options or restricted stock granted to Executive.
5.3 EXCLUSIVITY OF REMEDIES. Executive agrees that the rights and
-----------------------
entitlements set forth in this Section 5 are his exclusive rights and
entitlements from the Company and any affiliated entity upon the termination of
Executive's employment with the Company, and upon termination the Company shall
be released from other obligations hereunder.
6. COVENANTS.
---------
6.1 NON-INTERFERENCE COVENANT. As a means reasonably designed to
-------------------------
protect the Company's Confidential
-4-
<PAGE>
Information (as hereinafter defined) (Executive hereby agreeing and
acknowledging that the proscribed activities would necessarily involve the use
of such Confidential Information), during the Employment Term and for a period
of two years thereafter, Executive shall not, directly, indirectly or as an
agent on behalf of or in conjunction with any person, firm, partnership,
corporation or other entity, (a) hire, solicit or encourage the resignation of
person who is then, or within the prior six months has been, an employee of the
Company or its affiliated entities (including, but not limited to, any
independent sales representatives) to leave the employment of the Company or its
affiliated entities, or (b) solicit or service any person or entity with whom
the Company has a business relationship or who is or was during the Employment
Term, a customer or client of the Company.
6.2 EMPLOYMENT EXCLUSIVE. Executive shall not, during the Employment
--------------------
Term, own any interest (other than up to 1% of the voting securities of a
publicly traded corporation) in, render financial assistance to, or offer
personal services (for payment or otherwise), to any entity or individual that
competes with the Company in Company Business (as defined below) or that is a
material supplier of the Company. In addition, Executive shall not engage in any
activity which would interfere with the performance of Executive's services to
the Company. "COMPANY BUSINESS" means the Company's business as it is currently
conducted and any other business activity in which the Company is engaged at any
time during Executive's employment with the Company.
6.3 CONFIDENTIAL INFORMATION. Executive occupies a position of trust
------------------------
and confidence with respect to the Company's affairs and business. Executive has
and will have access to Confidential Information, which he acknowledges is
proprietary to the Company and highly sensitive in nature.
6.3.1 DEFINITION OF CONFIDENTIAL INFORMATION. "CONFIDENTIAL INFORMATION"
--------------------------------------
means information disclosed to Executive or known to Executive as a consequence
of or through his employment by the Company, whether or not related to his
duties, and includes trade secrets or any other like information relating to the
business and/or field of interest of the Company or any business and/or field of
interest seriously considered by the Company during Executive's employment by
the Company, including, but not limited to, information relating to Inventions
(as defined below), disclosures, processes, systems, methods, formulas, patents,
patent applications, machinery, materials, research activities and plans, cost
of production, contract forms, prices, volume of sales, marketing methods and
plans, promotional methods, and lists of names or classes of customers.
Information shall for purposes of this Agreement be considered to be
confidential if not known by the trade generally, even though such information
may have been disclosed to one or more third
-5-
<PAGE>
parties pursuant to consulting agreements, joint research agreements, or other
agreements entered into by the Company.
6.3.2 NO DISCLOSURE. During and after Executive's employment with the
-------------
Company, Executive shall not (a) use, disclose or otherwise permit any person or
entity access to any of the Confidential Information other than as required in
the good faith performance of Executive's duties with the Company, or (b) sell,
license or otherwise exploit any products or services which embody in whole or
in part any Confidential Information. During and after Executive's engagement
with the Company, Executive shall take all reasonable precautions to prevent
disclosure by Executive of the Confidential Information to unauthorized persons
or entities.
6.3.3 RETURN ALL MATERIALS. Upon termination of Executive's employment
--------------------
with the Company, Executive shall deliver to the Company all tangible materials
in any way embodying the Confidential Information, including any documentation,
records, listings, notes, data, sketches, drawings, memoranda, models, videos,
accounts, reference materials, samples, machine-readable media and equipment,
and wire frame models. Executive shall not retain any copies of any of the above
materials.
6.4 ASSIGNMENT OF INVENTIONS.
------------------------
6.4.1 DEFINITION OF INVENTIONS. "Inventions" mean discoveries,
------------------------
developments, concepts, ideas, methods, designs, improvements, inventions,
formulas, processes, techniques, programs, know-how and data, whether or not
patentable or registerable under copyright or similar statutes except, in
accordance with California Labor Code Section 2870, any such that (a) is not
related to the business of the Company, or the Company's actual or demonstrable
research or development, (b) does not involve the use of any equipment,
supplies, facility or trade secret information of the Company, (c) was developed
entirely on Executive's own time, and (d) does not result from any work
---
performed by Executive for the Company.
6.4.2 ASSIGNMENT. Executive agrees to and hereby does assign to the
----------
Company all his right, title and interest in any and all Inventions he may make
during his employment with the Company.
6.4.3 DUTY TO DISCLOSE AND ASSIST. Executive agrees to promptly disclose
---------------------------
in writing all Inventions to the Company, and to provide all assistance
reasonably requested by the Company in the preservation of the Company's
interests in the Inventions including obtaining patents in any country
throughout the world. Such services will be without additional compensation if
Executive is then employed by the
-6-
<PAGE>
Company and for reasonable compensation and subjected to his reasonable
availability if he is not. If cannot, after reasonable effort, secure
Executive's signature on any document or documents needed to apply for or
prosecute any patent, copyright, or other right or protection relating to an
Invention, whether because of his physical or mental incapacity or for any other
reason whatsoever, Executive hereby irrevocably designates and appoints the
Company and its duly authorized officers and agents as his agent and attorney-
in-fact, to act for and in his behalf and in his name and stead for the purpose
of executing and filing any such application or applications and taking all
other lawfully permitted actions to further the prosecution and issuance of
patents, copyrights, or similar protections thereon, with the same legal force
and effect as if executed by him.
6.5 OWNERSHIP OF COPYRIGHTS. Executive agrees that any work prepared
-----------------------
for the Company which is eligible for United States copyright protection or
protection under the Universal Copyright Convention, the Berne Copyright
Convention and/or the Buenos Aires Copyright Convention shall be a work made for
hire and ownership of all copyrights (including all renewals and extensions)
therein shall vest in the Company. If any such work is deemed not to be a work
made for hire for any reason, Executive hereby grants, transfers and assigns all
right, title and interest in such work and all copyrights in such work and all
renewals and extensions thereof to the Company, and agrees to provide all
assistance reasonably requested by the Company in the establishment,
preservation and enforcement of the Company's copyright in such work, such
assistance to be provided at the Company's expense but without any additional
compensation to Executive. Executive hereby agrees to and does hereby waive the
enforcement of all moral rights with respect to the work developed or produced
hereunder, including without limitation any and all rights of identification of
authorship and any and all rights of approval, restriction or limitation on use
or subsequent modifications.
6.6 LITIGATION. Executive agrees to render assistance, advice and
----------
counsel to the Company at its request regarding any matter, dispute or
controversy with which the Company may become involved and of which Executive
has or may have reason to have knowledge, information or expertise. Such
services will be without additional compensation if Executive is then employed
by the Company and for reasonable compensation and subjected to his reasonable
availability if he is not.
7. ARBITRATION AS THE EXCLUSIVE REMEDY.
-----------------------------------
7.1 ARBITRATION AS THE EXCLUSIVE REMEDY. Except for actions
-----------------------------------
seeking injunctive relief (which may be brought before any court having
jurisdiction under this Agreement),
-7-
<PAGE>
any controversy or claim (whether against the Company or any parent, subsidiary
or affiliate thereof, or any officer, director, employee or agent of any of the
foregoing) arising out of or relating to this Agreement, including, but not
limited to, any claim relating to its validity, interpretation, enforceability
or breach, and/or any other claim or controversy arising out of the employment
relationship or the commencement or termination of that relationship, including,
but not limited to, claims which are brought against any of the Company's
directors, officers, employees and agents and claims for breach of covenant, for
breach of an implied covenant, for intentional infliction of emotional distress,
or under any applicable statute (including, without limitation, claims for age
or sex discrimination) which are not settled by agreement between the parties,
shall be submitted to arbitration in Temecula, California (or such other place
as the parties may mutually agree) before an arbitrator to be mutually agreed
upon by the parties. In consideration of each party's agreement to submit to
arbitration all disputes with regard to this Agreement and/or with regard to any
alleged contract or tort or other claim arising out of the employment
relationship or the commencement or termination of that employment relationship,
and in consideration of the anticipated expedition and the minimizing of expense
of this arbitration remedy, each agrees that the arbitration provisions of this
Agreement shall provide it with its exclusive remedy against the other party
(including its officers, directors, employees and agents) and each party
expressly waives any right it might have to seek redress in any other forum
except as provided herein.
7.2 PROCEDURES. The party filing a claim must present it in writing to
----------
the other party in Temecula, California within six months of the date the party
filing the claim knew or should have known of it or the date of the termination,
whichever is earlier. Any claim not brought within the required time period will
be waived forever. In the proceedings (i) all testimony of witnesses shall be
taken under oath and (ii) upon conclusion of any proceedings hereunder, the
arbitrator shall render findings of fact and conclusions of law in a written
opinion setting forth the basis and reasons for any decision reached and deliver
such documents to each party to this Agreement along with a signed copy of the
award in accordance with Section 1283.6 of the California Code of Civil
Procedure. The arbitrator shall have power to allocate between the parties in
their award costs incurred in preparation for and as a result of any such
arbitration, including, without limitation, filing fees, attorneys' fees, the
compensation to be paid to the arbitrator in any such arbitration and costs of
transcripts.
-8-
<PAGE>
8. MISCELLANEOUS.
-------------
8.1 AGREEMENT AUTHORIZED. Executive hereby represents and warrants that
--------------------
he is free to enter into this Agreement and to render his services pursuant to
this Agreement, that he has resigned all offices with any other entities, and
that he is not subject to any obligation or restriction that would prevent him
from discharging his duties under this Agreement, and agrees to indemnify and
hold harmless the Company from and with respect to any liability, damages or
costs, including attorneys' fees, arising out of any breach by Executive of this
representation and warranty. The Company hereby represents and warrants that any
required authorization of this Agreement by its Board of Directors has been
obtained.
8.2 NOTICES. Any notice required or desired to be given to the
-------
Company or to Executive shall be given in writing, and shall be addressed (i) to
the Company at its principal place of business, and (ii) to Executive at his
most recent home address in the records of the Company, or to such other address
as that party may hereafter designate in writing, and shall be sufficiently
given by actual delivery thereof to the Company or Executive, as the case may
be, or by facsimile or overnight or registered mail, postage prepaid, return
receipt requested, addressed to the other party as aforesaid, and the date of
delivery, mailing or telegraphing shall be the date of the giving of such
notice.
8.3 PAYMENT OF TAXES. To the extent that any taxes become payable by
----------------
Executive by virtue of any payments made or benefits conferred by the Company,
the Company shall not be liable to pay or obligated to reimburse Executive for
any such taxes or to make any adjustment under this Agreement. Any payments
otherwise due under this Agreement to Executive, including, but not limited to,
the Base Salary and any bonus, shall be reduced by any required withholding for
Federal, State and/or local taxes and other appropriate payroll deductions. The
Company shall be entitled to offset any payment obligations to Executive under
this Agreement against any amounts it alleges in good faith that Executive owes
to the Company.
8.4 INSURANCE. The Company may, from time to time, apply for and take
---------
out, in its own name and at its own expense, life, health, accident, disability
or other insurance on Executive in any sum or sums that it may deem necessary to
protect its interests, and Executive shall aid and cooperate in all reasonable
respects with the Company in procuring any and all such insurance, including,
without limitation, submitting to the usual and customary medical examinations,
and by filling out, executing and delivering such applications and other
instruments in writing as may be reasonably required by an insurance company or
companies to which an application
-9-
<PAGE>
or applications for such insurance may be made by or for the Company.
8.5 ASSIGNMENT. This Agreement is a personal contract, and the rights,
----------
interests and obligations of Executive under this Agreement may not be sold,
transferred, assigned, pledged or hypothecated, except that this Agreement may
be assigned by the Company to any corporation or other business entity which
succeeds to all or substantially all of the business of the Company through
merger, consolidation, corporate reorganization or by acquisition of all or
substantially all of the assets of the Company and which assumes the Company's
obligations under this Agreement. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon any successor to the business
of the Company.
8.6 ENTIRE AGREEMENT. This Agreement sets forth the entire understanding
----------------
of the parties with respect to the employment relationship, including the
commencement and termination of the employment relationship, and supersedes any
and all prior agreements or understandings between the parties relating to such
subject matter. No person has any authority to make any representation or
promise on behalf of any of the parties which is inconsistent with the
representations set forth in the Agreement and the Agreement has not been
executed in reliance on any promise or representation not set forth in the
Agreement.
8.7 MODIFICATION, WAIVER AND AMENDMENT. None of the terms or provisions
----------------------------------
of this Agreement shall be modified or waived, and this Agreement may not be
amended or terminated, except by a written instrument signed by the party
against which any modification, waiver, amendment or termination is to be
enforced. No waiver of any one provision shall be considered a waiver of any
other provision, and the fact that an obligation is waived for a period of time
or in one instance shall not be considered to be a continuing waiver.
8.8 COOPERATION. Each party hereto agrees to execute any and all further
-----------
documents and writings and perform such other reasonable actions which may be or
become necessary or expedient to effectuate and carry out the provisions hereof.
8.9 GOVERNING LAW. This Agreement has been negotiated and entered into in
-------------
the State of California, concerns a business with its principal offices in
California and a California resident and all questions with respect to this
Agreement and the rights and liabilities of the parties shall be governed by the
laws of that state, regardless of the choice of law provisions of California or
any other jurisdiction.
-10-
<PAGE>
8.10 EQUITY. The parties hereto agree that the services to be rendered
------
under the terms of this Agreement, and the rights and privileges granted to the
Company by Executive under its terms, are of a special, unique, unusual,
extraordinary and intellectual character involving skill of the highest order
which gives them a peculiar value. In the event of the breach by Executive of
any of the provisions of this Agreement, the Company, in addition and as a
supplement to such other rights and remedies as may exist in its favor, may
apply to any court of law or equity having jurisdiction to enforce this
Agreement, and/or may apply for injunctive relief against any act which would
violate any of the provisions of this Agreement.
8.10.1 INJUNCTIVE RELIEF; PROFITS. Executive understands that monetary
--------------------------
damages will not be sufficient to avoid or compensate for a breach of any of the
covenants contained in Section 6 hereof and that injunctive relief would be
appropriate to prevent any such actual or threatened breach. Such right to
obtain injunctive relief may be exercised, at the option of the Company,
concurrently with, prior to, after, or in lieu of, the exercise of any other
rights or remedies which the Company may have as a result of any such breach or
threatened breach. Executive shall account for and pay over to the Company all
compensation, profits and other benefits, after taxes, inuring to Executive's
benefit which are derived or received by Executive or any other person or
business entity controlled by Executive resulting from any action or transaction
constituting a breach of any covenant contained in Section 6.
8.11 RULES OF CONSTRUCTION.
---------------------
8.11.1 HEADINGS. The Section headings in this Agreement are inserted only
--------
as a matter of convenience, and in no way define, limit, or extend or interpret
the scope of this Agreement or of any particular Section.
8.11.2 TENSE AND CASE. Throughout this Agreement, as the context may
--------------
require, references to any word used in one tense or case shall include all
other appropriate tenses or cases.
8.11.3 SEVERABILITY. Nothing contained in this Agreement shall be
------------
construed so as to require the commission of any act contrary to law and
whenever there is any conflict between any provision of this Agreement and any
statute, law, ordinance, order or regulation, contrary to which the parties have
no right to contract, the latter shall prevail, but in such event any provision
of this Agreement so affected shall be curtailed and limited only to the extent
necessary to bring it within legal requirements.
-11-
<PAGE>
8.13 COUNTERPARTS. This Agreement may be executed in two counterparts,
------------
each of which will be deemed an original, but all of which together will
constitute one and the same instrument.
EXECUTIVE ACKNOWLEDGES HAVING CAREFULLY READ, UNDERSTOOD AND CONSULTED WITH
AND BEEN ADVISED BY HIS OWN COUNSEL REGARDING ALL OF THE PROVISIONS IN THIS
AGREEMENT AND HAVING NEGOTIATED SUCH PROVISIONS. EXECUTIVE KNOWS THAT HE CANNOT
RELY ON ANY STATEMENT OUTSIDE OF (I) THIS AGREEMENT OR (II) A FORMAL WRITTEN
AMENDMENT OF THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first written above.
_______________________________
William H. Channell, Sr.
CHANNELL COMMERCIAL CORPORATION
_______________________________
By:
Its:
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<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "AGREEMENT") is entered into as of
___________, 1996, between Channell Commercial Corporation, a Delaware
corporation (the "COMPANY"), and William H. Channell, Jr. ("EXECUTIVE") with
reference to the following facts:
A. WHEREAS, Executive is currently serving as the Company's President;
B. WHEREAS, the Company regards Executive as valuable to it, and has
determined that it would be to the advantage and interest of the Company and its
stockholders to provide an inducement to remain in the service of the Company
and an incentive for increased efforts during such service;
C. Based on these facts, Executive and the Company wish to enter into an
employment contract providing for the continued employment of Executive on the
terms and conditions set forth herein.
NOW THEREFORE, based on the mutual covenants contained herein, the parties
agree as follows:
1. EMPLOYMENT AND DUTIES. The Company hereby agrees to employ Executive
---------------------
and Executive hereby accepts employment with the Company under the terms and
conditions set forth in this Agreement. Executive shall be employed as
President, with the duties and responsibilities commensurate with his position
as may be assigned by the Company. Executive shall devote substantially all of
his full working time, attention and energies to performing his duties for the
Company on an exclusive basis (except for a limited amount of time devoted to
personal financial matters and community activities), and shall perform his
duties faithfully and to the best of his abilities.
2. TERM OF EMPLOYMENT. Subject to earlier termination as provided in
------------------
Section 5, Executive's employment under this Agreement shall commence on the
date first stated above and continue until the fifth anniversary of such date
(the "EMPLOYMENT TERM"; each year during the "Employment Term" a "TERM YEAR").
In the event that Executive continues to be employed by the Company following
the Employment Term, that employment shall be governed by this Agreement
and shall continue for successive five-year terms until terminated by either
party.
<PAGE>
3. COMPENSATION. As compensation for the performance by Executive of all
------------
of his obligations under this Agreement, the Company shall pay to Executive:
3.1 BASE SALARY. A base salary during the Employment Term, at a rate of
-----------
Five Hundred Thousand Dollars ($500,000) per Term Year, payable in accordance
with the Company's normal practices for its senior executive officers (the "BASE
SALARY"). The Base Salary may be increased from time to time in the discretion
of the Compensation Committee of the Company's Board of Directors (the "Board").
The Base Salary shall be adjusted annually commencing on ______________, 199_,
to reflect the most recently published annualized percentage increase in the
Consumer Price Index of the Bureau of Labor Statistics of the United States
Department of Labor for the Los Angeles area.
3.2 INCENTIVE COMPENSATION. In addition to Base Salary, Executive will be
----------------------
entitled to participate in cash and other bonus programs of the Company,
including, to the extent provided by the committee of the Board administering
such plan, the Company's 1996 Performance Based Annual Incentive Compensation
Plan. Participation will be pursuant and subject to the terms and conditions of
such plan(s).
4. BENEFITS.
--------
4.1 EXPENSES. The Company shall repay or reimburse Executive for ordinary
--------
and necessary business expenses to the extent compatible with the Company's
general policies for its senior executive officers. Executive shall keep
accurate and complete records of all such expenses.
4.2 INSURANCE BENEFITS. During the Employment Term, the Company shall
------------------
provide Executive with those insurance benefits generally available to its
senior executive officers, as such benefits may be modified from time to time in
the Company's sole and absolute discretion.
4.3 VACATION AND SICK LEAVE. During the Employment Term, Executive shall
-----------------------
be entitled to a paid annual vacation in accordance with the policies
established from time to time by the Company for its senior executive officers;
provided, however, that Executive shall be entitled to no less than four weeks
paid annual vacation per Term Year. Without the Company's written consent,
vacation must be taken in the year earned and Executive's vacation will be
scheduled at times convenient to the Company's business. Executive shall be
entitled to paid sick days and personal days in accordance with the policies
established from time to time by the Company for its senior executive officers.
-2-
<PAGE>
4.4 AUTOMOBILE ALLOWANCE. During the Employment Term, the Company shall
--------------------
provide Executive with an automobile allowance in the amount of fifteen hundred
dollars ($1500.00) per calendar month, payable in accordance with the policies
established from time to time by the Company for its senior executive officers.
Executive shall secure, at his own expense, automobile insurance of a type and
in an amount and form satisfactory to the Company. Executive agrees to provide
evidence of such insurance and to promptly notify the Company if such insurance
or license is cancelled, suspended, expired or otherwise impaired.
4.5 INCENTIVE STOCK PLAN. Executive shall be eligible to participate in
--------------------
the Company's 1996 Incentive Stock Plan (the "STOCK PLAN"), or any successor or
comparable stock incentive plan, to the extent determined by the Board or its
duly authorized committee in its sole discretion.
5. TERMINATION OF EMPLOYMENT.
-------------------------
5.1 TERMINATION. The Company may terminate Executive's employment with
-----------
the Company at any time with or without "Cause" by written notice to Executive.
Cause exists if any one or more of the following should occur, as determined in
good faith by the Board: Executive's (a) failure to perform his duties under, or
breach of, this Agreement, (b) failure to comply with a reasonable direction of
the Board, (c) breach of his fiduciary duty to the Company or (d) conviction by
a court of competent jurisdiction of a felony or other serious crime. In the
event of Executive's physical or mental disability (so that Executive is not
reasonably able to render full services as contemplated hereby) for any
consecutive period exceeding eight (8) months, or for shorter periods
aggregating more than eight (8) months during any twelve (12) month period, the
Company shall nevertheless continue to pay full salary up to and including the
last date of the eighth consecutive month of disability, or the day on which the
shorter periods of disability shall have equalled to a total of eight (8) months
during such twelve (12) month period, but the Company may, at any time within
six (6) weeks thereafter, at its election terminate this Agreement by delivery
of written notice thereof to Executive. In the event that Executive dies during
the Employment Term, this Agreement shall terminate automatically.
5.2 PAYMENT UPON TERMINATION.
------------------------
5.2.1 GENERALLY. Upon any termination, the Company shall pay to Executive
---------
(or, if applicable, to Executive's estate) all amounts accrued and unpaid as of
the date of termination in respect of (i) Executive's salary for periods through
such date, (ii) vacation pay, and (iii) any reimbursement for expenses owing to
Executive pursuant to
-3-
<PAGE>
Section 4.1. In the event of a termination with Cause, Executive shall only be
entitled to the payments specified in this Section 5.3.1.
5.2.2 TERMINATION WITHOUT CAUSE. If the Company terminates Executive
-------------------------
other than for Cause, then in addition to amounts that Executive is entitled to
receive under Section 5.3.1, Executive shall be entitled to receive as a
severance benefit (i) three times Executive's Base Salary, payment of which
shall be accelerated and paid in one lump sum as soon as practically possible,
with an appropriate discount to reflect such acceleration, and (ii) accelerated
vesting of any options or restricted stock granted to Executive.
5.3 EXCLUSIVITY OF REMEDIES. Executive agrees that the rights and
-----------------------
entitlements set forth in this Section 5 are his exclusive rights and
entitlements from the Company and any affiliated entity upon the termination of
Executive's employment with the Company, and upon termination the Company shall
be released from other obligations hereunder.
6. COVENANTS.
---------
6.1 NON-INTERFERENCE COVENANT. As a means reasonably designed to
-------------------------
protect the Company's Confidential Information (as hereinafter defined)
(Executive hereby agreeing and acknowledging that the proscribed activities
would necessarily involve the use of such Confidential Information), during the
Employment Term and for a period of two years thereafter, Executive shall not,
directly, indirectly or as an agent on behalf of or in conjunction with any
person, firm, partnership, corporation or other entity, (a) hire, solicit or
encourage the resignation of person who is then, or within the prior six months
has been, an employee of the Company or its affiliated entities (including, but
not limited to, any independent sales representatives) to leave the employment
of the Company or its affiliated entities, or (b) solicit or service any person
or entity with whom the Company has a business relationship or who is or was
during the Employment Term, a customer or client of the Company.
6.2 EMPLOYMENT EXCLUSIVE. Executive shall not, during the Employment
--------------------
Term, own any interest (other than up to 1% of the voting securities of a
publicly traded corporation) in, render financial assistance to, or offer
personal services (for payment or otherwise), to any entity or individual that
competes with the Company in Company Business (as defined below) or that is a
material supplier of the Company. In addition, Executive shall not engage in
any activity which would interfere with the performance of Executive's services
to the Company. "COMPANY BUSINESS" means the Company's business as it is
currently conducted and any other business activity in which the Company is
engaged at any time during Executive's employment with the Company.
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<PAGE>
6.3 CONFIDENTIAL INFORMATION. Executive occupies a position of trust
------------------------
and confidence with respect to the Company's affairs and business. Executive has
and will have access to Confidential Information, which he acknowledges is
proprietary to the Company and highly sensitive in nature.
6.3.1 DEFINITION OF CONFIDENTIAL INFORMATION. "CONFIDENTIAL INFORMATION"
--------------------------------------
means information disclosed to Executive or known to Executive as a consequence
of or through his employment by the Company, whether or not related to his
duties, and includes trade secrets or any other like information relating to the
business and/or field of interest of the Company or any business and/or field of
interest seriously considered by the Company during Executive's employment by
the Company, including, but not limited to, information relating to Inventions
(as defined below), disclosures, processes, systems, methods, formulas, patents,
patent applications, machinery, materials, research activities and plans, cost
of production, contract forms, prices, volume of sales, marketing methods and
plans, promotional methods, and lists of names or classes of customers.
Information shall for purposes of this Agreement be considered to be
confidential if not known by the trade generally, even though such information
may have been disclosed to one or more third parties pursuant to consulting
agreements, joint research agreements, or other agreements entered into by the
Company.
6.3.2 NO DISCLOSURE. During and after Executive's employment with the
-------------
Company, Executive shall not (a) use, disclose or otherwise permit any person or
entity access to any of the Confidential Information other than as required in
the good faith performance of Executive's duties with the Company, or (b) sell,
license or otherwise exploit any products or services which embody in whole or
in part any Confidential Information. During and after Executive's engagement
with the Company, Executive shall take all reasonable precautions to prevent
disclosure by Executive of the Confidential Information to unauthorized persons
or entities.
6.3.3 RETURN ALL MATERIALS. Upon termination of Executive's employment
--------------------
with the Company, Executive shall deliver to the Company all tangible materials
in any way embodying the Confidential Information, including any documentation,
records, listings, notes, data, sketches, drawings, memoranda, models, videos,
accounts, reference materials, samples, machine-readable media and equipment,
and wire frame models. Executive shall not retain any copies of any of the
above materials.
6.4 ASSIGNMENT OF INVENTIONS.
------------------------
6.4.1 DEFINITION OF INVENTIONS. "Inventions" mean discoveries,
------------------------
developments, concepts, ideas, methods,
-5-
<PAGE>
designs, improvements, inventions, formulas, processes, techniques, programs,
know-how and data, whether or not patentable or registerable under copyright or
similar statutes except, in accordance with California Labor Code Section 2870,
any such that (a) is not related to the business of the Company, or the
Company's actual or demonstrable research or development, (b) does not involve
the use of any equipment, supplies, facility or trade secret information of the
Company, (c) was developed entirely on Executive's own time, and (d) does not
---
result from any work performed by Executive for the Company.
6.4.2 ASSIGNMENT. Executive agrees to and hereby does assign to the
----------
Company all his right, title and interest in any and all Inventions he may make
during his employment with the Company.
6.4.3 DUTY TO DISCLOSE AND ASSIST. Executive agrees to promptly disclose
---------------------------
in writing all Inventions to the Company, and to provide all assistance
reasonably requested by the Company in the preservation of the Company's
interests in the Inventions including obtaining patents in any country
throughout the world. Such services will be without additional compensation if
Executive is then employed by the Company and for reasonable compensation and
subjected to his reasonable availability if he is not. If cannot, after
reasonable effort, secure Executive's signature on any document or documents
needed to apply for or prosecute any patent, copyright, or other right or
protection relating to an Invention, whether because of his physical or mental
incapacity or for any other reason whatsoever, Executive hereby irrevocably
designates and appoints the Company and its duly authorized officers and agents
as his agent and attorney-in-fact, to act for and in his behalf and in his name
and stead for the purpose of executing and filing any such application or
applications and taking all other lawfully permitted actions to further the
prosecution and issuance of patents, copyrights, or similar protections thereon,
with the same legal force and effect as if executed by him.
6.5 OWNERSHIP OF COPYRIGHTS. Executive agrees that any work prepared
-----------------------
for the Company which is eligible for United States copyright protection or
protection under the Universal Copyright Convention, the Berne Copyright
Convention and/or the Buenos Aires Copyright Convention shall be a work made for
hire and ownership of all copyrights (including all renewals and extensions)
therein shall vest in the Company. If any such work is deemed not to be a work
made for hire for any reason, Executive hereby grants, transfers and assigns all
right, title and interest in such work and all copyrights in such work and all
renewals and extensions thereof to the Company, and agrees to provide all
assistance reasonably requested by the Company in the establishment,
preservation and enforcement of the Company's copyright in such work, such
-6-
<PAGE>
assistance to be provided at the Company's expense but without any additional
compensation to Executive. Executive hereby agrees to and does hereby waive the
enforcement of all moral rights with respect to the work developed or produced
hereunder, including without limitation any and all rights of identification of
authorship and any and all rights of approval, restriction or limitation on use
or subsequent modifications.
6.6 LITIGATION. Executive agrees to render assistance, advice and
----------
counsel to the Company at its request regarding any matter, dispute or
controversy with which the Company may become involved and of which Executive
has or may have reason to have knowledge, information or expertise. Such
services will be without additional compensation if Executive is then employed
by the Company and for reasonable compensation and subjected to his reasonable
availability if he is not.
7. ARBITRATION AS THE EXCLUSIVE REMEDY.
-----------------------------------
7.1 ARBITRATION AS THE EXCLUSIVE REMEDY. Except for actions seeking
-----------------------------------
injunctive relief (which may be brought before any court having jurisdiction
under this Agreement), any controversy or claim (whether against the Company or
any parent, subsidiary or affiliate thereof, or any officer, director, employee
or agent of any of the foregoing) arising out of or relating to this Agreement,
including, but not limited to, any claim relating to its validity,
interpretation, enforceability or breach, and/or any other claim or controversy
arising out of the employment relationship or the commencement or termination of
that relationship, including, but not limited to, claims which are brought
against any of the Company's directors, officers, employees and agents and
claims for breach of covenant, for breach of an implied covenant, for
intentional infliction of emotional distress, or under any applicable statute
(including, without limitation, claims for age or sex discrimination) which are
not settled by agreement between the parties, shall be submitted to arbitration
in Temecula, California (or such other place as the parties may mutually agree)
before an arbitrator to be mutually agreed upon by the parties. In
consideration of each party's agreement to submit to arbitration all disputes
with regard to this Agreement and/or with regard to any alleged contract or tort
or other claim arising out of the employment relationship or the commencement or
termination of that employment relationship, and in consideration of the
anticipated expedition and the minimizing of expense of this arbitration remedy,
each agrees that the arbitration provisions of this Agreement shall provide it
with its exclusive remedy against the other party (including its officers,
directors, employees and agents) and each party expressly waives any right it
might have to seek redress in any other forum except as provided herein.
-7-
<PAGE>
7.2 PROCEDURES. The party filing a claim must present it in writing to
----------
the other party in Temecula, California within six months of the date the party
filing the claim knew or should have known of it or the date of the termination,
whichever is earlier. Any claim not brought within the required time period will
be waived forever. In the proceedings (i) all testimony of witnesses shall be
taken under oath and (ii) upon conclusion of any proceedings hereunder, the
arbitrator shall render findings of fact and conclusions of law in a written
opinion setting forth the basis and reasons for any decision reached and deliver
such documents to each party to this Agreement along with a signed copy of the
award in accordance with Section 1283.6 of the California Code of Civil
Procedure. The arbitrator shall have power to allocate between the parties in
their award costs incurred in preparation for and as a result of any such
arbitration, including, without limitation, filing fees, attorneys' fees, the
compensation to be paid to the arbitrator in any such arbitration and costs of
transcripts.
8. MISCELLANEOUS.
-------------
8.1 AGREEMENT AUTHORIZED. Executive hereby represents and warrants that
--------------------
he is free to enter into this Agreement and to render his services pursuant to
this Agreement, that he has resigned all offices with any other entities, and
that he is not subject to any obligation or restriction that would prevent him
from discharging his duties under this Agreement, and agrees to indemnify and
hold harmless the Company from and with respect to any liability, damages or
costs, including attorneys' fees, arising out of any breach by Executive of this
representation and warranty. The Company hereby represents and warrants that
any required authorization of this Agreement by its Board of Directors has been
obtained.
8.2 NOTICES. Any notice required or desired to be given to the Company
-------
or to Executive shall be given in writing, and shall be addressed (i) to the
Company at its principal place of business, and (ii) to Executive at his most
recent home address in the records of the Company, or to such other address as
that party may hereafter designate in writing, and shall be sufficiently given
by actual delivery thereof to the Company or Executive, as the case may be, or
by facsimile or overnight or registered mail, postage prepaid, return receipt
requested, addressed to the other party as aforesaid, and the date of delivery,
mailing or telegraphing shall be the date of the giving of such notice.
8.3 PAYMENT OF TAXES. To the extent that any taxes become payable by
----------------
Executive by virtue of any payments made or benefits conferred by the Company,
the Company shall not be liable to pay or obligated to reimburse Executive for
any such taxes or to make any adjustment under this Agreement. Any
-8-
<PAGE>
payments otherwise due under this Agreement to Executive, including, but not
limited to, the Base Salary and any bonus, shall be reduced by any required
withholding for Federal, State and/or local taxes and other appropriate payroll
deductions. The Company shall be entitled to offset any payment obligations to
Executive under this Agreement against any amounts it alleges in good faith that
Executive owes to the Company.
8.4 INSURANCE. The Company may, from time to time, apply for and take
---------
out, in its own name and at its own expense, life, health, accident, disability
or other insurance on Executive in any sum or sums that it may deem necessary to
protect its interests, and Executive shall aid and cooperate in all reasonable
respects with the Company in procuring any and all such insurance, including,
without limitation, submitting to the usual and customary medical examinations,
and by filling out, executing and delivering such applications and other
instruments in writing as may be reasonably required by an insurance company or
companies to which an application or applications for such insurance may be made
by or for the Company.
8.5 ASSIGNMENT. This Agreement is a personal contract, and the rights,
----------
interests and obligations of Executive under this Agreement may not be sold,
transferred, assigned, pledged or hypothecated, except that this Agreement may
be assigned by the Company to any corporation or other business entity which
succeeds to all or substantially all of the business of the Company through
merger, consolidation, corporate reorganization or by acquisition of all or
substantially all of the assets of the Company and which assumes the Company's
obligations under this Agreement. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon any successor to the business
of the Company.
8.6 ENTIRE AGREEMENT. This Agreement sets forth the entire understanding
----------------
of the parties with respect to the employment relationship, including the
commencement and termination of the employment relationship, and supersedes any
and all prior agreements or understandings between the parties relating to such
subject matter. No person has any authority to make any representation or
promise on behalf of any of the parties which is inconsistent with the
representations set forth in the Agreement and the Agreement has not been
executed in reliance on any promise or representation not set forth in the
Agreement.
8.7 MODIFICATION, WAIVER AND AMENDMENT. None of the terms or provisions
----------------------------------
of this Agreement shall be modified or waived, and this Agreement may not be
amended or terminated, except by a written instrument signed by the party
against which any modification, waiver, amendment or termination is to
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<PAGE>
be enforced. No waiver of any one provision shall be considered a waiver of any
other provision, and the fact that an obligation is waived for a period of time
or in one instance shall not be considered to be a continuing waiver.
8.8 COOPERATION. Each party hereto agrees to execute any and all further
-----------
documents and writings and perform such other reasonable actions which may be or
become necessary or expedient to effectuate and carry out the provisions hereof.
8.9 GOVERNING LAW. This Agreement has been negotiated and entered into
-------------
in the State of California, concerns a business with its principal offices in
California and a California resident and all questions with respect to this
Agreement and the rights and liabilities of the parties shall be governed by the
laws of that state, regardless of the choice of law provisions of California or
any other jurisdiction.
8.10 EQUITY. The parties hereto agree that the services to be rendered
------
under the terms of this Agreement, and the rights and privileges granted to the
Company by Executive under its terms, are of a special, unique, unusual,
extraordinary and intellectual character involving skill of the highest order
which gives them a peculiar value. In the event of the breach by Executive of
any of the provisions of this Agreement, the Company, in addition and as a
supplement to such other rights and remedies as may exist in its favor, may
apply to any court of law or equity having jurisdiction to enforce this
Agreement, and/or may apply for injunctive relief against any act which would
violate any of the provisions of this Agreement.
8.10.1 INJUNCTIVE RELIEF; PROFITS. Executive understands that monetary
--------------------------
damages will not be sufficient to avoid or compensate for a breach of any of the
covenants contained in Section 6 hereof and that injunctive relief would be
appropriate to prevent any such actual or threatened breach. Such right to
obtain injunctive relief may be exercised, at the option of the Company,
concurrently with, prior to, after, or in lieu of, the exercise of any other
rights or remedies which the Company may have as a result of any such breach or
threatened breach. Executive shall account for and pay over to the Company all
compensation, profits and other benefits, after taxes, inuring to Executive's
benefit which are derived or received by Executive or any other person or
business entity controlled by Executive resulting from any action or transaction
constituting a breach of any covenant contained in Section 6.
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<PAGE>
8.11 RULES OF CONSTRUCTION.
---------------------
8.11.1 HEADINGS. The Section headings in this Agreement are inserted only
--------
as a matter of convenience, and in no way define, limit, or extend or interpret
the scope of this Agreement or of any particular Section.
8.11.2 TENSE AND CASE. Throughout this Agreement, as the context may
--------------
require, references to any word used in one tense or case shall include all
other appropriate tenses or cases.
8.11.3 SEVERABILITY. Nothing contained in this Agreement shall be
------------
construed so as to require the commission of any act contrary to law and
whenever there is any conflict between any provision of this Agreement and any
statute, law, ordinance, order or regulation, contrary to which the parties have
no right to contract, the latter shall prevail, but in such event any provision
of this Agreement so affected shall be curtailed and limited only to the extent
necessary to bring it within legal requirements.
8.13 COUNTERPARTS. This Agreement may be executed in two counterparts,
------------
each of which will be deemed an original, but all of which together will
constitute one and the same instrument.
EXECUTIVE ACKNOWLEDGES HAVING CAREFULLY READ, UNDERSTOOD AND CONSULTED WITH
AND BEEN ADVISED BY HIS OWN COUNSEL REGARDING ALL OF THE PROVISIONS IN THIS
AGREEMENT AND HAVING NEGOTIATED SUCH PROVISIONS. EXECUTIVE KNOWS THAT HE CANNOT
RELY ON ANY STATEMENT OUTSIDE OF (I) THIS AGREEMENT OR (II) A FORMAL WRITTEN
AMENDMENT OF THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first written above.
_______________________________
William H. Channell, Jr.
CHANNELL COMMERCIAL CORPORATION
_______________________________
By:
Its:
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<PAGE>
EXHIBIT 10.10
CHANNELL COMMERCIAL CORPORATION
1996 PERFORMANCE-BASED
ANNUAL INCENTIVE COMPENSATION PLAN
<PAGE>
CHANNELL COMMERCIAL CORPORATION
1996 PERFORMANCE-BASED
ANNUAL INCENTIVE COMPENSATION PLAN
1. NAME AND EFFECTIVE DATE. The plan hereby created will be known as the
Channell Commercial Corporation 1996 Performance-Based Annual Incentive
Compensation Plan (the "Plan"). The Plan was adopted effective ____________,
1996 and was approved by unanimous written consent of the Company's shareholders
dated __________, 1996.
2. PURPOSE. The purpose of the Plan is to provide additional compensation
as an incentive to key employees and other service providers to attain certain
specified performance objectives of Channell Commercial Corporation (the
"Company") and to ensure the continued availability of their full-time or part-
time services to the Company.
3. ADMINISTRATIVE COMMITTEE. The Plan will be administered by the
Compensation Committee of the Company's Board of Directors, consisting entirely
of two or more persons who are both: (i) "outside directors" within the meaning
of Section 162(m) of the Internal Revenue Code of 1986, as amended (including
proposed, temporary and final regulations promulgated thereunder from time to
time, the "Code"), and (ii) "disinterested persons" within the meaning of Rule
16b-3(c)(2)(i) of the General Rules and Regulations under the Securities
Exchange Act of 1934 ("Exchange Act"), or, whether or not that committee fails
to consist entirely of persons who are both "outside directors" and
"disinterested persons," by another committee of at least two members of the
Board that is designated by the Board to administer the Plan (in either event,
the "Committee"). The Committee is hereby vested with full powers of
administration, subject only to the provisions set forth herein.
4. ELIGIBLE PARTICIPANTS. For each Plan award period, the participants
entitled to share in the benefits of the Plan are the employees of and other
service providers to the Company designated by the Committee (hereinafter,
collectively, "participants"). A participant whose employment or service
relationship with the Company is terminated for any reason prior to the end of
any award period will not be entitled to participate in the Plan or receive any
benefits with respect to any later award period. With respect to the award
period in which termination occurs, the Committee will provide for prorated
awards based upon satisfaction of performance goals for the entire award period,
with the proration formula to be set by the Committee in its discretion.
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<PAGE>
5. AVAILABLE BONUS FUNDS.
5.1 Award or Pool Amounts and Allocations. The amount of an available
award to a participant or the aggregate amount of available awards to all
participants for each award period shall be determined based upon an objective
computation (the "Formula") of the actual performance of the Company relative to
preestablished performance goals (as described in Section 5.2 below). The
Committee shall determine the level of performance goals and all computations
included within each Formula. The Formula may be different for different
participants during a single award period. The performance goal or goals
included in each Formula for each award period shall be determined by the
Committee from among the following performance measures: level of sales (in the
aggregate or for a particular category or categories of sales); EBITDA (i.e.,
----
earnings before interest and taxes plus depreciation and amortization
expense) net income; income from operations; earnings per share; return on
sales; reduction in expenditure levels for a particular category or categories
of expenses versus a prior period; return on total capital; increase in the
price of the Company's stock over a specified period; invention, design or
development of proprietary product or improvements thereto (patented or
otherwise), or sales of such proprietary products or improvements or
profitability achieved from sales of proprietary products or improvements; and
return on equity. If the Committee sets an aggregate amount of available awards
to all participants for a particular award period (a "Bonus Pool"), to determine
the amount of the award for each participant under the Plan for that award
period, the Committee shall designate a percentage of the Bonus Pool awarded to
each such participant for such award period. If the Committee establishes a
Bonus Pool, the determination of the amount of the Bonus Pool and each
participant's participation therein shall be based strictly upon the Formula and
such percentage participations, except that the Committee may, in its
discretion, (a) designate in advance a maximum dollar award for any award period
with respect to any participant, and/or (b) designate in advance that certain
prior incentive awards (under this Plan or otherwise) made to a participant will
be deducted from award amounts otherwise earned under the Plan. If the Committee
does not establish a Bonus Pool, the determination of each participant's award
shall be based strictly upon the Formula applicable to each such participant for
the corresponding award period, subject to the same caveats (a) and (b)
indicated in the preceding sentence. The Committee shall not have the discretion
to increase, but shall have the discretion to decrease, any award determined in
accordance with the Plan. The reduction in any participant's award with respect
to any award period as a result of the Committee's exercise of such discretion
shall not increase the amount of an award to any other participant (through
reallocation of unutilized awards from a Bonus Pool or otherwise) with respect
to such award period. Notwithstanding anything in the Plan to the contrary, no
participant shall be entitled to earn in excess of One Million Dollars
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<PAGE>
($1,000,000) in cash or one hundred thousand (100,000) shares of Common
Stock under the Plan with respect to any single calendar year.
5.2 Timing of Committee Determinations. The Committee shall (a) set
the Formula (including the identification of performance measures and goals) for
determining the size of the Bonus Pool and the allocated percentages of the
participants in the Bonus Pool, and (b) set the Formula (including the
identification of performance measures and goals) for non-Bonus Pool awards, as
applicable, for each award period in advance of the commencement of such award
period; provided, however, that with respect to any award period consisting of
at least a full calendar year, such determinations may be made on or before
March 31 of such year provided that the award period corresponding to those
determinations shall conclude no earlier than nine months following the date on
which the Committee's determinations are made.
5.3 Determination of Performance Measures. The Committee may adjust
the Formula (including the identification of performance measures and goals)
relative to the elements thereof utilized for prior award periods, within the
limits specified herein, with respect to each award period of the Plan. The
Committee shall make such adjustments, if at all, with respect to each award
period prior to the commencement of such award period.
6. AWARD PERIODS; PAYMENT OF AWARDS.
6.1 Award Periods. Award periods may be quarters, calendar years or
such other periods as the Committee may designate.
6.2 Payments in Cash and Common Stock; Advances. Awards under the
Plan will be made reasonably promptly following the conclusion of each award
period. Awards will be made, at the discretion of the Committee (i) in cash by
Company check, (ii) subject to Section 6.4, through the issuance of shares of
the Company's authorized but unissued Common Stock, $0.01 par value ("Common
Stock"), or (iii) through any combination of (i) and (ii). All awards under the
Plan will be subject to withholding for applicable employment and income taxes.
Such withholding obligations shall be satisfied either in cash or in any other
method approved by the Committee, in its discretion. No awards under the Plan
will be made to any participant following the termination of such participant's
employment or service relationship with the Company (other than any amount
earned for a concluded award period that remains unpaid, and provided that the
Committee will provide for prorated awards based upon satisfaction of
performance goals for the entire award period in which termination occurs, with
the proration formula to be set by the Committee in its discretion in advance of
the commencement of the award period). For all purposes of the Plan, awards
shall be deemed fully earned (notwithstanding that the amounts thereof have not
been computed) as of the last day of each award period.
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<PAGE>
6.3 Committee Certifications. As a condition precedent to the payment
of any award, the Committee shall certify that the objective performance goal
for the award has been satisfied and that the amount of the award is no greater
than that dictated by the Formula and the participant's allocated percentage of
the Bonus Pool, if applicable, for the applicable award period. The Committee
shall make such determination by means of a written resolution of the Committee
that is maintained in the minute book of the Company.
6.4 Provisions Applicable to Grants of Common Stock. Common Stock
issued in respect of an award under the Plan shall be issued subject to such
conditions or restrictions (including restrictions on transfer), if any, as the
Committee shall deem appropriate in its discretion. Common Stock issued in
respect of an award under the Plan shall, except to the extent that the
Committee makes a contrary determination, be subject to restrictions prohibiting
any disposition within six months following the date of grant. No person
entitled to receive an award of Common Stock under the Plan shall have any of
the rights or privileges of a stockholder of the Company in respect of any
Common Stock until certificates representing such shares shall have been issued
and delivered. Notwithstanding anything to the contrary herein, no shares shall
be issued and delivered hereunder unless and until, in the opinion of counsel
for the Company, there shall have been full compliance with any applicable
registration requirements of the Securities Act of 1933, any applicable listing
requirements of any national securities exchange on which the Common Stock is
then listed, and any other requirements of law or of any regulatory bodies
having jurisdiction over such issuance and delivery. The total number of shares
of Common Stock that may be issued under this Plan in any fiscal year of the
Company, and the number of shares of Common Stock that may be issued under this
Plan in any fiscal year of the Company to any single participant, shall not
exceed Five Percent (5%) of the number of issued and outstanding shares of
Common Stock at the beginning of the prior fiscal year. If the outstanding
shares of the Common Stock of the Company are increased, decreased, changed into
or exchanged for a different number or kind of shares or securities of the
Company through a reorganization, recapitalization, reclassification, stock
dividend, stock split, reverse stock split or other similar transaction, an
appropriate and proportionate adjustment shall be made in the number of shares
to be issued pursuant to any award and the maximum number of shares which may be
issued under this Plan, as determined by the Committee in its sole discretion.
The dollar amount of each award of Common Stock under the Plan shall, for all
purposes of the Plan, be deemed equal to the fair market value thereof
(determined in accordance with Section 6.5) as of the date of the award or other
applicable date of determination, as determined by the Committee.
6.5 Fair Market Value of Common Stock. The fair market value of a
share of Common Stock of the Company shall be determined for purposes
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<PAGE>
of this Plan by reference to the closing price on the principal stock exchange
on which such shares are then listed or, if such shares are not then listed on a
stock exchange, by reference to the closing price (if approved for quotation on
the NASDAQ National Market System) or the mean between the bid and asked price
(if other over-the-counter issue) of a share as supplied by the National
Association of Securities Dealers, Inc. through NASDAQ (or its successor in
function), in each case as reported by The Wall Street Journal for the business
day immediately preceding the date on which the option is exercised (or, if for
any reason no such price is available, in such other manner as the Committee may
deem appropriate to reflect the then fair market value thereof).
7. NONASSIGNMENT. The interest of any participant in the Plan is not
assignable either by voluntary or involuntary assignment or operation of law
(except that, in the event of death, earned and unpaid amounts shall be payable
to the legal successor of a participant).
8. INDEMNIFICATION. No employee, member of the Committee, or director of
the Company will have any liability for any decision or action if made or done
in good faith, nor for any error or miscalculation unless such error or
miscalculation is the result of his or her fraud or deliberate disregard of any
provisions of the Plan. The Company will indemnify each director, member of the
Committee and any employee acting in good faith pursuant to this Plan against
any loss or expense arising therefrom.
9. AMENDMENT, SUSPENSION OR TERMINATION. The Board of Directors may from
time to time amend, suspend or terminate, in whole or in part, any or all the
provisions of this Plan; provided, however, that no such action will adversely
affect the right of any participant participating hereunder with respect to (a)
any award to which he or she may have become entitled hereunder prior to the
effective date of such amendment, suspension or termination, or (b) any award
period that commenced prior to the taking of such action by the Board. In
particular, but without limitation, the Board of Directors shall have the
authority to amend or modify the Plan from time to time in order to reflect
amendments to or regulations promulgated under Section 162(m) of the Code and
amendments to the Rules promulgated under Section 16 of the Exchange Act or to
continue the compliance of the Plan under such provisions (or any successor
provisions). Notwithstanding the foregoing, in the event that any amendment or
other modification of or to the Plan requires shareholder approval in order to
continue the compliance of the Plan as a "performance-based" plan under Section
162(m) of the Code or to continue compliance with the requirements of Rule 16b-3
promulgated under the Exchange Act, such amendment or modification shall be
contingent on the receipt of shareholder approval.
10. LIMITATIONS; PARTICIPATION IN OTHER PLANS. This Plan is not to be
construed as constituting a contract of employment or for services. Nothing
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<PAGE>
contained herein will affect or impair the Company's right to terminate the
employment or other contract for services of a participant hereunder. The
Company's obligation hereunder to make awards merely constitutes the unsecured
promise of the Company to make such awards (in the case of cash awards, from its
general assets), and no participant hereunder will have any interest in, or a
lien or prior claim upon, any property of the Company. Nothing herein nor the
participation by any participant shall limit the ability of such participant to
participate in any other compensatory plan or arrangement of the Company.
11. GOVERNING LAW. The terms of this Plan will be governed by and construed
in accordance with the laws of the State of California, without regard to
principles of conflict of laws.
12. TERM. This Plan shall continue in place until terminated by the Board
of Directors. Consistent with Section 162(m) of the Code, unless earlier
required to continue the compliance of the Plan under Section 162(m), the
continued utilization of the Plan shall be subject to shareholder ratification
at each fifth annual meeting of shareholders after the date of the unanimous
written consent of shareholders pursuant to which this Plan has been approved by
the Company's Shareholders.
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<PAGE>
EXHIBIT 10.11
STANDARD INDUSTRIAL LEASE--NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. PARTIES. This Lease, dated, for reference purposes only, DECEMBER 22, 1989
is made by and between William H. Channell (herein called "Lessor") and
Channell Commercial Corporation (herein called "Lessee").
2. PREMISES. Lessor hereby leases to Lessee and Lessee from Lessor for the
term, at the rental, and upon all of the conditions set forth herein, that
certain real property situated in the County of Riverside, State of California,
commonly known as 27040 Ynez Road, Temecula and described as 108,363 +/- Square
Foot Office/Industrial building situated on 9.55 +/- acres of land. Said
real-property including the land and all improvements therein, is herein called
"the Premises".
3. TERM.
3.1 TERM. The term of this Lease shall be for FIFTEEN YEARS (15) commencing
on January 1, 1990 and ending on December 31, 2005 unless sooner terminated
pursuant to any provision hereof.
3.2 DELAY IN POSSESSION. Notwithstanding said commencement date, if for any
reason Lessor cannot deliver possession of the Premises to Lessee on said
date, Lessor shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease or the obligations of Lessee
hereunder or extend the term hereof, but in such case, Lessee shall not be
obligated to pay rent until possession of the Premises is tendered to Lessee;
provided, however, that if Lessor shall not have delivered possession of the
Premises within sixty (60) days from said commencement date, Lessee may, at
Lessee's option, by notice in writing to Lessor within ten (10) days
thereafter, cancel this Lease, in which event the parties shall be discharged
from all obligations hereunder; provided 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.
3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said
commencement date, such occupancy shall be subject to all provisions hereof,
such occupancy shall not advance the termination date, and Lessee shall pay
rent for such period, at the initial monthly rates set forth below.
4. RENT. Lessee shall pay to Lessor as rent for the Premises, monthly payments
of $54,181.50, in advance, on the 1st day of each month of the term hereof.
Lessee shall pay Lessor upon the execution hereof $254,181.50 as rent for 1st
month plus security deposit. Rent for any period during the term hereof which is
for less than one month shall be a pro rata portion of the monthly installment.
Rent shall be payable in lawful money of the United States to Lessor at the
address stated herein or to such other persons or at such other places as Lessor
may designate in writing.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
$200,000.00 as security for Lessee's faithful performance of Lessee's
obligations hereunder. If Lessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
Lessor may use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default or for the payment of any other
sum to which Lessor may become obligated by reason of Lessee's default, or to
compensate Lessor for any loss or damage which Lessor may suffer thereby. If
Lessor so uses or applies all or any portion of said deposit, Lessee shall
within ten (10) days after written demand therefor deposit cash with Lessor in
an amount sufficient to restore said deposit to the full amount herein above
stated and Lessee's failure to do so shall be a material breach of this Lease.
If the monthly rent shall, from time to time, increase during the term of this
Lease, Lessee shall thereupon deposit with Lessor additional security deposit so
that the amount of security deposit held by Lessor shall at all times bear the
same proportion to current rent as the original security deposit bears to the
original monthly rent set forth in paragraph 4 hereof. Lessor shall not be
required to keep said deposit separate from its general accounts. If Lessee
performs all of Lessee's obligations hereunder, said deposit, or so much thereof
as has not theretofore been applied by Lessor, shall be returned, without
payment of interest or other increment for its use, to Lessee (or, at Lessor's
option, to the last assignee, if any, of Lessee's interest hereunder) at the
expiration of the term hereof, and after Lessee has vacated the Premises. No
trust relationship is created herein between Lessor and Lessee with respect to
said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for manufacturing,
assembly, warehousing of plastic injected products, as well as corporate
offices, or any other use which is reasonably comparable and for no other
purpose.
6.2 COMPLIANCE WITH LAW.
(a) Lessor warrants to Lessee that the Premises, in its state existing
on the date that the Lease term commences, but without regard to the use for
which Lessee will use the Premises, does not violate any covenants or
restrictions of record, or any applicable building code, regulation or ordinance
in effect on such Lease term commencement date. In the event it is determined
that this warranty has been violated, then it shall be the obligation of the
Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and
expense, rectify any such violation. In the event Lessee does not give to Lessor
written notice of the violation of this warranty within six months from the date
that the Lease term commences, the correction of same shall be the obligation of
the Lessee at Lessee's sole cost. The warranty contained in this paragraph
6.2(a) shall be of no force or effect if, prior to the date of this Lease,
Lessee was the owner or occupant of the Premises, and, in such event, Lessee
shall correct any such violation at Lessee's sole cost.
(b) Except as provided in paragraph 6.2(a), Lessee shall, at Lessee's
expense, comply promptly with all applicable statutes, ordinances, rules,
regulations, orders, covenants and restrictions of record, and requirements in
effect during the term or any part of the term hereof, regulating the use by
Lessee of the Premises. Lessee shall not use nor permit the use of the Premises
in any manner that will tend to create waste or a nuisance or, it there shall be
more than one tenant in the building containing the Premises, shall tend to
disturb such other tenants.
6.3 CONDITION OF PREMISES.
(a) Lessor shall deliver the Premises to Lessee clean and tree of
debris on Lease commencement date (unless Lessee is already in possession) and
Lessor further warrants to Lessee that the plumbing, lighting, air
conditioning, heating, and loading doors in the Premises shall be in good
operating condition on the Lease commencement date. In the event that it is
determined that this warranty has been violated, then it shall be the obligation
of Lessor, after receipt of written notice from Lessee setting forth with
specificity the nature of the violation, to promptly, at Lessor's sole cost,
rectify such violation. Lessee's failure to give such written notice to Lessor
within thirty (30) days after the Lease commencement date shall cause the
conclusive presumption that Lessor has complied with all of Lessor's obligations
hereunder. The warranty contained in this paragraph 6.3(a) shall be of no force
or effect if prior to the date of this Lease, Lessee was the owner or occupant
of the Premises.
(b) Except as otherwise provided in this Lease, Lessee hereby accepts
the Premises in their condition existing as of the Lease commencement date or
the date that Lessee takes possession at the Premises, whichever is earlier,
subject to all applicable zoning, municipal county and state laws, ordinances
and regulations governing and regulating the use of the Premises, and any
covenants or restrictions of record, and accepts this Lease subject thereto and
to all matters disclosed thereby and by any exhibits attached hereto. Lessee
acknowledges that neither Lessor nor Lessor's agent has made any representation
or warranty as to the present or future suitability of the Premises for the
conduct of Lessee's business.
7. MAINTENANCE, REPAIRS AND ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS. Lessee shall keep in good order, condition and
repair the Premises and every part thereof, structural and nonstructural,
(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 plumbing, heating, air
conditioning, (Lessee shall procure and maintain, at Lessee's expense, an air
conditioning system maintenance contract) ventilating, electrical, lighting
facilities and equipment within the Premises, fixtures, walls (interior and
exterior), foundations, ceilings, roofs (interior and exterior), floors,
windows, doors, plate glass and skylights located within the Premises, and all
landscaping, driveways, parking lots, fences and signs located on the Premises
and sidewalks and parkways adjacent to the Premises.
7.2 SURRENDER. On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same condition
as when received, ordinary wear and tear excepted, clean and free of debris.
Lessee shall repair any damage to the Premises occasioned
<PAGE>
by the installation or removal of Lessee's trade fixtures, furnishings and
equipment. Notwithstanding anything to the contrary otherwise stated in this
Lease, Lessee shall leave the air lines, power panels, electrical distribution
systems, lighting fixtures, space heaters, air conditioning, plumbing and
fencing on the premises in good operating condition.
7.3 LESSOR'S RIGHTS. If Lessee fails to perform Lessee's obligations under
this Paragraph 7, or under any other paragraph of this Lease, Lessor may at its
option (but shall not be required to) enter upon the Premises after ten (10)
days' prior 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 same in good order, condition and repair, and the cost
thereof together with interest thereon at the maximum rate then allowable by law
shall become due and payable as additional rental to Lessor together with
Lessee's next rental installment.
7.4 LESSOR'S OBLIGATIONS. Except for the obligations of Lessor under
Paragraph 6.2(a) and 6.3(a) (relating to Lessor's warranty), Paragraph 9
(relating to destruction of the Premises) and under Paragraph 14 (relating to
condemnation of the Premises), it is intended by the parties hereto that Lessor
have no obligation, in any manner whatsoever, to repair and maintain the
Premises nor the building located thereon nor the equipment therein, whether
structural or non structural, all of which obligations are intended to be that
of the Lessee under Paragraph 7.1 hereof. Lessee expressly waives the benefit
of any statute now or hereinafter in effect which would otherwise afford Lessee
the right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the premises in good order, condition and
repair.
7.5 ALTERATIONS AND ADDITIONS
(a) Lessee shall not, without Lessor's prior written consent make any
alterations, improvements, additions, or Utility Installations in, on or about
the Premises, except for non structural alterations not exceeding $2,500 in
cumulative costs during the term of this Lease. In any event, whether or not in
excess of $2,500 in cumulative cost, Lessee shall make no change or alteration
to the exterior of the Premises nor the exterior of the building(s) on the
Premises without Lessor's prior written consent. As used in this Paragraph 7.5
the term "Utility Installation" shall mean carpeting, window coverings, air
lines, power panels, electrical distribution systems, lighting fixtures, space
heaters, air conditioning, plumbing and fencing. Lessor may require that Lessee
remove any or all of said alterations, improvements, additions or Utility
Installations at the expiration of the term, and restore the Premises to their
prior condition. Lessor may require Lessee to provide Lessor, at Lessee's sole
cost and expense, a lien and completion bond in an amount equal to one and
one-half times the estimated cost of such improvements, to insure Lessor
against any liability for mechanic's and materialmen's liens and to insure
completion of the work. Should Lessee make any alterations, improvements,
additions or Utility Installations without the prior approval of Lessor, Lessor
may require that Lessee remove any or all of the same.
(b) Any alterations, improvements, additions or Utility Installations
in, or about the Premises that Lessee shall desire to make and which requires
the consent of the Lessor shall be presented to Lessor in written form, with
proposed detailed plans. If Lessor shall give its consent, the consent shall be
deemed conditioned upon Lessee acquiring permit to do so from appropriate
governmental agencies, the furnishing of a copy thereof to Lessor prior to the
commencement of the work and the compliance by Lessee of all conditions of said
permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in 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 itself and Lessor against the same and shall
pay and satisfy any such adverse judgment that maybe rendered thereon before the
enforcement thereof against the Lessor or the Premises, upon the condition that
if Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to such contested lien claim or demand
indemnifying Lessor against liability for the same and holding the Premises 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.
(d) Unless Lessor requires their removal, as set forth in Paragraph
7.5(a), all alterations, improvements, additions and Utility Installations
(whether or not such Utility Installations constitute trade fixtures of Lessee),
which may be made on the Premises, shall become the property of Lessor and
remain upon and be surrendered with the Premises at the expiration of the term.
Notwithstanding the provisions or this Paragraph 7.5(d), Lessee's machinery and
equipment, other than that which is affixed to the Premises so that it cannot be
removed without material damage to the Premises, shall remain the property of
Lessee and may be removed by Lessee subject to the provisions of Paragraph 7.2.
8. INSURANCE INDEMNITY.
8.1 INSURING PARTY. As used in this Paragraph 8, the term "insuring party"
shall mean the party who has the obligation to obtain the Property Insurance
required hereunder. The insuring party shall be designated in Paragraph 46
hereof. In the event Lessor is the insuring party, Lessor shall also maintain
the liability insurance described in paragraph 8.2 hereof, in addition to, and
not in lieu of, the insurance required to be maintained by Lessee under said
paragraph 8.2, but Lessor shall not be required to name Lessee as an additional
insured on such policy. Whether the insuring party is the Lessor or the Lessee,
Lessee shall, as additional rent for the Premises, pay the cost of all insurance
required hereunder, except for that portion of the cost attributable to Lessor's
liability insurance coverage in excess of $1,000,000 per occurrence. If Lessor
is the insuring party Lessee shall, within ten (10) days following demand by
Lessor, reimburse Lessor for the cost of the insurance so obtained.
8.2 LIABILITY INSURANCE. Lessee shall, at Lessee's expense obtain and keep
in force during the term of this Lease a policy of Combined Single Limit, Bodily
Injury and Property Damage insurance insuring Lessor and Lessee against any
liability arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be a combined
single limit policy in an amount not less than $500,000 per occurrence. The
policy shall insure performance by Lessee of the indemnity provisions of this
Paragraph 8. The limits of said insurance shall not, however, limit the
liability of Lessee hereunder.
8.3 PROPERTY INSURANCE.
(a) The insuring party shall obtain and keep in force during the term
of this Lease a policy or policies of insurance covering loss or damage to the
Premises, in the amount of the full replacement value thereof, as the same may
exist from time to time, which replacement value is now $5,000,000.00, but in no
event less than the total amount required by lenders having liens on the
Premises, against all perils included within the classification of fire,
extended coverage, vandalism, malicious mischief, flood (in the event same is
required by a lender having a lien on the Premises), and special extended perils
("all risk" as such term is used in the insurance industry). Said insurance
shall provide for payment of loss thereunder to Lessor or to the holders of
mortgages or deeds of trust on the Premises. The insuring party shall, in
addition, obtain and keep in force during the term of this Lease a policy of
rental value insurance covering a period of one year, with loss payable to
Lessor, which insurance shall also cover all real estate taxes and insurance
costs for said period. A stipulated value or agreed amount endorsement deleting
the coinsurance provision of the policy shall be procured with said insurance as
well as an automatic increase in insurance endorsement causing the increase in
annual property insurance coverage by 2% per quarter. If the insuring part shall
fail to procure and maintain said insurance the other party may, but shall not
be required to, procure and maintain the same, but at the expense of Lessee. If
such insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence, and Lessee shall be liable for such deductible
amount.
(b) If the Premises are part of a larger building, or if the Premises
are part of a group of buildings owned by Lessor which are adjacent to the
Premises, then Lessee shall pay for any increase in the property insurance of
such other building or buildings if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
(c) If the Lessor is the insuring party the Lessor will not insure
Lessee's fixtures, equipment or tenant improvements unless the tenant
improvements have become a part of the Premises under paragraph 7, hereof. But
if Lessee is the insuring part the Lessee shall insure its fixtures, equipment
and tenant improvements.
8.4 INSURANCE POLICIES. Insurance required hereunder shall be in companies
holding a "General Policyholders Rating" of at least B plus, or such other
rating as may be required by a lender having a lien on the Premises, as set
forth in the most current issue of "Best's Insurance Guide". The insuring party
shall deliver to the other party copies of policies of such insurance or
certificates evidencing the existence and amounts of such insurance with lost
payable clauses as required by this paragraph 8. No such policy shall be
cancelable or subject to reduction of coverage or other modification except
after thirty (30) days' prior written notice to Lessor. If Lessee is the
insuring party Lessee shall, at least thirty (30) days prior to the expiration
of such policies, furnish Lessor with renewals or "binders" thereof, or Lessor
may order such insurance and charge the cost thereof to Lessee, which amount
shall be payable by Lessee upon demand. Lessee shall not do or permit to be done
anything which shall invalidate the insurance policies referred to in Paragraph
8.3. If Lessee does or permits to be done anything which shall increase the cost
of the insurance policies referred to in Paragraph 8.3, then Lessee shall
forthwith upon Lessor's demand reimburse Lessor for any additional premiums
attributable to any act or omission or operation of Lessee causing such increase
in the cost of insurance. If Lessor is the insuring party, and if the insurance
policies maintained hereunder cover other improvements in addition to the
Premises, Lessor shall deliver to Lessee a written statement setting forth the
amount of any such insurance cost increase and showing in reasonable detail the
manner in which it has been computed.
8.5 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other
for loss or damage arising out of or incident to the perils insured against
under paragraph 8.3, which perils occur in, on or about the Premises, whether
due to the negligence of Lessor or Lessee or their agents, employees,
contractors and/or invitees. Lessee and Lessor shall, upon obtaining the
policies of insurance required hereunder, give notice to the insurance carrier
or carriers that the foregoing mutual waiver of subrogation is contained in this
Lease.
8.6 INDEMNITY. Lessee shall indemnify and hold harmless Lessor from and
against any and all claims arising from Lessee's use of the Premises, or from
the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and shall
further indemnify and hold harmless Lessor from and against any and all claims
arising from any breach or default in the performance of any obligation on
Lessee's part to be performed under the terms or this Lease, or arising from
any negligence of the Lessee, or any of Lessee's agents, contractors, or
employees, and from and against all costs, attorney's fees, expenses and
liabilities incurred in the defense of any such claim or any action or
proceeding brought thereon; and in case any action or proceeding be brought
against Lessor by reason of my such claim, Lessee upon notice from Lessor shall
defend the same at Lessee's expense by counsel satisfactory to Lessor. Lessee,
as a material part of the consideration to Lessor, hereby assumes all risk of
damage to property or injury to persons, in, upon or about the Premises arising
from any cause and Lessee hereby waives it claims in respect thereof against
Lessor.
8.7 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for damage to the goods, wares, merchandise or other property of
Lessee. Lessee's employees, invitees, customers, or my other person in or about
the Premises, nor shall Lessor be liable for injury to the person of Lessee.
Lessee's employees, agents or contractors, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures or from any other
cause, whether the said damage or injury results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places and regardless of whether the cause of
such damage or injury or the means of repairing the same is inaccessible to
Lessee, Lessor shall not be liable for any damages arising from any act or
neglect of any other tenant, if any, of the building in which the Premises are
located.
<PAGE>
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "Premises Partial Damage" shall herein mean damage or destruction
to the Premises to the extent that the cost of repair is less than 50% of the
then replacement cost of the Premises. "Premises Building Partial Damage" shall
herein mean damage or destruction to the building of which the Premises are a
part to the extent that the cost of repair is less than 50% of the then
replacement cost of such building as a whole.
(b) "Premises Total Destruction" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is 50% or more
of the then replacement cost of the Premises. "Premises Building Total
Destruction" shall herein mean damage or destruction to the building of which
the Premises are a part to the extent that the cost of repair is 50% or more of
the then replacement cost of such building as a whole.
(c) "Insured Loss" shall herein mean damage or destruction which was
caused by an event required to be covered by the insurance described in
paragraph 8.
9.2 PARTIAL DAMAGE -- INSURED LOSS. Subject to the provisions of paragraphs
9.4, 9.5 and 9.6, if at any time during the term of this Lease there is damage
which is an Insured Loss and which falls into the classification of Premises
Partial Damage or Premises Building Partial Damage, then Lessor shall, at
Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or
tenant improvements unless the same have become a part of the Premises pursuant
to Paragraph 7.5 hereof as soon as reasonably possible and this Lease shall
continue in full force and effect. Notwithstanding the above, if the Lessee is
the insuring party, and if the insurance proceeds received by Lessor are not
sufficient to effect such repair, Lessor shall give notice to Lessee of the
amount required in addition to the insurance proceeds to effect such repair.
Lessee shall contribute the required amount to Lessor within ten days after
Lessee has received notice from Lessor of the shortage in the insurance. When
Lessee shall contribute such amount to Lessor, Lessor shall make such repairs as
soon as reasonably possible and this Lease shall continue in full force and
effect. Lessee shall in no event have any right to reimbursement for any such
amounts so contributed.
9.3 PARTIAL DAMAGE -- UNINSURED LOSS. Subject to the provisions of
Paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease there
is damage which is not an Insured Loss and which falls within the classification
of Premises Partial Damage or Premises Building Partial Damage, unless caused by
a negligent or willful act of Lessee (in which event Lessee shall make the
repairs at Lessee's expense), Lessor may at Lessor's option either (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after the date of the occurrence of such
damage of Lessor's intention to cancel and terminate this Lease, as of the date
of the occurrence of such damage. In the event Lessor elects to give such notice
of Lessor's intention to cancel and 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 intention to repair such damage at Lessee's
expense, without reimbursement from Lessor, in which event this Lease shall
continue in full force and effect, and Lessee shall proceed to make such repairs
as soon as reasonably possible. If Lessee does not give such notice within such
10-day part this Lease shall be cancelled and terminated as of the date of the
occurrence of such damage.
9.4 TOTAL DESTRUCTION. If at any time during the term of this Lease there is
damage, whether or not an Insured Loss, (including destruction required by any
authorized public authority), which falls into the classification of Premises
Total Destruction or Premises Building Total Destruction, this Lease shall
automatically terminate as of the date of such total destruction.
9.5 DAMAGE NEAR END OF TERM.
(a) If at any time during the last six months of the term of this
Lease there is damage, whether or not an Insured Loss, which falls within the
classification of Premises Partial Damage, Lessor may at Lessor's option cancel
and terminate this Lease as of the date of occurrence of such damage by giving
written notice to Lessee of Lessor's election to do so within 30 days after the
date of occurrence of such damage.
(b) Notwithstanding paragraph 9.5(a), in the event that Lessee has
an option to extend or renew this Lease, and the time within which said option
may be exercised has not yet expired, Lessee shall exercise such option, if it
is to be exercised at all, no later than 20 days after the occurrence of an
Insured Loss falling within the classification of Premises Partial Damage during
the last six months of the term of this Lease. If Lessee duly exercises such
option during said 20 day period, 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 during said 20 day
period, then Lessor may at Lessor's option terminate and cancel this Lease as of
the expiration of said 20 day period by giving written notice to Lessee of
Lessor's election to do so within 10 days after the expiration of said 20 day
period, notwithstanding any term or provision in the grant of option to the
contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in paragraphs 9.2 or 9.3, and
Lessor or Lessee repairs or restores the Premises pursuant to the provisions of
this Paragraph 9, the rent payable hereunder for the period during which such
damage, repair 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 rent, if any, Lessee shall have no claim against Lessor for any damage
suffered by reason of any such damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence such repair or
restoration within 90 days after such obligations shall accrue, Lessee may at
Lessee's option cancel and terminate this Lease by giving Lessor written notice
of Lessee's election to do so at any time prior to the commencement of such
repair or restoration. In such event this Lease shall terminate as of the date
of such notice.
9.7 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall,
in addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.8 WAIVER. Lessor and Lessee waive the provisions of any statutes which
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessee shall pay the real property tax, as defined
in paragraph 10.2, applicable to the Premises during the term of this Lease.
All such payments shall be made at least ten (10) days prior to the delinquency
date of such payment. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes paid by Lessee shall
cover any period of time prior to or after the expiration of the term hereof,
Lessee's share of such taxes shall be equitably prorated to cover only the
period of time within the tax fiscal year during which this Lease shall be in
effect, and Lessor shall reimburse Lessee to the extent required. If Lessee
shall fail to pay any such taxes, Lessor shall have the right to pay the same,
in which case Lessee shall repay such amount to Lessor with Lessee's next rent
installment together with interest at the maximum rate then allowable by law.
10.2 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "Real
Property Tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Premises by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage or other improvement
district thereof, as against any legal or equitable interest of Lessor in the
Premises or in the real property of which the Premises are a part, as against
Lessor's right to rent or other income therefrom, and as against Lessor's
business of leasing the Premises. The term "real property tax" shall also
include any tax, fee, levy, assessment or charge (i) in substitution of,
partially or totally, any tax, fee, levy, assessment or charge hereinabove
included within the definition of "real property tax," or (ii) the nature of
which was hereinbefore included within the definition of "real property tax,"
or (iii) which is imposed for a service or right not charged prior to June 1,
1978, or, if previously charged, has been increased since June 1, 1978, or
(iv) which is imposed as a result of a transfer, either partial or total, of
Lessor's interest in the Premises or which is added to a tax or charge
hereinbefore included within the definition of real property tax by reason of
such transfer, or (v) which is imposed by reason of this transaction, any
modifications or changes hereto, or any transfers hereof.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the real property taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere. When possible,
Lessee shall cause said trade fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property of
Lessor.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee
within 10 days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor of
all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED. Lessees shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a breach of
this Lease.
12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, provided that said assignee assumes, in full, the
obligations of Lessee under this Lease. Any such assignment shall not, in any
way, affect or limit the liability of Lessee under the terms of this Lease even
if after such assignment or subletting the terms of this Lease are materially
changed or altered without the consent of Lessee, the consent of whom shall not
be necessary.
12.3 NO RELEASE OF LESSEE. Regardless of Lessor's consent, no subletting
or assignment shall release Lessee of Lessee's obligation or alter the primary
liability of Lessee to pay the rent and to perform all other obligations to be
performed by Lessee hereunder. The acceptance of rent by Lessor from any other
person shall not be deemed to be a waiver by Lessor of any provision hereof.
Consent to one assignment or subletting shall not be deemed consent to any
subsequent assignment or subletting. In the event of default by any assignee of
Lessee or any successor of Lessee, in the performance of any of the terms
hereof, Lessor may proceed directly against Lessee without the necessity of
exhausting remedies against said assignee. Lessor may consent to subsequent
assignments or subletting of this Lease or amendments or modifications to this
Lease with assignees.
Initials:
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of Lessee, without notifying Lessee, or any successor of Lessee, and without
obtaining its or their consent thereto and such action shall not relieve Lessee
of liability under this Lease.
12.4 ATTORNEY'S FEES. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable attorneys fees incurred in connection
therewith, such attorneys fees not to exceed $350.00 for each such request.
13. DEFAULTS; REMEDIES.
13.1 DEFAULTS. The occurrence of any one or more of the following events
shall constitute a material default and breach of this Lease by Lessee.
(a) The vacating or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three days after written notice thereof
from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to
Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice
to Pay Rent or Quit shall also constitute the notice required by this
subparagraph.
(c) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Lessee,
other than described in paragraph (b) above, where such failure shall continue
for a period of 30 days after written notice thereof from Lessor to Lessee;
provided, however, that it the nature of Lessee's default is such that more than
30 days are reasonably required for its cure, then Lessee shall not be deemed to
be in default if Losses commenced such cure within said 30-day period and
thereafter diligently prosecutes such cure to completion.
(d) (i) The making by Lessee of any general arrangement or assignment
for the benefit of creditors; (ii) Lessee becomes a "debtor" as defined in 11
U.S.C. (S) 101 or any successor statute thereto (unless, in the case
of a petition filed against Lessee, the same is dismissed within 60 days); (iii)
the appointment of a trustee or receiver to take possession of substantially all
of Lessee's assets located at the Premises or of Lessee's interest in this
Lease, where possession is not restored to Lessee within 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 30 days. Provided, however, in the event that
any provision of this paragraph 13.1(d) is contrary to any applicable law, such
provision shall be of no force or effect.
(e) The discovery by Lessor that any financial statement given to
Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any successor
in interest of Lessee or any guarantor of Lessee's obligation hereunder, and any
of them, was materially false.
13.2 REMEDIES. In the event of any such material default or breach by
Lessee, Lessor may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event Lessor
shall be entitled to recover from Lessee all damages incurred by Lessor by
reason of Lessee's default including, but not limited to, the cost of recovering
possession of the Premises; expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorney's fees, and any
real estate commission actually paid; the worth at the time of award by the
court having jurisdiction thereof of the amount by which the unpaid rent for the
balance of the term after the time of such award exceeds the amount of such
rental loss for the same part that Lessee proves could be reasonably avoided;
that portion of the leasing commission paid by Lessor pursuant to Paragraph 15
applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
Unpaid installments of rent and other unpaid monetary obligations of Lessee
under the terms of this Lease shall bear interest from the date due at the
maximum rate then allowable by law.
13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails
to perform obligations required of Lessor within a reasonable time, but in no
event later than thirty (30) days after written notice by Lessee to Lessor and
to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have theretofore been furnished to Lessee in
writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such 30-day period and thereafter
diligently prosecutes the same to completion.
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 on Lessor by the
terms of any mortgage or trust deed covering the Premises. Accordingly, if any
installment of rent or any other sum due from Lessee shall not be received by
Lessor or Lessor's designee within ten (10) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a late charge equal to 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
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 rent, then rent shall automatically become due and
payable quarterly in advance, rather than monthly, notwithstanding paragraph 4
or any other provision of this Lease to the contrary.
13.5 IMPOUNDS. In the event that a late charge is payable hereunder, whether
or not collected, for three (3) installments of rent or any other monetary
obligation of Lessee under the terms of this Lease, Lessee shall pay to Lessor,
if Lessor shall so request, in addition to any other payments required under
this Lease, a monthly advance installment, payable at the same time as the
monthly rent, as estimated by Lessor, for real property tax and insurance
expenses on the Premises which are payable by Lessee under the terms of this
Lease. Such fund shall be established to insure payment when due, before
delinquency, of any or all such real property taxes and insurance premiums. If
the amounts paid to Lessor by Lessee under the provisions of this paragraph are
insufficient to discharge the obligations of Lessee to pay such real property
taxes and insurance premiums as the same become due, Lessee shall pay to
Lessor, upon Lessor's demand, such additional sums necessary to pay such
obligations. All moneys paid to Lessor under this paragraph may be intermingled
with other moneys of Lessor and shall not bear interest. In the event of a
default in the obligations of Lessee to perform under this Lease, then any
balance remaining from funds paid to Lessor under the provisions of this
paragraph may, at the option of Lessor, be applied to the payment of any
monetary default of Lessee in lieu of being applied to the payment of real
property tax and insurance premiums.
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 10% of the floor area of the
building on the Premises, or more then 25% of the land area of the Premises
which is not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing only 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 or the Premises remaining, except that the rent shall be reduced in the
proportion that the floor area of the building taken bears to the total floor
area of the building situated on the Premises. No reduction of rent shall occur
if the only area taken is that which does not have a building located thereon.
Any award for the taking of all or any part of the Premises under the power of
eminent domain or any payment made under threat of the exercise of such power
shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any award for loss of or damage to Lessee's trade fixtures and removable
personal property. In the event that this Lease is not terminated by reason of
such condemnation, Lessor shall to the extent of severance damages received by
Lessor in connection with such condemnation, repair any damage to the Premises
caused by such condemnation except to the extent that Lessee has been reimbursed
therefore by the condemning authority. Lessee shall pay any amount in excess of
such severance damages required to complete such repair.
15. BROKER'S fEES.
(a) Upon execution of this Lease by both parties, Lessor shall pay to N/A
----
licensed real estate broker(s), a fee as set forth in a separate agreement
between Lessor and said broker(s), or in the event there is no separate
agreement between Lessor and said broker(s), the sum of $ , for brokerage
-----
service rendered by said broker(s) to Lessor in this transaction.
(b) Lessor further agrees that if Lessee exercises any Option as
defined in paragraph 39.1 of this Lease, which is granted to Lessee under this
Lease, or any subsequently granted option which is substantially similar to an
Option granted to Lessee under this Lease, or if Lessee acquires any rights to
the Premises or other premises described in this Lease which are substantially
similar to what Lessee would have acquired had an Option herein granted to
Lessee been exercised, or if Lessee remains in possession of the Premises after
the expiration of the term of this Lease after having failed to exercise an
Option, or if said broker(s) are the procuring cause of any other lease or sale
entered into between the parties pertaining to the Premises and/or any adjacent
property in which Lessor has an interest, then as to any of said transactions,
Lessor shall pay said broker(s) a fee in accordance with the schedule of said
broker(s) in effect at the time of execution of this Lease.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but
also on behalf of any person, corporation, association, or other entity having
an ownership interest in said Real Property or any part thereof, when such fee
is due hereunder. Any transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this Paragraph 15. Said broker shall be a
third party beneficiary of the provisions of this Paragraph 15.
16. ESTOPPEL CERTIFICATE.
(a) Lessee shall at any time upon not less than ten (10) days' prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance if any, and (ii)
acknowledging that there are not, to Lessee's knowledge, any uncured defaults on
the part of Lessor hereunder, or specifying such defaults if any are claimed.
Any such statement may be conclusively relied upon by any prospective purchaser
or encumbrancer of the Premises.
(b) At Lessor's option, Lessee's failure to deliver such statement
within such time shall be a material breach of this Lease or shall be
<PAGE>
conclusive upon Lessee (i) that this Lease is in full force and effect, without
modification except as may be represented by Lessor, (ii) that there are no
uncured defaults in Lessor's performance, and (iii) that not more than one
month's rent has been paid in advance or such failure may be considered by
Lessor as a default by Lessee under this Lease.
(c) If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee hereby agrees to deliver to any lender or purchaser
designated by Lessor such financial statements of Lessee as may be reasonably
required by such lender or purchaser. Such statements shall include the past
three years' financial statements of Lessee. All such financial statements shall
be received by Lessor and such lender or purchaser in confidence and shall be
used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the
owner or owners at the time in question of the fee title or a lessee's interest
in a ground lease of the Premises, and except as expressly provided in Paragraph
15, in the event of any transfer of such title or interest, Lessor herein named
(and in case of any subsequent transfers then the grantor) shall be relieved
from and after the date of such transfer of all liability as respects Lessor's
obligations thereafter to be performed, provided that any funds in the hands of
Lessor or the then grantor at the time of such transfer, in which Lessee has an
interest, shall be delivered to the grantee. The obligations contained in this
Lease to be performed by Lessor shall, subject as aforesaid, be binding on
Lessor's successors and assigns, only during their respective periods of
ownership.
18. SEVERABILITY. The invalidity of any provision of this Lease as determined by
a court of competent jurisdiction, shall in now way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum rate
then allowable by law from the date due. Payment of such interest shall not
excuse or cure any default by Lessee under this Lease, provided, however, that
interest shall not be payable on late charges incurred by Lessee nor on any
amounts upon which late charges are paid by Lessee.
20. TIME OF ESSENCE. Time is of the essence.
21. ADDITIONAL RENT. Any monetary obligations of Lessee to Lessor under the
terms of this Lease shall be deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
agreement or understanding pertaining to any such matter shall be effective.
This Lease may be modified in writing only, signed by the parties in interest at
the time of the modification. Except as otherwise stated in this Lease, Lessee
hereby acknowledges that neither the real estate broker listed in Paragraph 15
hereof nor any cooperating broker on this transaction nor the Lessor or any
employees or agents of any of said persons has made any oral or written
warranties or representations to Lessee relative to the condition or use by
Lessee of said Premises and Lessee acknowledges that Lessee assumes all
responsibility regarding the Occupational Safety Health Act, the legal use and
adaptability of the Premises and the compliance thereof with all applicable laws
and regulations in effect during the term of this Lease except as otherwise
specifically stated in this Lease.
23. NOTICES. Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery or by certified mail, and if given
personally or by mail, shall be deemed sufficiently given if addressed to Lessee
or to Lessor at the address noted below the signature of the respective parties,
as the case may be. Either party may by notice to the other specify a different
address for notice purposes except that upon Lessee's taking possession of the
Premises, the Premises shall constitute Lessee's address for notice purposes. A
copy of all notices required or permitted to be given to Lessor hereunder shall
be concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by notice to Lessee.
24. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the
Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, but all options and rights of
first refusal, if any, granted under the terms of this Lease shall be deemed
terminated and be of no further effect during said month to month tenancy.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee
shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions of
Paragraph 17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
wherein the Premises are located.
30. SUBORDINATION.
(a) This Lease, at Lessor's option, shall be subordinate to any ground
lease, mortgage, deed of trust, or any other hypothecation or security now or
hereafter placed upon the real property of which the Premises are a part and to
any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Lessee, this Lease shall be deemed prior to such mortgage,
deed of trust, or ground lease, whether this Lease is dated prior or subsequent
to the date of said mortgage, deed of trust or ground lease or the date of
recording thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to
execute such documents within 10 days after written demand shall constitute a
material default by Lessee hereunder, or, at Lessor's option, Lessor shall
execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee
does hereby make, constitute and irrevocably appoint Lessor as Lessee's
attorney-in-fact and in Lessee's name, place and stead, to execute such
documents in accordance with this paragraph 30(b).
31. ATTORNEY'S FEES. If either party or the broker named herein brings an
action to enforce the terms hereof or declare rights hereunder, the prevailing
party in any such action, on trial or appeal, shall be entitled to his
reasonable attorney's fees to be paid by the losing party as fixed by the court.
The provisions of this paragraph shall inure to the benefit of the broker named
herein who seeks to enforce a right hereunder.
32. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to enter
the Premises at reasonable times for the purpose of inspecting the same, showing
the same to prospective purchasers, lenders, or lessees, and making showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part as Lessor may deem necessary or desirable.
Lessor may at any time place on or about the Premises any ordinary "For Sale"
signs and Lessor may at any time during the last 120 days of the term hereof
place on or about the Premises any ordinary "For Lease" signs, all without
rebate of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises without Lessor's
prior written consent except that Lessee shall have the right, without the prior
permission of Lessor to place ordinary and usual for rent or sublet signs
thereon.
35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
36. CONSENTS. Except for paragraph 33 hereof, wherever in this Lease the
consent of one party is required to an act of the other party such consent
shall not be unreasonably withheld.
37. GUARNATOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
39. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Premises.
39. OPTIONS.
39.1 DEFINITION. As used in this paragraph the word "Options" has the following
meaning: (1) the right or option to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (2) the option or right of first refusal to lease the Premises or the
right of first offer to lease the Premises or the right of first refusal to
lease other property of Lessor or the right of first offer to lease other
property of Lessor; (3) the right or option 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 or option to purchase other property of
Lessor, or the right of first refusal to purchase other property of Lessor or
the right of first offer to purchase other property of Lessor.
<PAGE>
39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease are
personal to Lessee and may not be exercised or be assigned voluntarily or
involuntarily, by or to any person or entity other than Lessee, provided,
however, the Option may be exercised by or assigned to any Lessee Affiliate as
defined in paragraph 12.2 of this Lease. The Options herein granted to Lessee
are not assignable separate and apart from this Lease.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple options to
extend or renew this Lease a later option cannot be exercised unless the prior
option to extend or renew this Lease has been so exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary, (i) during the time
commencing from the date Lessor gives to Lessee a notice of default pursuant to
paragraph l3.l(b) or 13.1(c) and continuing until the default alleged in said
notice of default is cured, or (ii) during the period of time commencing on the
day after a monetary obligation to Lessor is due from Lessee and unpaid (without
any necessity for notice thereof to Lessee) continuing until the obligation is
paid, or (iii) at any time after an event of default described in paragraphs
13.1(a), 13.1(d), or 13.1(e) (without any necessity of Lessor to give notice of
such default to Lessee), or (iv) in the event that Lessor has given to Lessee
three or more notices of default under paragraph 13.1(b), where a late charge
has become payable under paragraph 13.4 for each of such defaults, or paragraph
13.l(c), whether or not the defaults are cured, during the 12 month prior to the
time that Lessee intends to exercise the subject Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a part of 30 days after such obligation becomes due (without any necessity
of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to
cure a default specified in paragraph 13.1(c) within 30 days after the date that
Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to
diligently prosecute said cure to completion, or (iii) Lessee commits a default
described in paragraph 13.1 (a), 13.1(d) or 13.1(e) (without any necessity of
Lessor to give notice of such default to Lessee), or (iv) Lessor gives to Lessee
three or more notices of default under paragraph 13.1(b), where a late charge
becomes payable under paragraph 13.4 for each such default, or paragraph
13.l(c), whether or not the defaults are cured.
40. MULTIPLE TENANT BUILDING. In the event that the Premises are part of a
larger building or group of buildings then Lessee agrees that it will abide
by, keep and observe all reasonable rules and regulations which Lessor may make
from time to time for the management, safety, care, and cleanliness of the
building and grounds, the parking of vehicles and the preservation of good
order therein as well as for the convenience of other occupants and tenants of
the building. The violations of any such rules and regulations shall be deemed
a material breach of this Lease by Lessee.
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 Lessee,
its agents and invitees from acts of third parties.
42. EASEMENTS. Lessor reserves to itself the right, from time to time, to
grant such easements, rights and dedications that Lessor deems necessary or
desirable, and to cause the recordation of Parcel Maps and restrictions, so
long as such easements, rights, dedications, Maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall
sign any of the aforementioned documents upon request of Lessor and failure to
do so shall constitute a material breach of this Lease.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one party to the other under the
provisions hereof, the party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment, and there shall survive the right
on the part of said party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said party
to pay such sum or any part thereof, said party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
44. AUTHORITY. If Lessee 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 behalf of said entity. If Lessee is a corporation, trust
or partnership, Lessee shall, within thirty (30) days after execution of this
Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
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. INSURING PARTY. The insuring party under this lease shall be the Channell
Commercial Corporation.
47. ADDENDUM. Attached hereto is an addendum or addenda containing
paragraphs 3.1 through 4.1 which constitutes a part of this Lease.
3.1 Lessor hereby grants to Lessee additional five (5) year renewal options
beyond the expiration date of December 31, 2005.
4.1 Rent increases three (3) years after the anniversary date of this lease
and each anniversary date thereafter an increase will be added to the Base
rental rate equal to the percentage increase stated in the cost of living index.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS
AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES
SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND
TAX CONSEQUENCES OF THIS LEASE.
The parties hereto have executed this Lease at the place on the dates
specified immediately adjacent to their respective signatures.
Executed at Temuecula, California
------------------------ ---------------------------------
on December 28, 1989 By /s/ William H. Channell
--------------------------------- --------------------------------
William H. Channell, Individual
Address 27040 Ynez Road By
---------------------------- --------------------------------
Temecula, California 92390
- ----------------------------------- "LESSOR" (Corporate seal)
Executed at Temecula, California Channell Commercial Corporation
------------------------ --------------------------------
on December 28, 1989 By /s/ William H. Channell
--------------------------------- --------------------------------
William H. Channell, Individual
Address 27040 Ynez Road By
---------------------------- --------------------------------
Temecula, California 92390
- ----------------------------------- "LESSEE" (Corporate Seal)
<PAGE>
AMENDMENT TO STANDARD INDUSTRIAL LEASE -
NET DATED DECEMBER 22, 1989 (THE "LEASE")
BY AND BETWEEN WILLIAM H. CHANNELL
("LESSOR") AND CHANNELL COMMERCIAL
CORPORATION ("LESSEE")
The following terms completely replace and supersede the Addendum
provision's labeled as "3.1" and "4.1" on page 6 of the Lease and no amounts
shall be payable by Lessee for any period by reason of the superseded paragraph
3.1.
3.1 Options to Extend. Lessor hereby grants to Lessee the option to
-----------------
extend the term of this Lease for two (2) additional sixty (60) month periods
commencing when the prior term expires (i.e. option periods of January 1, 2006
to December 31, 2010 and January 1, 2011 to December 31, 2015). Lessee shall
provide to Lessor written notice of exercise no later than the later of (i) six
(6) months prior to the date upon which such option period would commence or
(ii) thirty (30) days after Lessor gives written notice to Lessee that the
existing Term is scheduled to expire and that Lessor has not received any notice
of exercise (which notice from Lessor shall not be given more than twelve (12)
months prior to the date upon which such option period would commence). The rent
for the option periods shall be the same as for the initial term with C.P.I.
adjustments continuing as of each August 1st throughout the option periods. All
other terms of the Lease shall also continue in effect during the option
periods.
4.1 C.P.I. The initial base monthly rent of $54,181.50 payable pursuant
------
to paragraph 4 of the Lease shall be adjusted to reflect changes in the Consumer
Price Index from the base month of August, 1996 (the "Base Month"). The Consumer
Price Index of The Bureau of Labor Statistics of the U.S. Department of Labor
for all urban consumers for Los Angeles, Anaheim and Riverside, all items (1967
= 100), shall herein be referred to as the "C.P.I.". The base rent shall be
adjusted as of each August 1st during the term including during any option
terms. The initial base rent shall be multiplied by a fraction the numerator of
which shall be the C.P.I. of the calendar month which is 2 months prior to the
month for which the adjustment is to take effect (i.e. June of each year, the
first of which would be June 1997, two months prior to the first adjustment to
be effective as of August 1, 1997) and the denominator of which shall be the
C.P.I. of the calendar month of June 1996 (i.e. 2 months prior to the base month
of August 1996). The sum so calculated shall constitute the new monthly rental
for the 12 months following each such August 1 adjustment, provided, however,
-------- -------
that the new monthly rental shall in no event be less than 102%, nor more than
- ----
107%, of the monthly rental applicable during the 12-month period immediately
preceding such August 1 adjustment.
In the event the compilation and/or publication of the C.P.I. shall be
transferred to any other governmental department or bureau or agency or shall be
discontinued, then the index most nearly the same as the C.P.I. shall be used to
make such calculation. In the event that Lessor and Lessee cannot agree on such
alternative index, then the matter shall be submitted for decision to the
American Arbitration Association in accordance with the then rules of said
association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
Except as amended hereby, the Lease remains in full force and effect.
<PAGE>
Executed at: Lessor
------
Temecula, California
- -----------------------------
on May 29, 1996 By: /s/ William H. Channell
-------------------------- -------------------------------
William H. Channell
Address: 27040 Ynez Road
-------------------
Temecula, California 92390
- -----------------------------
Executed at: Lessee
------
Temecula, California Channell Commercial
- ----------------------------- -------------------
Corporation
-----------
on May 29, 1996 By: /s/ William H. Channell
-------------------------- -------------------------------
Address: 27040 Ynez Road By: William H. Channell
------------------- -------------------------------
Temecula, California 92390
- -----------------------------
<PAGE>
EXHIBIT 10.12
STANDARD INDUSTRIAL LEASE--NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. PARTIES. This Lease, dated, for reference purposes only, MAY 29, 1996 is made
by and between Channell Family Trust Dated October 6, 1987 (herein called
"Lessor") and Channell Commercial Corporation (herein called "Lessee").
2. PREMISES. Lessor hereby leases to Lessee and Lessee from Lessor for the
term, at the rental, and upon all of the conditions set forth herein, that
certain real property situated in the County of Riverside, State of California,
commonly known as 40761 County Center Drive, Temecula 92589 and described as
100,000 +/- Square Foot Office/Industrial building situated on 4.97 +/- acres of
land. Said real-property including the land and all improvements therein, is
herein called "the Premises".
3. TERM.
3.1 TERM. The term of this Lease shall be for Nine years and four months
commencing on August 1, 1996 and ending on December 31, 2005 unless sooner
terminated pursuant to any provision hereof.
3.2 DELAY IN POSSESSION. Notwithstanding said commencement date, if for any
reason Lessor cannot deliver possession of the Premises to Lessee on said
date, Lessor shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease or the obligations of Lessee
hereunder or extend the term hereof, but in such case, Lessee shall not be
obligated to pay rent until possession of the Premises is tendered to Lessee;
provided, however, that if Lessor shall not have delivered possession of the
Premises within sixty (60) days from said commencement date, Lessee may, at
Lessee's option, by notice in writing to Lessor within ten (10) days
thereafter, cancel this Lease, in which event the parties shall be discharged
from all obligations hereunder; provided 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.
3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said
commencement date, such occupancy shall be subject to all provisions hereof,
such occupancy shall not advance the termination date, and Lessee shall pay
rent for such period, at the initial monthly rates set forth below.
4. RENT. Lessee shall pay to Lessor as rent for the Premises, monthly payments
of $35,000, in advance, on the 1st day of each month of the term hereof. Lessee
shall pay Lessor upon the execution hereof $105,000 as rent for 1st month plus
security deposit. Rent for any period during the term hereof which is for less
than one month shall be a pro rata portion of the monthly installment. Rent
shall be payable in lawful money of the United States to Lessor at the address
stated herein or to such other persons or at such other places as Lessor may
designate in writing.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
$70,000 as security for Lessee's faithful performance of Lessee's obligations
hereunder. If Lessee fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Lease, Lessor may use,
apply or retain all or any portion of said deposit for the payment of any rent
or other charge in default or for the payment of any other sum to which Lessor
may become obligated by reason of Lessee's default, or to compensate Lessor for
any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies
all or any portion of said deposit, Lessee shall within ten (10) days after
written demand therefor deposit cash with Lessor in an amount sufficient to
restore said deposit to the full amount herein above stated and Lessee's failure
to do so shall be a material breach of this Lease. If the monthly rent shall,
from time to time, increase during the term of this Lease, Lessee shall
thereupon deposit with Lessor additional security deposit so that the amount of
security deposit held by Lessor shall at all times bear the same proportion to
current rent as the original security deposit bears to the original monthly rent
set forth in paragraph 4 hereof. Lessor shall not be required to keep said
deposit separate from its general accounts. If Lessee performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not theretofore
been applied by Lessor, shall be returned, without payment of interest or other
increment for its use, to Lessee (or, at Lessor's option, to the last assignee,
if any, of Lessee's interest hereunder) at the expiration of the term hereof,
and after Lessee has vacated the Premises. No trust relationship is created
herein between Lessor and Lessee with respect to said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for manufacturing,
assembly, warehousing of plastic injected products, as well as corporate
offices, or any other use which is reasonably comparable and for no other
purpose.
6.2 COMPLIANCE WITH LAW.
(a) Lessor warrants to Lessee that the Premises, in its state existing
on the date that the Lease term commences, but without regard to the use for
which Lessee will use the Premises, does not violate any covenants or
restrictions of record, or any applicable building code, regulation or ordinance
in effect on such Lease term commencement date. In the event it is determined
that this warranty has been violated, then it shall be the obligation of the
Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and
expense, rectify any such violation. In the event Lessee does not give to Lessor
written notice of the violation of this warranty within six months from the date
that the Lease term commences, the correction of same shall be the obligation of
the Lessee at Lessee's sole cost. The warranty contained in this paragraph
6.2(a) shall be of no force or effect if, prior to the date of this Lease,
Lessee was the owner or occupant of the Premises, and, in such event, Lessee
shall correct any such violation at Lessee's sole cost.
(b) Except as provided in paragraph 6.2(a), Lessee shall, at Lessee's
expense, comply promptly with all applicable statutes, ordinances, rules,
regulations, orders, covenants and restrictions of record, and requirements in
effect during the term or any part of the term hereof, regulating the use by
Lessee of the Premises. Lessee shall not use nor permit the use of the Premises
in any manner that will tend to create waste or a nuisance or, it there shall be
more than one tenant in the building containing the Premises, shall tend to
disturb such other tenants.
6.3 CONDITION OF PREMISES.
(a) Lessor shall deliver the Premises to Lessee clean and tree of
debris on Lease commencement date (unless Lessee is already in possession) and
Lessor further warrants to Lessee that the plumbing, lighting, air
conditioning, heating, and loading doors in the Premises shall be in good
operating condition on the Lease commencement date. In the event that it is
determined that this warranty has been violated, then it shall be the obligation
of Lessor, after receipt of written notice from Lessee setting forth with
specificity the nature of the violation, to promptly, at Lessor's sole cost,
rectify such violation. Lessee's failure to give such written notice to Lessor
within thirty (30) days after the Lease commencement date shall cause the
conclusive presumption that Lessor has complied with all of Lessor's obligations
hereunder. The warranty contained in this paragraph 6.3(a) shall be of no force
or effect if prior to the date of this Lease, Lessee was the owner or occupant
of the Premises.
(b) Except as otherwise provided in this Lease, Lessee hereby accepts
the Premises in their condition existing as of the Lease commencement date or
the date that Lessee takes possession at the Premises, whichever is earlier,
subject to all applicable zoning, municipal county and state laws, ordinances
and regulations governing and regulating the use of the Premises, and any
covenants or restrictions of record, and accepts this Lease subject thereto and
to all matters disclosed thereby and by any exhibits attached hereto. Lessee
acknowledges that neither Lessor nor Lessor's agent has made any representation
or warranty as to the present or future suitability of the Premises for the
conduct of Lessee's business.
7. MAINTENANCE, REPAIRS AND ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS. Lessee shall keep in good order, condition and
repair the Premises and every part thereof, structural and nonstructural,
(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 plumbing, heating, air
conditioning, (Lessee shall procure and maintain, at Lessee's expense, an air
conditioning system maintenance contract) ventilating, electrical, lighting
facilities and equipment within the Premises, fixtures, walls (interior and
exterior), foundations, ceilings, roofs (interior and exterior), floors,
windows, doors, plate glass and skylights located within the Premises, and all
landscaping, driveways, parking lots, fences and signs located on the Premises
and sidewalks and parkways adjacent to the Premises.
7.2 SURRENDER. On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same condition
as when received, ordinary wear and tear excepted, clean and free of debris.
Lessee shall repair any damage to the Premises occasioned
<PAGE>
by the installation or removal of Lessee's trade fixtures, furnishings and
equipment. Notwithstanding anything to the contrary otherwise stated in this
Lease, Lessee shall leave the air lines, power panels, electrical distribution
systems, lighting fixtures, space heaters, air conditioning, plumbing and
fencing on the premises in good operating condition.
7.3 LESSOR'S RIGHTS. If Lessee fails to perform Lessee's obligations under
this Paragraph 7, or under any other paragraph of this Lease, Lessor may at its
option (but shall not be required to) enter upon the Premises after ten (10)
days' prior 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 same in good order, condition and repair, and the cost
thereof together with interest thereon at the maximum rate then allowable by law
shall become due and payable as additional rental to Lessor together with
Lessee's next rental installment.
7.4 LESSOR'S OBLIGATIONS. Except for the obligations of Lessor under
Paragraph 6.2(a) and 6.3(a) (relating to Lessor's warranty), Paragraph 9
(relating to destruction of the Premises) and under Paragraph 14 (relating to
condemnation of the Premises), it is intended by the parties hereto that Lessor
have no obligation, in any manner whatsoever, to repair and maintain the
Premises nor the building located thereon nor the equipment therein, whether
structural or non structural, all of which obligations are intended to be that
of the Lessee under Paragraph 7.1 hereof. Lessee expressly waives the benefit
of any statute now or hereinafter in effect which would otherwise afford Lessee
the right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the premises in good order, condition and
repair.
7.5 ALTERATIONS AND ADDITIONS
(a) Lessee shall not, without Lessor's prior written consent make any
alterations, improvements, additions, or Utility Installations in, on or about
the Premises, except for non structural alterations not exceeding $2,500 in
cumulative costs during the term of this Lease. In any event, whether or not in
excess of $2,500 in cumulative cost, Lessee shall make no change or alteration
to the exterior of the Premises nor the exterior of the building(s) on the
Premises without Lessor's prior written consent. As used in this Paragraph 7.5
the term "Utility Installation" shall mean carpeting, window coverings, air
lines, power panels, electrical distribution systems, lighting fixtures, space
heaters, air conditioning, plumbing and fencing. Lessor may require that Lessee
remove any or all of said alterations, improvements, additions or Utility
Installations at the expiration of the term, and restore the Premises to their
prior condition. Lessor may require Lessee to provide Lessor, at Lessee's sole
cost and expense, a lien and completion bond in an amount equal to one and
one-half times the estimated cost of such improvements, to insure Lessor
against any liability for mechanic's and materialmen's liens and to insure
completion of the work. Should Lessee make any alterations, improvements,
additions or Utility Installations without the prior approval of Lessor, Lessor
may require that Lessee remove any or all of the same.
(b) Any alterations, improvements, additions or Utility Installations
in, or about the Premises that Lessee shall desire to make and which requires
the consent of the Lessor shall be presented to Lessor in written form, with
proposed detailed plans. If Lessor shall give its consent, the consent shall be
deemed conditioned upon Lessee acquiring permit to do so from appropriate
governmental agencies, the furnishing of a copy thereof to Lessor prior to the
commencement of the work and the compliance by Lessee of all conditions of said
permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in 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 itself and Lessor against the same and shall
pay and satisfy any such adverse judgment that maybe rendered thereon before the
enforcement thereof against the Lessor or the Premises, upon the condition that
if Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to such contested lien claim or demand
indemnifying Lessor against liability for the same and holding the Premises 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.
(d) Unless Lessor requires their removal, as set forth in Paragraph
7.5(a), all alterations, improvements, additions and Utility Installations
(whether or not such Utility Installations constitute trade fixtures of Lessee),
which may be made on the Premises, shall become the property of Lessor and
remain upon and be surrendered with the Premises at the expiration of the term.
Notwithstanding the provisions or this Paragraph 7.5(d), Lessee's machinery and
equipment, other than that which is affixed to the Premises so that it cannot be
removed without material damage to the Premises, shall remain the property of
Lessee and may be removed by Lessee subject to the provisions of Paragraph 7.2.
8. INSURANCE INDEMNITY.
8.1 INSURING PARTY. As used in this Paragraph 8, the term "insuring party"
shall mean the party who has the obligation to obtain the Property Insurance
required hereunder. The insuring party shall be designated in Paragraph 46
hereof. In the event Lessor is the insuring party, Lessor shall also maintain
the liability insurance described in paragraph 8.2 hereof, in addition to, and
not in lieu of, the insurance required to be maintained by Lessee under said
paragraph 8.2, but Lessor shall not be required to name Lessee as an additional
insured on such policy. Whether the insuring party is the Lessor or the Lessee,
Lessee shall, as additional rent for the Premises, pay the cost of all insurance
required hereunder, except for that portion of the cost attributable to Lessor's
liability insurance coverage in excess of $1,000,000 per occurrence. If Lessor
is the insuring party Lessee shall, within ten (10) days following demand by
Lessor, reimburse Lessor for the cost of the insurance so obtained.
8.2 LIABILITY INSURANCE. Lessee shall, at Lessee's expense obtain and keep
in force during the term of this Lease a policy of Combined Single Limit, Bodily
Injury and Property Damage insurance insuring Lessor and Lessee against any
liability arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be a combined
single limit policy in an amount not less than $500,000 per occurrence. The
policy shall insure performance by Lessee of the indemnity provisions of this
Paragraph 8. The limits of said insurance shall not, however, limit the
liability of Lessee hereunder.
8.3 PROPERTY INSURANCE.
(a) The insuring party shall obtain and keep in force during the term
of this Lease a policy or policies of insurance covering loss or damage to the
Premises, in the amount of the full replacement value thereof, as the same may
exist from time to time, which replacement value is now $5,000,000.00, but in no
event less than the total amount required by lenders having liens on the
Premises, against all perils included within the classification of fire,
extended coverage, vandalism, malicious mischief, flood (in the event same is
required by a lender having a lien on the Premises), and special extended perils
("all risk" as such term is used in the insurance industry). Said insurance
shall provide for payment of loss thereunder to Lessor or to the holders of
mortgages or deeds of trust on the Premises. The insuring party shall, in
addition, obtain and keep in force during the term of this Lease a policy of
rental value insurance covering a period of one year, with loss payable to
Lessor, which insurance shall also cover all real estate taxes and insurance
costs for said period. A stipulated value or agreed amount endorsement deleting
the coinsurance provision of the policy shall be procured with said insurance as
well as an automatic increase in insurance endorsement causing the increase in
annual property insurance coverage by 2% per quarter. If the insuring part shall
fail to procure and maintain said insurance the other party may, but shall not
be required to, procure and maintain the same, but at the expense of Lessee. If
such insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence, and Lessee shall be liable for such deductible
amount.
(b) If the Premises are part of a larger building, or if the Premises
are part of a group of buildings owned by Lessor which are adjacent to the
Premises, then Lessee shall pay for any increase in the property insurance of
such other building or buildings if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
(c) If the Lessor is the insuring party the Lessor will not insure
Lessee's fixtures, equipment or tenant improvements unless the tenant
improvements have become a part of the Premises under paragraph 7, hereof. But
if Lessee is the insuring part the Lessee shall insure its fixtures, equipment
and tenant improvements.
8.4 INSURANCE POLICIES. Insurance required hereunder shall be in companies
holding a "General Policyholders Rating" of at least B plus, or such other
rating as may be required by a lender having a lien on the Premises, as set
forth in the most current issue of "Best's Insurance Guide". The insuring party
shall deliver to the other party copies of policies of such insurance or
certificates evidencing the existence and amounts of such insurance with lost
payable clauses as required by this paragraph 8. No such policy shall be
cancelable or subject to reduction of coverage or other modification except
after thirty (30) days' prior written notice to Lessor. If Lessee is the
insuring party Lessee shall, at least thirty (30) days prior to the expiration
of such policies, furnish Lessor with renewals or "binders" thereof, or Lessor
may order such insurance and charge the cost thereof to Lessee, which amount
shall be payable by Lessee upon demand. Lessee shall not do or permit to be done
anything which shall invalidate the insurance policies referred to in Paragraph
8.3. If Lessee does or permits to be done anything which shall increase the cost
of the insurance policies referred to in Paragraph 8.3, then Lessee shall
forthwith upon Lessor's demand reimburse Lessor for any additional premiums
attributable to any act or omission or operation of Lessee causing such increase
in the cost of insurance. If Lessor is the insuring party, and if the insurance
policies maintained hereunder cover other improvements in addition to the
Premises, Lessor shall deliver to Lessee a written statement setting forth the
amount of any such insurance cost increase and showing in reasonable detail the
manner in which it has been computed.
8.5 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other
for loss or damage arising out of or incident to the perils insured against
under paragraph 8.3, which perils occur in, on or about the Premises, whether
due to the negligence of Lessor or Lessee or their agents, employees,
contractors and/or invitees. Lessee and Lessor shall, upon obtaining the
policies of insurance required hereunder, give notice to the insurance carrier
or carriers that the foregoing mutual waiver of subrogation is contained in this
Lease.
8.6 INDEMNITY. Lessee shall indemnify and hold harmless Lessor from and
against any and all claims arising from Lessee's use of the Premises, or from
the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and shall
further indemnify and hold harmless Lessor from and against any and all claims
arising from any breach or default in the performance of any obligation on
Lessee's part to be performed under the terms or this Lease, or arising from
any negligence of the Lessee, or any of Lessee's agents, contractors, or
employees, and from and against all costs, attorney's fees, expenses and
liabilities incurred in the defense of any such claim or any action or
proceeding brought thereon; and in case any action or proceeding be brought
against Lessor by reason of my such claim, Lessee upon notice from Lessor shall
defend the same at Lessee's expense by counsel satisfactory to Lessor. Lessee,
as a material part of the consideration to Lessor, hereby assumes all risk of
damage to property or injury to persons, in, upon or about the Premises arising
from any cause and Lessee hereby waives it claims in respect thereof against
Lessor.
8.7 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for damage to the goods, wares, merchandise or other property of
Lessee. Lessee's employees, invitees, customers, or my other person in or about
the Premises, nor shall Lessor be liable for injury to the person of Lessee.
Lessee's employees, agents or contractors, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures or from any other
cause, whether the said damage or injury results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places and regardless of whether the cause of
such damage or injury or the means of repairing the same is inaccessible to
Lessee, Lessor shall not be liable for any damages arising from any act or
neglect of any other tenant, if any, of the building in which the Premises are
located.
<PAGE>
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "Premises Partial Damage" shall herein mean damage or destruction
to the Premises to the extent that the cost of repair is less than 50% of the
then replacement cost of the Premises. "Premises Building Partial Damage" shall
herein mean damage or destruction to the building of which the Premises are a
part to the extent that the cost of repair is less than 50% of the then
replacement cost of such building as a whole.
(b) "Premises Total Destruction" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is 50% or more
of the then replacement cost of the Premises. "Premises Building Total
Destruction" shall herein mean damage or destruction to the building of which
the Premises are a part to the extent that the cost of repair is 50% or more of
the then replacement cost of such building as a whole.
(c) "Insured Loss" shall herein mean damage or destruction which was
caused by an event required to be covered by the insurance described in
paragraph 8.
9.2 PARTIAL DAMAGE -- INSURED LOSS. Subject to the provisions of
paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease there
is damage which is an Insured Loss and which falls into the classification of
Premises Partial Damage or Premises Building Partial Damage, then Lessor shall,
at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or
tenant improvements unless the same have become a part of the Premises pursuant
to Paragraph 7.5 hereof as soon as reasonably possible and this Lease shall
continue in full force and effect. Notwithstanding the above, if the Lessee is
the insuring party, and if the insurance proceeds received by Lessor are not
sufficient to effect such repair, Lessor shall give notice to Lessee of the
amount required in addition to the insurance proceeds to effect such repair.
Lessee shall contribute the required amount to Lessor within ten days after
Lessee has received notice from Lessor of the shortage in the insurance. When
Lessee shall contribute such amount to Lessor, Lessor shall make such repairs as
soon as reasonably possible and this Lease shall continue in full force and
effect. Lessee shall in no event have any right to reimbursement for any such
amounts so contributed.
9.3 PARTIAL DAMAGE -- UNINSURED LOSS. Subject to the provisions of
Paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease there
is damage which is not an Insured Loss and which falls within the classification
of Premises Partial Damage or Premises Building Partial Damage, unless caused by
a negligent or willful act of Lessee (in which event Lessee shall make the
repairs at Lessee's expense), Lessor may at Lessor's option either (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after the date of the occurrence of such
damage of Lessor's intention to cancel and terminate this Lease, as of the date
of the occurrence of such damage. In the event Lessor elects to give such notice
of Lessor's intention to cancel and 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 intention to repair such damage at Lessee's
expense, without reimbursement from Lessor, in which event this Lease shall
continue in full force and effect, and Lessee shall proceed to make such repairs
as soon as reasonably possible. If Lessee does not give such notice within such
10-day part this Lease shall be cancelled and terminated as of the date of the
occurrence of such damage.
9.4 TOTAL DESTRUCTION. If at any time during the term of this Lease there
is damage, whether or not an Insured Loss, (including destruction required by
any authorized public authority), which falls into the classification of
Premises Total Destruction or Premises Building Total Destruction, this Lease
shall automatically terminate as of the date of such total destruction.
9.5 DAMAGE NEAR END OF TERM.
(a) If at any time during the last six months of the term of this
Lease there is damage, whether or not an Insured Loss, which falls within the
classification of Premises Partial Damage, Lessor may at Lessor's option cancel
and terminate this Lease as of the date of occurrence of such damage by giving
written notice to Lessee of Lessor's election to do so within 30 days after the
date of occurrence of such damage.
(b) Notwithstanding paragraph 9.5(a), in the event that Lessee has
an option to extend or renew this Lease, and the time within which said option
may be exercised has not yet expired, Lessee shall exercise such option, if it
is to be exercised at all, no later than 20 days after the occurrence of an
Insured Loss falling within the classification of Premises Partial Damage during
the last six months of the term of this Lease. If Lessee duly exercises such
option during said 20 day period, 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 during said 20 day
period, then Lessor may at Lessor's option terminate and cancel this Lease as of
the expiration of said 20 day period by giving written notice to Lessee of
Lessor's election to do so within 10 days after the expiration of said 20 day
period, notwithstanding any term or provision in the grant of option to the
contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in paragraphs 9.2 or 9.3, and
Lessor or Lessee repairs or restores the Premises pursuant to the provisions of
this Paragraph 9, the rent payable hereunder for the period during which such
damage, repair 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 rent, if any, Lessee shall have no claim against Lessor for any damage
suffered by reason of any such damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence such repair or
restoration within 90 days after such obligations shall accrue, Lessee may at
Lessee's option cancel and terminate this Lease by giving Lessor written notice
of Lessee's election to do so at any time prior to the commencement of such
repair or restoration. In such event this Lease shall terminate as of the date
of such notice.
9.7 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall,
in addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.8 WAIVER. Lessor and Lessee waive the provisions of any statutes which
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessee shall pay the real property tax, as defined
in paragraph 10.2, applicable to the Premises during the term of this Lease.
All such payments shall be made at least ten (10) days prior to the delinquency
date of such payment. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes paid by Lessee shall
cover any period of time prior to or after the expiration of the term hereof,
Lessee's share of such taxes shall be equitably prorated to cover only the
period of time within the tax fiscal year during which this Lease shall be in
effect, and Lessor shall reimburse Lessee to the extent required. If Lessee
shall fail to pay any such taxes, Lessor shall have the right to pay the same,
in which case Lessee shall repay such amount to Lessor with Lessee's next rent
installment together with interest at the maximum rate then allowable by law.
10.2 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "Real
Property Tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Premises by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage or other improvement
district thereof, as against any legal or equitable interest of Lessor in the
Premises or in the real property of which the Premises are a part, as against
Lessor's right to rent or other income therefrom, and as against Lessor's
business of leasing the Premises. The term "real property tax" shall also
include any tax, fee, levy, assessment or charge (i) in substitution of,
partially or totally, any tax, fee, levy, assessment or charge hereinabove
included within the definition of "real property tax," or (ii) the nature of
which was hereinbefore included within the definition of "real property tax,"
or (iii) which is imposed for a service or right not charged prior to June 1,
1978, or, if previously charged, has been increased since June 1, 1978, or
(iv) which is imposed as a result of a transfer, either partial or total, of
Lessor's interest in the Premises or which is added to a tax or charge
hereinbefore included within the definition of real property tax by reason of
such transfer, or (v) which is imposed by reason of this transaction, any
modifications or changes hereto, or any transfers hereof.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the real property taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere. When possible,
Lessee shall cause said trade fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property of
Lessor.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee
within 10 days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor of
all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED. Lessees shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a breach of
this Lease.
12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, provided that said assignee assumes, in full, the
obligations of Lessee under this Lease. Any such assignment shall not, in any
way, affect or limit the liability of Lessee under the terms of this Lease even
if after such assignment or subletting the terms of this Lease are materially
changed or altered without the consent of Lessee, the consent of whom shall not
be necessary.
12.3 NO RELEASE OF LESSEE. Regardless of Lessor's consent, no subletting
or assignment shall release Lessee of Lessee's obligation or alter the primary
liability of Lessee to pay the rent and to perform all other obligations to be
performed by Lessee hereunder. The acceptance of rent by Lessor from any other
person shall not be deemed to be a waiver by Lessor of any provision hereof.
Consent to one assignment or subletting shall not be deemed consent to any
subsequent assignment or subletting. In the event of default by any assignee of
Lessee or any successor of Lessee, in the performance of any of the terms
hereof, Lessor may proceed directly against Lessee without the necessity of
exhausting remedies against said assignee. Lessor may consent to subsequent
assignments or subletting of this Lease or amendments or modifications to this
Lease with assignees.
Initials:
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NET -3-
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<PAGE>
of Lessee, without notifying Lessee, or any successor of Lessee, and without
obtaining its or their consent thereto and such action shall not relieve Lessee
of liability under this Lease.
12.4 ATTORNEY'S FEES. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable attorneys fees incurred in connection
therewith, such attorneys fees not to exceed $350.00 for each such request.
13. DEFAULTS; REMEDIES.
13.1 DEFAULTS. The occurrence of any one or more of the following events
shall constitute a material default and breach of this Lease by Lessee.
(a) The vacating or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three days after written notice thereof
from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to
Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice
to Pay Rent or Quit shall also constitute the notice required by this
subparagraph.
(c) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Lessee,
other than described in paragraph (b) above, where such failure shall continue
for a period of 30 days after written notice thereof from Lessor to Lessee;
provided, however, that it the nature of Lessee's default is such that more than
30 days are reasonably required for its cure, then Lessee shall not be deemed to
be in default if Losses commenced such cure within said 30-day period and
thereafter diligently prosecutes such cure to completion.
(d) (i) The making by Lessee of any general arrangement or assignment
for the benefit of creditors; (ii) Lessee becomes a "debtor" as defined in 11
U.S.C. (S) 101 or any successor statute thereto (unless, in the case
of a petition filed against Lessee, the same is dismissed within 60 days); (iii)
the appointment of a trustee or receiver to take possession of substantially all
of Lessee's assets located at the Premises or of Lessee's interest in this
Lease, where possession is not restored to Lessee within 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 30 days. Provided, however, in the event that
any provision of this paragraph 13.1(d) is contrary to any applicable law, such
provision shall be of no force or effect.
(e) The discovery by Lessor that any financial statement given to
Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any successor
in interest of Lessee or any guarantor of Lessee's obligation hereunder, and any
of them, was materially false.
13.2 REMEDIES. In the event of any such material default or breach by
Lessee, Lessor may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event Lessor
shall be entitled to recover from Lessee all damages incurred by Lessor by
reason of Lessee's default including, but not limited to, the cost of recovering
possession of the Premises; expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorney's fees, and any
real estate commission actually paid; the worth at the time of award by the
court having jurisdiction thereof of the amount by which the unpaid rent for the
balance of the term after the time of such award exceeds the amount of such
rental loss for the same part that Lessee proves could be reasonably avoided;
that portion of the leasing commission paid by Lessor pursuant to Paragraph 15
applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
Unpaid installments of rent and other unpaid monetary obligations of Lessee
under the terms of this Lease shall bear interest from the date due at the
maximum rate then allowable by law.
13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails
to perform obligations required of Lessor within a reasonable time, but in no
event later than thirty (30) days after written notice by Lessee to Lessor and
to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have theretofore been furnished to Lessee in
writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such 30-day period and thereafter
diligently prosecutes the same to completion.
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 on Lessor by the
terms of any mortgage or trust deed covering the Premises. Accordingly, if any
installment of rent or any other sum due from Lessee shall not be received by
Lessor or Lessor's designee within ten (10) days after such amount shall be due,
then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a
late charge equal to 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 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 rent, then rent shall automatically become due and payable
quarterly in advance, rather than monthly, notwithstanding paragraph 4 or any
other provision of this Lease to the contrary.
13.5 IMPOUNDS. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) installments of rent or any other
monetary obligation of Lessee under the terms of this Lease, Lessee shall pay to
Lessor, if Lessor shall so request, in addition to any other payments required
under this Lease, a monthly advance installment, payable at the same time as the
monthly rent, as estimated by Lessor, for real property tax and insurance
expenses on the Premises which are payable by Lessee under the terms of this
Lease. Such fund shall be established to insure payment when due, before
delinquency, of any or all such real property taxes and insurance premiums. If
the amounts paid to Lessor by Lessee under the provisions of this paragraph are
insufficient to discharge the obligations of Lessee to pay such real property
taxes and insurance premiums as the same become due, Lessee shall pay to Lessor,
upon Lessor's demand, such additional sums necessary to pay such obligations.
All moneys paid to Lessor under this paragraph may be intermingled with other
moneys of Lessor and shall not bear interest. In the event of a default in the
obligations of Lessee to perform under this Lease, then any balance remaining
from funds paid to Lessor under the provisions of this paragraph may, at the
option of Lessor, be applied to the payment of any monetary default of Lessee in
lieu of being applied to the payment of real property tax and insurance
premiums.
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 10% of the floor area of the
building on the Premises, or more then 25% of the land area of the Premises
which is not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing only 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 or the Premises remaining, except that the rent shall be reduced in the
proportion that the floor area of the building taken bears to the total floor
area of the building situated on the Premises. No reduction of rent shall occur
if the only area taken is that which does not have a building located thereon.
Any award for the taking of all or any part of the Premises under the power of
eminent domain or any payment made under threat of the exercise of such power
shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any award for loss of or damage to Lessee's trade fixtures and removable
personal property. In the event that this Lease is not terminated by reason of
such condemnation, Lessor shall to the extent of severance damages received by
Lessor in connection with such condemnation, repair any damage to the Premises
caused by such condemnation except to the extent that Lessee has been reimbursed
therefore by the condemning authority. Lessee shall pay any amount in excess of
such severance damages required to complete such repair.
15. BROKER'S fEES.
(a) Upon execution of this Lease by both parties, Lessor shall pay to
N/A licensed real estate broker(s), a fee as set forth in a separate agreement
- ---
between Lessor and said broker(s), or in the event there is no separate
agreement between Lessor and said broker(s), the sum of $ , for brokerage
-----
service rendered by said broker(s) to Lessor in this transaction.
(b) Lessor further agrees that if Lessee exercises any Option as
defined in paragraph 39.1 of this Lease, which is granted to Lessee under this
Lease, or any subsequently granted option which is substantially similar to an
Option granted to Lessee under this Lease, or if Lessee acquires any rights to
the Premises or other premises described in this Lease which are substantially
similar to what Lessee would have acquired had an Option herein granted to
Lessee been exercised, or if Lessee remains in possession of the Premises after
the expiration of the term of this Lease after having failed to exercise an
Option, or if said broker(s) are the procuring cause of any other lease or sale
entered into between the parties pertaining to the Premises and/or any adjacent
property in which Lessor has an interest, then as to any of said transactions,
Lessor shall pay said broker(s) a fee in accordance with the schedule of said
broker(s) in effect at the time of execution of this Lease.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but
also on behalf of any person, corporation, association, or other entity having
an ownership interest in said Real Property or any part thereof, when such fee
is due hereunder. Any transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this Paragraph 15. Said broker shall be a
third party beneficiary of the provisions of this Paragraph 15.
16. ESTOPPEL CERTIFICATE.
(a) Lessee shall at any time upon not less than ten (10) days' prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance if any, and (ii)
acknowledging that there are not, to Lessee's knowledge, any uncured defaults on
the part of Lessor hereunder, or specifying such defaults if any are claimed.
Any such statement may be conclusively relied upon by any prospective purchaser
or encumbrancer of the Premises.
(b) At Lessor's option, Lessee's failure to deliver such statement
within such time shall be a material breach of this Lease or shall be
<PAGE>
conclusive upon Lessee (i) that this Lease is in full force and effect, without
modification except as may be represented by Lessor, (ii) that there are no
uncured defaults in Lessor's performance, and (iii) that not more than one
month's rent has been paid in advance or such failure may be considered by
Lessor as a default by Lessee under this Lease.
(c) If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee hereby agrees to deliver to any lender or purchaser
designated by Lessor such financial statements of Lessee as may be reasonably
required by such lender or purchaser. Such statements shall include the past
three years' financial statements of Lessee. All such financial statements shall
be received by Lessor and such lender or purchaser in confidence and shall be
used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the
owner or owners at the time in question of the fee title or a lessee's interest
in a ground lease of the Premises, and except as expressly provided in Paragraph
15, in the event of any transfer of such title or interest, Lessor herein named
(and in case of any subsequent transfers then the grantor) shall be relieved
from and after the date of such transfer of all liability as respects Lessor's
obligations thereafter to be performed, provided that any funds in the hands of
Lessor or the then grantor at the time of such transfer, in which Lessee has an
interest, shall be delivered to the grantee. The obligations contained in this
Lease to be performed by Lessor shall, subject as aforesaid, be binding on
Lessor's successors and assigns, only during their respective periods of
ownership.
18. SEVERABILITY. The invalidity of any provision of this Lease as determined
by a court of competent jurisdiction, shall in now way affect the validity of
any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum rate
then allowable by law from the date due. Payment of such interest shall not
excuse or cure any default by Lessee under this Lease, provided, however, that
interest shall not be payable on late charges incurred by Lessee nor on any
amounts upon which late charges are paid by Lessee.
20. TIME OF ESSENCE. Time is of the essence.
21. ADDITIONAL RENT. Any monetary obligations of Lessee to Lessor under the
terms of this Lease shall be deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
agreement or understanding pertaining to any such matter shall be effective.
This Lease may be modified in writing only, signed by the parties in interest at
the time of the modification. Except as otherwise stated in this Lease, Lessee
hereby acknowledges that neither the real estate broker listed in Paragraph 15
hereof nor any cooperating broker on this transaction nor the Lessor or any
employees or agents of any of said persons has made any oral or written
warranties or representations to Lessee relative to the condition or use by
Lessee of said Premises and Lessee acknowledges that Lessee assumes all
responsibility regarding the Occupational Safety Health Act, the legal use and
adaptability of the Premises and the compliance thereof with all applicable laws
and regulations in effect during the term of this Lease except as otherwise
specifically stated in this Lease.
23. NOTICES. Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery or by certified mail, and if given
personally or by mail, shall be deemed sufficiently given if addressed to Lessee
or to Lessor at the address noted below the signature of the respective parties,
as the case may be. Either party may by notice to the other specify a different
address for notice purposes except that upon Lessee's taking possession of the
Premises, the Premises shall constitute Lessee's address for notice purposes. A
copy of all notices required or permitted to be given to Lessor hereunder shall
be concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by notice to Lessee.
24. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of
the Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, but all options and rights of
first refusal, if any, granted under the terms of this Lease shall be deemed
terminated and be of no further effect during said month to month tenancy.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions of
Paragraph 17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
wherein the Premises are located.
30. SUBORDINATION.
(a) This Lease, at Lessor's option, shall be subordinate to any ground
lease, mortgage, deed of trust, or any other hypothecation or security now or
hereafter placed upon the real property of which the Premises are a part and to
any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Lessee, this Lease shall be deemed prior to such mortgage,
deed of trust, or ground lease, whether this Lease is dated prior or subsequent
to the date of said mortgage, deed of trust or ground lease or the date of
recording thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to
execute such documents within 10 days after written demand shall constitute a
material default by Lessee hereunder, or, at Lessor's option, Lessor shall
execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee
does hereby make, constitute and irrevocably appoint Lessor as Lessee's
attorney-in-fact and in Lessee's name, place and stead, to execute such
documents in accordance with this paragraph 30(b).
31. ATTORNEY'S FEES. If either party or the broker named herein brings an
action to enforce the terms hereof or declare rights hereunder, the prevailing
party in any such action, on trial or appeal, shall be entitled to his
reasonable attorney's fees to be paid by the losing party as fixed by the court.
The provisions of this paragraph shall inure to the benefit of the broker named
herein who seeks to enforce a right hereunder.
32. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to enter
the Premises at reasonable times for the purpose of inspecting the same, showing
the same to prospective purchasers, lenders, or lessees, and making showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part as Lessor may deem necessary or desirable.
Lessor may at any time place on or about the Premises any ordinary "For Sale"
signs and Lessor may at any time during the last 120 days of the term hereof
place on or about the Premises any ordinary "For Lease" signs, all without
rebate of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises without Lessor's
prior written consent except that Lessee shall have the right, without the prior
permission of Lessor to place ordinary and usual for rent or sublet signs
thereon.
35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
36. CONSENTS. Except for paragraph 33 hereof, wherever in this Lease the
consent of one party is required to an act of the other party such consent
shall not be unreasonably withheld.
37. GUARNATOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Premises.
39. OPTIONS.
39.1 DEFINITION. As used in this paragraph the word "Options" has the following
meaning: (1) the right or option to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (2) the option or right of first refusal to lease the Premises or the
right of first offer to lease the Premises or the right of first refusal to
lease other property of Lessor or the right of first offer to lease other
property of Lessor; (3) the right or option 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 or option to purchase other property of
Lessor, or the right of first refusal to purchase other property of Lessor or
the right of first offer to purchase other property of Lessor.
<PAGE>
39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease are
personal to Lessee and may not be exercised or be assigned voluntarily or
involuntarily, by or to any person or entity other than Lessee, provided,
however, the Option may be exercised by or assigned to any Lessee Affiliate as
defined in paragraph 12.2 of this Lease. The Options herein granted to Lessee
are not assignable separate and apart from this Lease.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple options to
extend or renew this Lease a later option cannot be exercised unless the prior
option to extend or renew this Lease has been so exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary, (i) during the time
commencing from the date Lessor gives to Lessee a notice of default pursuant to
paragraph l3.l(b) or 13.1(c) and continuing until the default alleged in said
notice of default is cured, or (ii) during the period of time commencing on the
day after a monetary obligation to Lessor is due from Lessee and unpaid (without
any necessity for notice thereof to Lessee) continuing until the obligation is
paid, or (iii) at any time after an event of default described in paragraphs
13.1(a), 13.1(d), or 13.1(e) (without any necessity of Lessor to give notice of
such default to Lessee), or (iv) in the event that Lessor has given to Lessee
three or more notices of default under paragraph 13.1(b), where a late charge
has become payable under paragraph 13.4 for each of such defaults, or paragraph
13.l(c), whether or not the defaults are cured, during the 12 month prior to the
time that Lessee intends to exercise the subject Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a part of 30 days after such obligation becomes due (without any necessity
of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to
cure a default specified in paragraph 13.1(c) within 30 days after the date that
Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to
diligently prosecute said cure to completion, or (iii) Lessee commits a default
described in paragraph 13.1 (a), 13.1(d) or 13.1(e) (without any necessity of
Lessor to give notice of such default to Lessee), or (iv) Lessor gives to Lessee
three or more notices of default under paragraph 13.1(b), where a late charge
becomes payable under paragraph 13.4 for each such default, or paragraph
13.l(c), whether or not the defaults are cured.
40. MULTIPLE TENANT BUILDING. In the event that the Premises are part of a
larger building or group of buildings then Lessee agrees that it will abide
by, keep and observe all reasonable rules and regulations which Lessor may make
from time to time for the management, safety, care, and cleanliness of the
building and grounds, the parking of vehicles and the preservation of good
order therein as well as for the convenience of other occupants and tenants of
the building. The violations of any such rules and regulations shall be deemed
a material breach of this Lease by Lessee.
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 Lessee,
its agents and invitees from acts of third parties.
42. EASEMENTS. Lessor reserves to itself the right, from time to time, to
grant such easements, rights and dedications that Lessor deems necessary or
desirable, and to cause the recordation of Parcel Maps and restrictions, so
long as such easements, rights, dedications, Maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall
sign any of the aforementioned documents upon request of Lessor and failure to
do so shall constitute a material breach of this Lease.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one party to the other under the
provisions hereof, the party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment, and there shall survive the right
on the part of said party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said party
to pay such sum or any part thereof, said party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
44. AUTHORITY. If Lessee 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 behalf of said entity. If Lessee is a corporation, trust
or partnership, Lessee shall, within thirty (30) days after execution of this
Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
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. INSURING PARTY. The insuring party under this lease shall be the Channell
Commercial Corporation.
47. ADDENDUM. Attached hereto is an addendum or addenda containing
paragraphs 3.1 through 4.1 which constitutes a part of this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS
AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES
SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND
TAX CONSEQUENCES OF THIS LEASE.
The parties hereto have executed this Lease at the place on the dates
specified immediately adjacent to their respective signatures.
Executed at Temuecula, California Channell Family Trust dated
October 6, 1987
------------------------ ---------------------------------
on May 29, 1996 By
--------------------------------- -------------------------------
William H. Channell, Trustee
Address 27040 Ynez Road By
---------------------------- -------------------------------
Jacqueline M. Channell, Trustee
Temecula, California 92390
- ----------------------------------- "LESSOR" (Corporate seal)
Executed at Temecula, California Channell Commercial Corporation
------------------------ --------------------------------
on May 29, 1996 By
--------------------------------- -------------------------------
Address 27040 Ynez Road By
---------------------------- -------------------------------
Temecula, California 92390
- ----------------------------------- "LESSEE" (Corporate Seal)
<PAGE>
ADDENDUM TO STANDARD INDUSTRIAL LEASE -
NET DATED MAY 29, 1996 (THE "LEASE")
BY AND BETWEEN CHANNELL FAMILY TRUST DATED
OCTOBER 6, 1987 ("LESSOR") AND CHANNELL COMMERCIAL
CORPORATION ("LESSEE")
The following terms are made a part of the Lease.
3.1 Options to Extend. Lessor hereby grants to Lessee the option to
-----------------
extend the term of this Lease for two (2) additional sixty (60) month periods
commencing when the prior term expires (i.e. option periods of January 1, 2006
to December 31, 2010 and January 1, 2011 to December 31, 2015). Lessee shall
provide to Lessor written notice of exercise no later than the later of (i) six
(6) months prior to the date upon which such option period would commence or
(ii) thirty (30) days after Lessor gives written notice to Lessee that the
existing Term is scheduled to expire and that Lessor has not received any notice
of exercise (which notice from Lessor shall not be given more than twelve (12)
months prior to the date upon which such option period would commence). The
rent for the option periods shall be the same as for the initial term with
C.P.I. adjustments continuing as of each August 1st throughout the option
periods. All other terms of the Lease shall also continue in effect during the
option periods.
4.1 C.P.I. The initial base monthly rent of $35,000 payable pursuant to
-----
paragraph 4 of the Lease shall be adjusted to reflect changes in the Consumer
Price Index from the base month of August, 1996 (the "Base Month"). The
Consumer Price Index of The Bureau of Labor Statistics of the U.S. Department of
Labor for all urban consumers for Los Angeles, Anaheim and Riverside, all items
(1967 = 100), shall herein be referred to as the "C.P.I.". The base rent shall
be adjusted as of each August 1st during the term including during any option
terms. The initial base rent shall be multiplied by a fraction the numerator of
which shall be the C.P.I. of the calendar month which is 2 months prior to the
month for which the adjustment is to take effect (i.e. June of each year, the
first of which would be June 1997, two months prior to the first adjustment to
be effective as of August 1, 1997) and the denominator of which shall be the
C.P.I. of the calendar month of June 1996 (i.e. 2 months prior to the base month
of August 1996). The sum so calculated shall constitute the new monthly rental
for the 12 months following each such August 1 adjustment, provided, however,
-------- -------
that the new monthly rental shall in no event be less than 102%, nor more than
- ----
107%, of the monthly rental applicable during the 12-month period immediately
preceding such August 1 adjustment.
In the event the compilation and/or publication of the C.P.I. shall be
transferred to any other governmental department or bureau or agency or shall be
discontinued, then the index most nearly the same as the C.P.I. shall be used to
make such calculation. In the event that Lessor and Lessee cannot agree on such
alternative index, then the matter shall be submitted for decision to the
American Arbitration Association in accordance with the then rules of said
association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
<PAGE>
Executed at: LESSOR
------
Temecula, California Channell Family Trust
- --------------------------------- ---------------------
dated October 6, 1987
---------------------
on May 29, 1996 By: /s/ William H. Channell
------------------------------ ------------------------------
William H. Channell, Trustee
Address: 27040 Ynez Road By: /s/ Jacqueline M. Channell
----------------------- ------------------------------
Jacqueline M. Channell,Trustee
Temecula, California 92390
- ---------------------------------
Executed at: LESSEE
------
Temecula, California Channell Commercial
- --------------------------------- --------------------
Corporation
-----------
on May 29, 1996 By: /s/ William H. Channell
------------------------------ -------------------------------
Address: 27040 Ynez Road By:
----------------------- -------------------------------
Temecula, California 92390
- ---------------------------------
<PAGE>
[LETTERHEAD OF WINTHROP RESOURCES]
EXHIBIT 10.16
Lease Agreement Number CH030196
--------
LEASE AGREEMENT
THIS LEASE AGREEMENT, DATED AS OF THE 1st DAY OF
--------------
March , 1996, BETWEEN WINTHROP RESOURCES CORP. (THE"LESSOR")
--------- --
AT 1015 OPUS CENTER, 9900 BREN ROAD EAST, MINNETONKA, MN 55343 AND
Channell Commercial Corporation (THE LESSEE")
------------------------------------------------
(Lessee's Full Legal Name)
26040 Ynez Road
--------------------------------------------------------------
(Lessee's Address)
Temecula CA 92589-9022
--------------------------------------------------------------
LESSOR HEREBY LEASES TO LESSEE AND LESSEE HEREBY RENTS FROM LESSOR,
THE EQUIPMENT LISTED ON THE LEASE SCHEDULE(S) ATTACHED HERETO OR
INCORPORATED HEREIN BY REFERENCE FROM TIME TO TIME (HEREIN REFERRED TO
AS THE "EQUIPMENT"), SUBJECT TO THE TERMS AND CONDITIONS HEREOF, AS
SUPPLEMENTED WITH RESPECT TO EACH ITEM OF EQUIPMENT BY THE TERMS AND
CONDITIONS SET FORTH IN THE APPROPRIATE LEASE SCHEDULE. THE TERM
"LEASE AGREEMENT" SHALL INCLUDE THE VARIOUS LEASE SCHEDULES
IDENTIFYING EACH ITEM OF EQUIPMENT OR THE APPROPRIATE LEASE SCHEDULE
IDENTIFYING ONE OR MORE PARTICULAR ITEMS OF EQUIPMENT.
1. TERM
This Lease Agreement is effective from the date it is executed by both
parties. The term of this Lease Agreement as to all Equipment designated on any
particular Lease Schedule shall commence on the Installation Date for all
Equipment on such Lease Schedule and shall continue for an initial period ending
that number of months from the Commencement Date as set forth in such Lease
Schedule, (the "initial Term") and shall continue from year to year thereafter
until terminated. The term of this Lease Agreement as to all Equipment
designated on any particular Lease Schedule may be terminated without cause at
the end of the Initial Term or any year thereafter by either party mailing
written notice of its termination to the other party not less than one hundred
twenty(l20) days prior to such termination date.
2. COMMENCEMENT DATE
The Installation Date for each item of equipment shall be the day following
the date said item of equipment is installed at the location of installation,
ready for use, and declared acceptable for maintenance by the maintenance
vendor. The Commencement Date for any Lease Schedule is the first of the month
following installation of all the equipment on the Lease Schedule, unless the
latest Installation Date for any equipment on the Lease Schedule falls on the
first day of the month, in which case that is the Commencement Date. The Lessee
agrees to execute and deliver a Certificate of Acceptance to Lessor upon
installation.
3. LEASE CHARGES
The Lease Charges for the Equipment leased pursuant to this Lease Agreement
shall be the aggregate Lease Charges set forth on each and every Lease Schedule
executed pursuant hereto. Lessee promises to pay Lessor the Lease Charges in
accordance with the Lease Schedule(s), and the payments shall be made at
Lessor's address indicated thereon. The Monthly Lease Charge shall be paid by
Lessee monthly in advance with the first full month's payment due on the
Commencement Date. If the Installation Date does not fall on the first day of a
month, the Lease Charge for the period from the Installation Date to the
Commencement Date shall be an amount equal to the Monthly Lease Charge divided
by thirty (30) and multiplied by the number of days from and including the
Installation Date to the Commencement Date and such amount shall be due and
payable upon receipt of invoice. Charges for taxes made in accordance with
Section 4 and charges made under any other provision of this Lease Agreement and
payable by Lessee shall be paid to Lessor at Lessor's address specified on the
Lease Schedule(s) on the date specified in invoices delivered to Lessee. Lessee
agrees that if payment as specified above is not received by Lessor within (10)
days of the due date, Lessee shall, to the extent permitted by law, pay on
demand, as a late charge, an amount equal to one and one-half percent (1 1/2%)
or the maximum percentage allowed by law, whichever is less, of the amount then
due for each thirty (30) days or portions thereof that the payment is not
received after the due date.
4. TAXES
In addition to the Lease Charges set forth in section 3 the Lessee shall be
responsible for the timely payment and discharge of all license or registration
fees, assessments, sales and use taxes, rental taxes, gross receipts taxes,
personal property taxes and other taxes now or hereafter imposed by any federal,
state or local government upon the Equipment, the Lease Charges or upon the
ownership, leasing, renting, purchase, possession or use of the Equipment
(whether the same be assessed to Lessor or Lessee). Lessee shall be responsible
for the negotiating and filing of property taxes on the Equipment and shall
indemnify Lessor to the extent of any such unpaid property taxes (including
penalties and interest) and costs of Lessor associated therewith. Except as
otherwise required by law or except as otherwise directed from time
<PAGE>
to time by Lessor, Lessee shall pay and discharge at least ten (10) days before
delinquency any and all such fees, assessments and taxes directly to the proper
levying authority. Nothing herein shall be deemed to prevent Lessor from itself
paying and discharging any such taxes, fees or assessments and Lessee shall pay
to Lessor the amount of any such taxes, fees, or assessments remitted by Lessor
within ten (10) days of notice thereof. Lessee, upon notice to Lessor, may, in
Lessee's own name, contest or protest any such taxes, and Lessor shall honor any
such notice except when in Lessor's sole opinion such contest is futile or will
cause a levy or lien to arise on the Equipment or cloud Lessor's title thereto.
Lessee shall, in addition, be responsible to Lessor for the payment and
discharge of any penalties or interest. Nothing herein shall be construed to
require Lessee to be responsible for any federal or state taxes or payments in
lieu thereof, imposed upon or measured by the net income of Lessor, or state
franchise taxes of Lessor, or except as provided hereinabove, any penalties or
interest resulting from Lessor's failure to timely remit such tax payments.
5. DELIVERY AND FREIGHT COSTS
Lessee shall accept delivery of the Equipment and allow the Equipment to be
installed within seven (7) days after delivery to the Location of Installation
and on or about the date designated on the Lease Schedule(s) attached hereto.
All transportation charges upon the Equipment for delivery to Lessee's
designated Location of Installation are to be paid by Lessee. All rigging,
drayage charges, structural alterations, rental of heavy equipment and/or other
expense necessary to place the Equipment in Lessee's building are to be promptly
paid by Lessee.
Lessor shall not be liable for any failure or delay in furnishing the
Equipment, materials or labor resulting from fire, explosion, flood, storm, act
of God, government acts, orders or regulations, hostilities, civil disturbances,
strike, labor difficulties, machinery breakdown, transportation contingencies,
difficulty in obtaining parts, supplies or shipping facilities or delay of
carriers, or any other cause not subject to control of Lessor.
6. INSTALLATION
Lessee agrees to pay for the actual installation of the Equipment at
Lessee's site. Lessee shall make available and agrees to pay for ail costs
associated with providing a suitable place of installation and necessary
electrical power, outlets and air conditioning required for operating the
Equipment as defined in the Equipment manufacturer's Installation Manual. All
supplies consumed or required by the Equipment shall be furnished and paid for
by Lessee.
7. RETURN TO LESSOR
Upon the termination of this Lease Agreement as to the Equipment on any
Lease Schedule, Lessee shall prepare the Equipment for shipping, using the
manufacturer's standard packing materials and will deliver and pay for such
delivery of the Equipment to Lessor's loading dock, Minneapolis, Minnesota, at
the time designated in writing by Lessor. Irrespective of any other provision
hereof, Lessee will bear the risk of damage from fire, the elements or otherwise
until delivery of the Equipment to Lessor's loading dock. At such time as the
Equipment is placed on Lessor's loading dock, the Equipment will be at the risk
of Lessor.
8. MAINTENANCE
Lessor warrants that the Equipment will be eligible for the manufacturer's
Maintenance Agreement upon delivery to Lessee. Lessee shall enter into and
maintain in force during the entire term of this Lease Agreement, a
manufacturer's Maintenance Agreement covering maintenance of the Equipment.
Lessee will cause the manufacturer to keep the Equipment in good working
order in accordance with the provisions of the manufacturer's Maintenance
Agreement and make all necessary adjustments and repairs to the Equipment. The
manufacturer is hereby authorized to accept the directions of Lessee with
respect thereto. Lessee agrees to allow the manufacturer full and free access to
the Equipment. All maintenance and services charges, whether under the
manufacturer's Maintenance Agreement or otherwise, and all expenses, if any, of
the manufacturer's customer engineers incurred in connection with maintenance
and repair services, shall be promptly paid by Lessee. Upon the termination of
this Lease Agreement, Lessee warrants that the Equipment shall be eligible for
the manufacturer's standard Maintenance Agreement upon delivery to the Lessor.
Should the Equipment not be eligible for the manufacturer's standard Maintenance
Agreement, Lessee agrees to reimburse Lessor for any costs it incurs in making
the Equipment eligible for standard maintenance.
9. LOCATION, OWNERSHIP AND USE
The Equipment shall, at all times, be the sole and exclusive property of
Lessor. Lessee shall have no right or property interest therein, except for the
right to use the Equipment in the normal operation of its business at the
Location of Installation, or as otherwise provided herein. The Equipment is and
shall remain personal property even if installed in or attached to real
property. Lessor shall be permitted to display notice of its ownership on the
Equipment by means of a suitable stencil, label or plaque affixed thereto.
Lessee shall keep the Equipment at all times free and clear from all
claims, levies, liens, encumbrances and process. Lessee shall give Lessor
immediate notice of any such attachment or other judicial process affecting any
of the Equipment. Lessee shall not pledge, lend, create a security interest in,
sublet or part with possession of the Equipment or any part thereof, or attempt
in any manner to dispose thereof, or remove the Equipment or any part thereof,
from the Location of Installation as specified in the appropriate Lease
Schedule(s) without Lessor's written permission.
Any special feature(s) installed on the Equipment at the time of delivery
which are not specified on the Lease Schedule(s) are and shall remain the sole
property of the Lessor and it is agreed that such feature(s) may be removed at
any time at Lessor's cost at the reasonable convenience of the Lessee.
Lessee shall cause the Equipment to be operated in accordance with the
applicable vendor's or manufacturer's manual of instructions by competent and
qualified personnel.
10. FINANCING STATEMENT
Lessor is hereby authorized by Lessee to cause this Lease Agreement or
other instruments, including Uniform Commercial Code Financing Statements, to be
filed or recorded for the purposes of showing Lessor's interest in the
Equipment. Lessee agrees to execute any such instruments as Lessor may request
from time to time.
<PAGE>
11. ALTERATIONS AND ATTACHMENTS
Upon prior written notice to Lessor, Lessee may, at its own expense, make
alterations in or add attachments to the Equipment. provided such alterations
and attachments shall not interfere with the normal operation of the Equipment.
All such alterations and attachments, unless Lessor shall otherwise agree in
writing, shall be removed by Lessee at Lessee's expense and the Equipment
restored to its original condition, reasonable wear and tear excepted, upon
termination of the appropriate Lease Schedule(s) annexed to this Lease
Agreement. If the alteration or attachment interferes with the normal and
satisfactory operation or maintenance of any of the Equipment, or creates a
safety hazard, Lessee shall, upon notice from Lessor to that effect, promptly
remove the alteration or attachment at Lessee's expense and restore the
Equipment to its normal condition.
12. LOSS AND DAMAGE
Lessee shall assume and bear risk of loss and damage (including any
governmental requisition, condemnation or confiscation) to the Equipment and all
component parts thereof from any and every cause whatsoever, whether or not
covered by insurance. No loss or damage to the Equipment or any component parts
thereof shall impair any obligation of Lessee under this Lease, which shall
continue in full force and effect except as hereinafter expressly provided.
Lessee shall repair or cause to be repaired all damage to the Equipment. In the
event that all or part of the Equipment shall, as a result of any cause
whatsoever, become lost, stolen, destroyed or rendered irreparably unusable or
damaged. as determined by Lessee, then Lessee shall, within ten (10) days after
it shall have made such determination, fully inform Lessor in regard thereto and
shall pay to Lessor (1) the greater of (a) Lessor's then applicable Unrecovered
Investment in said Equipment as of the next succeeding rental payment date or
(b) the insurable value of the Equipment as provided in Section 13 hereinbelow,
and (2) all rentals and other sums past due or becoming due to and including
such next succeeding rental payment date in respect of such Equipment. Upon
payment of said amounts, the Lease Schedule shall terminate as to said
Equipment. For purposes of this Agreement, "Unrecovered Investment" shall mean
those values which shall be assigned to an item or items of Equipment upon the
disposition, loss, theft or destruction thereof, and shall be that value which,
as of the date for its calculation and payment, will result (after provision for
the recapture and payment of all applicable taxes) in no loss to the Lessor.
13. INSURANCE
Commencing upon delivery of the Equipment to Lessee and continuing
thereafter, until Lessee has delivered possession of the Equipment to Lessor or
as otherwise herein provided, whether or not this Lease Agreement has terminated
as to the Equipment, Lessee, at its expense, agrees to and shall keep the
Equipment adequately insured with responsible insurers satisfactory to the
Lessor, and said insurance shall protect all interests of Lessor and be for such
risks including the liability of Lessor for public liability and property damage
and be in such amounts as Lessor may require. Said insurance shall not be in
excess over other coverage but shall be primary insurance up to and including
the stated policy limits. Said insurance shall cover the interest of both the
Lessor and Lessee in the Equipment, or as the case may be, shall protect both
the Lessor and Lessee in respect to all risks arising out of the condition,
delivery, installation, maintenance, use or operation of the Equipment. All such
insurance shall provide for thirty (30) days prior written notice to Lessor of
cancellation, restriction or reduction of coverage. Lessee hereby irrevocably
appoints Lessor as Lessee's attorney-in-fact to make claim for, receive payment
of and execute and endorse all documents, checks or drafts for loss or damage or
return premium under any insurance policy issued on the Equipment. Prior to
installation on the Equipment all policies or certificates of insurance shall be
delivered to Lessor by Lessee. In no event shall loss or damage insurance on the
Equipment be in an amount less than the greater of(l) Lessor's corresponding
Unrecovered Investment or (2) its then fair market value. The proceeds of said
loss or damage insurance shall be payable to Lessor, but Lessor shall remit all
such insurance proceeds to Lessee at such time as Lessee either (i) provides
Lessor satisfactory proof that the damage has been repaired and the Equipment
has been restored to good working order and condition or (ii) has paid to Lessor
the amounts otherwise due to Lessor on loss of such Equipment. It is understood
and agreed that any payments made by Lessee or its insurance carrier for loss or
damage of any kind whatsoever to the Equipment are not made as accelerated
rental payments or adjustments of rental, but are made solely as indemnity to
Lessor for loss or damage of its Equipment.
14. ENFORCEMENT OF WARRANTIES
Upon receipt of a written request from Lessee, Lessor shall, so long as
this Agreement is in force, take all reasonable action requested by Lessee to
enforce the Equipment manufacturer's warranties, expressed or implied, issued on
or applicable to the Equipment, which are enforceable by Lessor in its own name.
Lessor shall obtain for Lessee all service furnished by manufacturer in
connection therewith; provided, however, that Lessor shall not be required to
commence any suit or action or resort to litigation to enforce any such warranty
unless Lessee shall first pay to Lessor in advance all expenses in connection
therewith, including attorney's fees.
If any such warranty shall be enforceable by Lessee in its own name, Lessee
shall, upon receipt of written request from Lessor, so long as this Lease
Agreement is in force, take all reasonable action requested by Lessor to enforce
any such warranty which is enforceable by Lessee in its own name; provided,
however, that Lessee shall not be obligated to commence any suit or action or
resort to litigation to enforce any such warranty unless Lessor shall pay all
expenses in connection therewith.
15. WARRANTIES, DISCLAIMERS AND INDEMNITY
Lessor warrants that at the time the Equipment is delivered to Lessee,
Lessor will have full right, power and authority to lease the Equipment to
Lessee. THE EXPRESS WARRANTIES HEREIN CONTAINED ARE IN LIEU OF ANY AND ALL OTHER
WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING THE WARRANTY OF MERCHANTABILITY AND
OF FITNESS FOR ANY PARTICULAR PURPOSE. LESSEE ACKNOWLEDGES THAT IT IS NOT
RELYING ON LESSOR'S SKILL OR JUDGMENT TO SELECT OR FURNISH GOODS SUITABLE FOR
ANY PARTICULAR PURPOSE AND THAT THERE ARE NO WARRANTIES WHICH ARE NOT CONTAINED
IN THIS AGREEMENT. LESSOR SHALL NOT BE LIABLE FOR DAMAGES, INCLUDING SPECIAL,
INCIDENTAL OR CONSEQUENTIAL DAMAGES, ARISING OUT OF OA IN CONNECTION WITH THE
PERFORMANCE OF THE EQUIPMENT OR ITS USE BY LESSEE, AND SHALL NOT BE LIABLE FOR
ANY
<PAGE>
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, ARISING OUT OF OR IN CONNECTION
WITH LESSOR'S FAILURE TO PERFORM ITS OBLIGATIONS HEREUNDER.
Lessee agrees that Lessor shall not be liable to Lessee for, and Lessee
shall indemnify and hold Lessor harmless with respect to, any claim from a third
party for any liability, claim, loss, damage or expense of any kind or nature
caused, directly or indirectly, by: (1) the inadequacy of any Equipment for any
purpose; (2) any deficiency or defect in any Equipment; (3) the use or
performance of any Equipment; (4) any interruption or loss of service, use or
performance of any Equipment; or (5) any loss of business or other special
incidental or consequential damages whether or not resulting from any of the
foregoing.
16. SOFTWARE AND LICENSED PROGRAM
Lessor and Lessee agree that any data processing programs (the "Software")
made a part of the Lease Agreement are subject to the following: (1) Lessor
disclaims all warranties and obligations in regard to the Software other than
its obligation to pay the lump sum price of the Software to the Software vendor;
(2) Lessee agrees that Lessor shall not be liable to Lessee for, and Lessee
shall indemnify and hold Lessor harmless with respect to, any claim for any
liability, claim, loss, damage or expense of any kind or nature caused, directly
or indirectly, by: (a) the inadequacy of any Software for any purpose; (b) any
deficiency or defect in any Software; (c) the use or performance of any
Software; (d) any interruption or loss of service, use or performance of any
Software; or (e) any loss of business or other special incidental or
consequential damages whether or not resulting from any of the foregoing and
Lessee further agrees to deal directly with the Software vendor for any
problems, deficiencies or inadequacies relating to the Software; (3) Lessee's
obligation to pay the monthly Lease Charges for the Software shall be absolute
and unconditional and shall not be subject to any delay, reduction, set-off,
defense, counterclaim or recoupment for any reason whatsoever, including any
discontinuance or termination of any License Agreement with the Software vendor,
any damage to or destruction of the Software or any failure of the Software to
perform in accordance with the representation of the Software vendor and if the
Software is unsatisfactory for any reason, Lessee shall make any claim solely
against the Software vendor and shall nevertheless, pay Lessor all Lease Charges
under the Lease; (4) The responsibility for all software maintenance and
enhancement costs shall remain with the Lessee.
17. EVENT OF DEFAULT
The occurrence of any of the following events shall constitute an event of
default under this Lease Agreement and/or any Lease Schedule:
(a) The nonpayment by Lessee of any Lease Charges when due, or the
nonpayment by Lessee of any other sum required hereunder to be paid by
Lessee, which non payment continues for a period of ten (10) days from
the date when due.
(b) The failure of Lessee to perform any other term, covenant or condition
of this Lease Agreement, any Commitment Letter, any Lease Schedule or
any other document, agreement or instrument executed pursuant hereto
or in connection herewith which is not cured within (10) days after
written notice thereof from Lessor.
(c) Lessee ceases doing business as a going concern, is insolvent, makes
an assignment for the benefit of creditors, admits in writing its
inability to pay its debts as they become due, files a voluntary
petition in bankruptcy, is subject to an involuntary petition in
bankruptcy, is adjudicated bankrupt or insolvent, files or has filed
against it a petition seeking any reorganization, arrangement or
composition, under any present or future statute, law or regulation.
(d) Any of Lessee's representations or warranties made herein or on any
statement or certificate at any time given in writing pursuant hereto
or in connection herewith shall be false or misleading in any material
respect.
(e) Lessee defaults under or otherwise has accelerated any material
obligation, credit agreement, loan agreement, conditional sales
contract, lease, indenture or debenture; or Lessee defaults under any
other agreement now existing or hereafter made with Lessor.
(f) The breach or repudiation by any party thereto of any guaranty,
subordination agreement or other agreement running in favor of Lessor
obtained in connection with this Lease Agreement.
18. REMEDIES
Should any event of default occur and be continuing, Lessor may, in order
to protect the interests and reasonably expected profits and bargain of Lessor,
and with or without notice or demand upon Lessee, pursue and enforce,
successively and/or concurrently, any one or more of the following remedies:
(a) Without retaking the Equipment.
(1) recover from Lessee all accrued and unpaid rents and other
amounts then due and owing under the terms hereof,
(2) recover from Lessee from time to time all rents and other amounts
as and when becoming due hereunder,
(3) accelerate and cause to become immediately due and payable all
rents and other amounts due and/or likely to become due hereunder
and recover from Lessee the then worth to Lessor of such amounts,
(4) cause to become immediately due and payable and recover from
Lessee (i) the then applicable Unrecovered Investment in the
Equipment, plus (ii) the then worth to Lessor of its anticipated
remaining loss of bargain;
(b) Retake possession of the Equipment (by Lessor, independent contractor,
or by requiring Lessee to assemble and surrender the Equipment in
accordance with the provisions of Section 7 hereinabove) without
liability to Lessee therefor which is hereby expressly waived, and
(1) terminate the term of this Lease Agreement as to the Equipment,
(2) recover from Lessee all accrued and unpaid rents and other
amounts owing under the terms hereof,
(3) sell the Equipment at public or private sale, and recover from
Lessee the difference, if any, by which the Net Proceeds of sale
shall be less than (i) the Lessor's then applicable Unrecovered
Investment in the Equipment, plus (ii) the then worth to Lessor
of its anticipated remaining loss of bargain,
(4) re-lease the Equipment to a third party for the account of Lessee
and recover from Lessee when becoming due any deficiency between
the rents provided herein and those received from such third
party,
(5) re-lease the Equipment to a third party for the account of Lessee
and recover from Lessee the then worth to Lessor of any
deficiency between the rents provided herein and those receivable
from such third party over the re-leased term,
<PAGE>
(6) recover from Lessee the then worth to Lessor of the excess of the
rents reserved herein for the balance of the whole term (or any
remaining term not covered by any re-lease pursuant to Section
18(b)(5) herein above) over the then reasonable rental value of
the Equipment; and
(c) Pursue any other remedy Lessor may otherwise have, at law, in equity
or under any statute and recover such other actual damages as may be
incurred by Lessor.
For purposes of Section 18, "Net Proceeds" shall mean the amount received
in cash upon the sale of the Equipment, less all expenses incurred by or for
Lessor in connection with such sale, including reconditioning and removal
expenses, repair costs, commissions, reasonable attorney's fees and less all
sums accrued and unpaid to Lessor pursuant to this Lease Agreement to the date
of such sale. Lessor's pursuit and enforcement of any one or more remedies shall
not be deemed an election or waiver by Lessor of any other remedy. Lessor shall
attempt in good faith to mitigate its damages, but Lessor shall not be obligated
to sell or re-lease the Equipment. Any sale or release may be held at such place
or places as are selected by Lessor, with or without having the Equipment
present. Any such sale or re-lease, may be at wholesale or retail, in bulk or in
parcels. For purposes of determining the worth to Lessor of any amounts, said
amounts shall be discounted at a rate of ten percent (10%) per annum. Time and
exactitude of each of the terms and conditions of the Lease Agreement are hereby
declared to be of the essence. Lessor may accept past due payments without
modifying the terms of this Lease Agreement and without waiving any further
rights of Lessor hereunder. Except as expressly provided herein, neither Lessee
nor Lessor shall be liable to the other for any consequential or incidental
damages.
19. COSTS AND ATTORNEYS' FEES
In the event of any action at law or a suit in equity by reason of Lessee's
breach of this Lease Agreement, any Commitment Letter, any Lease Schedule, or
any other document, agreement or instrument executed pursuant hereto or in
connection herewith, or in the event of any governmental examination or
investigation of Lessee, which requires Lessor's participation and which
participation would not be required but for this Lease Agreement, or pursuant to
Lessor exercising any of its rights herein conferred or retained, Lessee, in
addition to all other sums which Lessee may be called upon to pay under the
provisions of this Lease Agreement, will pay to Lessor its reasonable costs of
collection or other out-of-pocket costs and expenses and attorney's fees on
account thereof.
20. LESSOR'S PERFORMANCE OPTION
Should Lessee fail to make any payment or to do any act as provided by this
Lease Agreement, then Lessor shall have the right (but not the obligation),
without notice to Lessee of its intention to do so and without releasing Lessee
from any obligation hereunder to make or to do the same, to make advances to
preserve the Equipment or Lessor's title thereto, and to pay, purchase, contest
or compromise any insurance premium, encumbrance, charge, tax, lien or other sum
which in the judgment of Lessor appears to affect the Equipment, and in
exercising any such rights, Lessor may incur any liability and expend whatever
amounts in its absolute discretion it may deem necessary therefor. All sums so
incurred or expended by Lessor shall be due and payable by Lessee within ten
(10) days of notice thereof.
21. QUIET POSSESSION AND INSPECTION
Lessor hereby convenants with Lessee that Lessee shall quietly possess the
Equipment subject to and in accordance with the provisions hereof so long as
Lessee is not in default hereunder; provided, however, that Lessor or its
designated agent may, at any and all reasonable times during business hours,
enter Lessee's premises for the purposes of inspecting the Equipment and the
manner in which it is being used.
22. ASSIGNMENTS
This Lease Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and (to the extent specified in
any assignment) assigns. Lessee, however, shall not assign this Lease Agreement
or sublet any of the Equipment without first obtaining the prior written consent
of Lessor and its assigns, if any. Lessee acknowledges that the terms and
conditions of this Lease Agreement have been fixed in anticipation of the
possible assignment of Lessor's rights under this Agreement and in and to the
Equipment as collateral security to a third party ("Assignee" herein) which will
rely upon and be entitled to the benefit of the provisions of this Lease
Agreement. Lessee agrees to provide Lessor or its potential Assigns with
Lessee's most recent audited and its most current financial statements. Lessee
agrees with Lessor and such Assignee to recognize in writing any such assignment
within fifteen (15) days after receipt of written notice thereof and to pay
thereafter all sums due to Lessor hereunder directly to such Assignee as
directed by it, notwithstanding any defense, set-off or counterclaim whatsoever
(whether arising from a breach of this Lease Agreement or not) that Lessee may
from time to time have against Lessor. Upon such assignment, the Lessor shall
remain obligated to perform any obligations it may have under the Lease
Agreement and the Assignee shall (unless otherwise expressly agreed to in
writing by the Assignee) have no obligation to perform such obligations. Any
such assignment shall be subject to Lessee's rights to the use and possession of
the Equipment so long as Lessee is not in default hereunder.
23. SURVIVAL OF OBLIGATIONS
All agreements, representations, and warranties contained in this Lease
Agreement, any Lease Schedules, or in any document attached thereto, shall be
for the benefit of Lessor and Lessee and their successors, any Assignee or
Secured Party and shall survive the execution and delivery of the Lease
Agreement and the expiration or other termination of this Lease Agreement.
24. CORPORATE AUTHORITY
The parties hereto covenant and warrant that the persons executing this
Lease Agreement and each Lease Schedule on their behalf have been duly
authorized to so execute this Agreement, and this Agreement constitutes a valid
and binding obligation to the parties hereto. The Lessee will, if requested by
Lessor, provide to Lessor Certificates of Authority naming the officers of the
Lessee which have the authority to execute this Agreement and any Lease
Schedules attached thereto.
<PAGE>
25. LANDLORD'S AND MORTGAGEE'S WAIVER
If requested, Lessee shall furnish waivers, in form and substance
satisfactory to Lessor, from all landlords and mortgagees of any premises upon
which any item is located.
26. MISCELLANEOUS
This Lease Agreement, the Lease Schedule(s), attached riders, and any
documents or instruments issued or executed pursuant hereto shall be governed by
the laws of the State of Minnesota and constitute the entire Agreement between
Lessor and Lessee with respect to the lease of the Equipment superseding all
prior correspondence between the parties. No provision of this Lease Agreement
shall be deemed waived, amended or modified by either party unless such waiver,
amendment or modification is in writing and signed by each of the parties
hereto.
The parties hereto submit to the jurisdiction of the courts of the State
of Minnesota and Lessee hereby waives local venue with respect to claims arising
out of this Lease Agreement.
Any notice provided for herein shall be in writing and sent by certified or
registered mail to the parties at the addresses stated on page 1 of the Lease
Agreement.
This Lease Agreement shall not become effective until delivered to Lessor
at its offices at Minnetonka, Minnesota and there executed by Lessor. If this
Lease Agreement shall be executed by Lessor prior to being executed by Lessee,
it shall become voidable at Lessor's option five (5) days after the date of
Lessor's execution hereof, unless Lessor shall have received by such date a copy
hereof executed by a duly authorized representative of Lessee.
This Agreement is made subject to the terms and conditions included herein
and Lessee's acceptance is effective only to the extent that such terms and
conditions are consistent with the terms and conditions herein. Any acceptance
which contains terms and conditions which are in addition or inconsistent with
the terms and conditions herein will be a counter-offer and will not be binding
unless agreed to in writing by Lessor.
The terms used in this Lease Agreement, unless otherwise defined, shall
have the meanings ascribed to them in the Lease Schedule(s).
27. REPOSSESSION
LESSEE ACKNOWLEDGES THAT, PURSUANT TO SECTION 18(b) HEREOF, LESSOR HAS BEEN
GIVEN THE RIGHT TO REPOSSESS THE EQUIPMENT SHOULD LESSEE BECOME IN DEFAULT OF
ITS OBLIGATIONS HEREUNDER. LESSEE HEREBY WAIVES THE RIGHT, IF ANY, TO REQUIRE
LESSOR TO GIVE LESSEE NOTICE AND A JUDICIAL HEARING PRIOR TO EXERCISING SUCH
RIGHT OF REPOSSESSION.
28. NET LEASE
This Lease Agreement is a net lease and Lessee's obligation to pay all
Lease Charges and other amounts payable hereunder shall be absolute and
unconditional and, except as expressly provided herein, shall not be subject to
any abatement, reduction, defense, counterclaim, set-off, or recoupment,
including any present or future claim against Lessor or the manufacturer of the
Equipment. Except as expressly provided herein, this Lease Agreement shall not
terminate for any reason, including any defect in the Equipment or Lessor's
title thereto or any destruction or loss of use of any item of Equipment.
29. HEADINGS
Section headings herein are used for convenience only and shall not
otherwise affect the provisions of this Lease Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by their respective duly authorized representative.
Accepted by: Accepted by:
WINTHROP/RESOURCES CORPORATION CHANNELL COMMERCIAL CORPORATION
----------------------------------
(Lessee's Name)
By: /s/ Kirk A. MacKenzie By: /s/ William H. Channell
------------------------------ ------------------------------
Name: Kirk A. MacKenzie Name: William H. Channell
---------------------------- ----------------------------
(Please Type or Print) (Please Type or Print)
Title: Vice President/Treasurer Title: Ex. Vice-President
--------------------------- ---------------------------
Date 3/18/96 Date March 11, 1996
---------------------------- ----------------------------
Lease Agreement No. CH030196
-------------
<PAGE>
WINTHROP RESOURCES CORPORATION
LEASE SCHEDULE NO. 001
---
This Lease Schedule is issued pursuant to the Lease Agreement dated as of March
1, 1996, by and between the undersigned. (Lease Agreement No. CH030196)
LESSOR LESSEE
Winthrop Resources Corporation Channell Commercial Corporation
1015 Opus Center 26040 Ynez Road
9900 Bren Road East Temecula, CA 92589-9022
Minnetonka, MN 55343
SUPPLIER OF EQUIPMENT LOCATION OF EQUIPMENT
Term of Lease from Commencement Date: 36 months
Monthly Lease Charge: $29,806 per month
Anticipated Delivery and Installation Date: April 1996
Security Deposit: Lessee shall deliver upon execution of this Lease Schedule by
Lessee, a Security Deposit in the amount of $29,806 which amount is equal to one
month(s) of Lessor's Lease Charge. Provided there is no default by Lessee, this
Security Deposit will be applied by Lessor as the Lease Charges for the last
month(s) of the Lease.
Maintenance Vendor: _______________ Maintenance Agreement No.________________
EQUIPMENT
MANUFACTURER QTY MACHINE/MODEL EQUIPMENT/DESCRIPTION (including features)
- ------------ --- ------------- ------------------------------------------
SEE ATTACHMENT "A"
The monthly lease charge of $29,806 is based on a lease rate factor of .030168
times the estimated costs of $988,000 and assumes a minimum of 40% hardware
content. This lease rate factor will be affected by any changes in the actual
costs of hardware and software leased.
ACCEPTED: ACCEPTED:
WINTHROP RESOURCES CORPORATION CHANNELL COMMERCIAL CORPORATION
"LESSOR" "LESSEE"
BY: /s/ Kirk A. MacKenzie BY: /s/ Gary W. Baker
------------------------------ -------------------------------
NAME: Kirk A. MacKenzie NAME: Gary W. Baker
---------------------------- -----------------------------
please print or type please print or type
TITLE: Vice President/Treasurer TITLE: C.F.O.
--------------------------- ----------------------------
DATE: 3/18/96 DATE: March 13, 1996
---------------------------- -----------------------------
<PAGE>
LEASE AGREEMENT NUMBER: CH030196 Page 1 of 2
LEASE SCHEDULE NUMBER: 001
ATTACHMENT A
------------
<TABLE>
<CAPTION>
MANUFACTURER QTY MACHINE/MODEL EQUIPMENT DESCRIPTION (including features)
- ------------ --- ------------- ------------------------------------------
<C> <C> <C> <S>
HP 1 A3389A Disk Array MDL 20+CD-ROM Disk
HP 1 A3237A Add-on Storage Controller For MDL 20
HP 1 A3396A Add-on 4.3GB Disk Drive Module
HP 1 A2997A 1.8 KVA RAKMTD HP PWRTRUST+FLD
HP 1 C2788A 1600MM Cabinet +200-240 Volts N. Amer
HP 1 A3238A Add-on Power Supply
HP 4 A3234A Add-on 16MB Wit - Cache Module
HP 1 A3254A Add-on Battery Backup Unit
HP 1 Integration
HP 1 E5930A HP UPS PWR Dist Unit
HP 3 C2791A Six One-Unit Filler Panels
HP 1 A3389A First Year of System Support
HP 1 A3224A K210 Server w/OMB RAM
HP 1 A3027A K Series Memory/128MB ECC Memory Module
HP 1 A2997A 1.8 KVA RACKMT PWRTRUST+Add-on
HP 1 A3183A DDS DAT Drive +4-16GB DAT Upgrade Kit
HP 1 C2786A 1600MM Cabinet+200-240 Volts N. Amer
HP 2 A3351A 2GB FWD SCSI-2 Disk DR+Filed Add-on
HP 1 A2969A 20MB/SEC F/W SCSI-2 Interface
HP 1 C2804A Rackmount Kit for HP 3000/9000 K-Class
HP 1 C1064WX Console for E,F,G,H,I 800 Series Pro
HP 1 J2085A Add-ons for DTC161x+8 Port RS-232
HP 1 E4468A Rack Tie for 1.6M Cabinet
HP 1 C2791A Six One-Unit Filler Panels
HP 1 A3196A 5M AC Power Cord
HP 1 Integration
HP 1 A3224A First Year System Support
HP 1 J2064A DTC 16RX Routable Datacomm Server
HP 1 J2496A DTC 16RX Management Software
HP 1 J2064A First Year of System Support
HP 1 B3700AA LIC Product # for HP Glance Plus Pak
HP 1 B2491A Mirror Disk/UX LIC+CD-ROM
HP 1 B3921AA S800 HP-UX 10.00 DOC+MAN on CD-ROM
HP 1 B3921AA S800 HP-UX 10.0 DOC-SYS Admin MAN
HP 1 B3920AA HP-UX 10.01 Server OP Sys
HP 1 B3931AA S800 HP-UX 10.0 Doc+Advanced Usage
HP 1 B3701AA Media/Manual Glancepak
HP 1 B3920AA First Year of System Support
HP 1 B2491A 1 Year 24x7 System Support
HP 1 B3919AA UP-UX 10.0 User Lic S800+CD-ROM
HP 1 B3919AA Phone-in Asst License to Use Updates
Symix 40 SYM-SFS Concurrent Sessions
Symix 40 MPC-SES Molding Process Control Sessions
Symix 1 WDC-Base Data Collection/Store Foreward
Symix 6 WSF-SES Data Collection/Store Forward Concurrent
Symix 1 MNT-4000 Maintenance 24 Months @ 8% Year
Symix 1 SUP-4000 Support 24 Months @ 4% Year
</TABLE>
<PAGE>
LEASE AGREEMENT NUMBER: CH030196 Page 2 of 2
LEASE SCHEDULE NUMBER: 001
ATTACHMENT A
------------
<TABLE>
<CAPTION>
MANUFACTURER QTY MACHINE/MODEL EQUIPMENT DESCRIPTION (including features)
- ------------ --- ------------- ------------------------------------------
<C> <C> <C> <S>
Symix 1 ESA-4000 MPC/RMA Ext. Serv. Agreement 2 Yr.
Symix 48 Progress Workgroup Server
Symix 1 Progress Maintenance 1 Year
Symix 40 Progress Query/Results
Symix 1 Progress Maintenance 1 Year
Symix 1 Progress 4GL Development
Symix 1 Progress Maintenance 1 Year
Symix 10 Progress Query/Report
Symix 1 Progress Maintenance 1 Year
Symix 1 Provision Progress Pro Vision (Stand
Alone) Wind
Symix 1 Provision Progress Maintenance 1 Year
Symix 10 Progress Single Database
Symix 1 Progress Maintenance 1 Year
Symix 10 Progress Client Networking
Symix 1 Progress Maintenance 1 Year
Symix 38 CON-5500 Implementation Consulting Services-Day
Symix 32 EDU-5500 In-House Education
Symix 166 EDU-5500 On-Site Education
Symix 8 CON-550 Technical Consulting - 8 Day
Symix 1 Programming Service
Symix 90 P33000 Integration Services - 90 Hours
Symix 19 CON-3100 Project Management - 19 Days
Symix 1 Object Code and Documentation
Nortel 1 Phone System
Octel 1 Voice Mail
Compaq 50 Personal Computers
</TABLE>
ACCEPTED: ACCEPTED:
WINTHROP RESOURCES CORPORATION CHANNELL COMMERCIAL CORPORATION
"LESSOR" "LESSEE"
BY: /s/ Kirk A. MacKenzie BY: /s/ Gary W. Baker
------------------------------ -------------------------------
NAME: Kirk A. MacKenzie NAME: Gary W. Baker
---------------------------- -----------------------------
please print or type please print or type
TITLE: Vice President/Treasurer TITLE: C.F.O.
--------------------------- ----------------------------
DATE: 3/18/96 DATE: March 13, 1996
---------------------------- -----------------------------
<PAGE>
Rider Number: 002
Lease Agreement Number: CH030196
Lease Schedule Number: 001
Lessee Name: Channell Commercial Corporation
Lease Dated: March 1, 1996
INTEREST RATE FLUCTUATION
-------------------------
This lease is intended to be a fixed rate lease from commencement date to the
end of the term. The three year treasury rate is an integral part of the lease
rate in this lease. The Lessee and Lessor agree that the lease rate shall be
fixed for the interim period and that should the three year treasury note
increase between the execution date of this Agreement and commencement date, the
lease rate will be adjusted accordingly and will then be fixed for the term of
the lease.
ACCEPTED: ACCEPTED:
WINTHROP RESOURCES CORPORATION CHANNELL COMMERCIAL CORPORATION
"LESSOR" "LESSEE"
BY: /s/ Kirk A. MacKenzie BY: /s/ Gary W. Baker
------------------------------ ------------------------------
NAME: Kirk A. MacKenzie NAME: Gary W. Baker
---------------------------- ----------------------------
please print or type please print or type
TITLE: Vice President/Treasurer TITLE: C.F.O.
--------------------------- ---------------------------
DATE : 3/18/96 DATE: March 13, 1996
--------------------------- ----------------------------
<PAGE>
Rider Number: 001
Lease Agreement Number: CH030196
Lease Schedule Number (s): 001
Lessee Name: Channell Commercial Corporation
Lease Dated: March 1, 1996
PURCHASE OPTION
---------------
Lessee, provided it is not then in default under the terms of this Lease, shall
have the option to purchase the equipment leased hereby at the normal
termination of this Lease, in whole or in part as to any schedule(s), on an as-
is, where-is basis, for the then determined "Fair Market Value" provided that
the Lessee has made all then accrued lease payments due under the Lease prior to
exercising his option to purchase such equipment and Lessor has received written
notice of Lessee' s election to exercise said purchase option not less than one
hundred and twenty (120) days prior to the date the initial term of the Lease
shall expire.
If the parties cannot agree on a "Fair Market Value," each party may appoint an
independent appraiser. Each appraiser shall determine "Fair Market Value" based
on market conditions at the time and would be a value obtained in an arms length
transaction between an informed and willing buyer-user under no compulsion to
buy and an informed and willing seller under no compulsion to sell and would
include all costs normally associated with a transaction of this type. If the
two appraisals are within 15% of each other, "Fair Market Value" will be the
average of the two. If not within 15% of each other, the appraisers will appoint
a third appraiser whose appraisal will be averaged with the closest of the two
earlier appraisals.
Title to the equipment will transfer to Lessee only after Lessor has received
all payments required under this Purchase Option.
ACCEPTED: ACCEPTED:
WINTHROP RESOURCES CORPORATION CHANNELL COMMERCIAL CORPORATION
"LESSOR" "LESSEE"
BY: /s/ Kirk A. MacKenzie BY: /s/ William H. Channell
------------------------------ ------------------------------
NAME: Kirk A. MacKenzie NAME: William H. Channell Jr.
---------------------------- ----------------------------
please print or type please print or type
TITLE: Vice President/Treasurer TITLE: Ex. Vice - President
--------------------------- ---------------------------
DATE: 3/18/96 DATE: March 11, 1996
---------------------------- ----------------------------
<PAGE>
EXHIBIT 10.17
INDEMNITY AGREEMENT
This INDEMNITY AGREEMENT (this "Agreement") is made as of the _____ day of
____________, 1996, by and between Channell Commercial Corporation, a Delaware
corporation and the successor to Channell Commercial Corporation, a California
corporation (including its predecessor, the "Corporation"), and _________
("Indemnitee"), with reference to the following facts and circumstances:
A. Indemnitee is currently serving as a director and/or officer of the
Corporation or certain of its Affiliates (as hereinafter defined) and the
Corporation wishes Indemnitee to continue in such capacity.
B. In order to induce Indemnitee to continue to serve as a director
and/or officer of the Corporation and/or its Affiliates, the Corporation and
Indemnitee desire to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Corporation hereby agrees to indemnify Indemnitee as follows:
1. Definitions. As used in this Agreement:
-----------
1.1 The term "Affiliate" shall include any corporation, partnership,
joint venture, trust or other enterprise in which Indemnitee acts as a director,
officer, employee or agent at the direction of the Corporation.
1.2 The term "Proceeding" shall include any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative.
1.3 The term "Expenses" means all expenses incurred in connection
with a Proceeding, including, without limitation, attorneys' fees, disbursements
and retainers, accounting and witness fees, travel and deposition costs,
expenses of investigations, judicial or administrative proceedings and appeals,
and any expenses of establishing a right to indemnification or to advances of
costs and expenses pursuant to this Agreement or otherwise.
2. Indemnification.
---------------
2.1 Indemnification in Third Party Actions. The Corporation shall
--------------------------------------
indemnify Indemnitee if he or she was or is a party or is threatened to be made
a party to any Proceeding, other than an action by or in the right of the
Corporation or an Affiliate (which actions are covered by Section 2.2 below), by
reason of the fact that he or she is or was a director,
<PAGE>
officer, employee and/or agent of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of an
Affiliate, against Expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such
Proceeding if Indemnitee acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Corporation and/or the Affiliate (as the case may be) and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The termination of any Proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that Indemnitee did not act in good
faith and in a manner which Indemnitee reasonably believed to be in or not
opposed to the best interests of the Corporation and/or the Affiliate (as the
case may be), or that, with respect to any criminal action or proceeding,
Indemnitee had reasonable cause to believe that his or her conduct was unlawful.
2.2 Indemnification in Proceedings by or in the Name of the
-------------------------------------------------------
Corporation or an Affiliate. The Corporation shall indemnify Indemnitee if he
- ---------------------------
or she was or is a party or is threatened to be made a party to any Proceeding
by or in the right of the Corporation or an Affiliate to procure a judgment in
its favor by reason of the fact that Indemnitee is or was a director, officer,
employee and/or agent of the Corporation or is or was serving at the request of
the Corporation as a director, officer, employee or agent of an Affiliate,
against Expenses actually and reasonably incurred by Indemnitee in connection
with the defense or settlement of such Proceeding, if Indemnitee acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the Corporation and/or the Affiliate (as the case may be),
except to the extent expressly limited by the provisions of Section 145(b) of
the Delaware General Corporation Law as in effect on the date of this Agreement.
2.3 Indemnification of Expenses of Successful Party.
-----------------------------------------------
Notwithstanding any other provision of this Agreement, to the extent that
Indemnitee is successful on the merits or otherwise in defense of any
Proceeding, or in defense of any claim, issue or matter therein, the Corporation
shall indemnify him or her against Expenses actually and reasonably incurred by
him or her in connection therewith.
2.4 Indemnification Available Under Applicable Law. Without
----------------------------------------------
limitation of the provisions of Sections 2.1, 2.2 or 2.3 hereof, the Corporation
shall indemnify Indemnitee to the fullest extent permitted by applicable law,
including, without limitation, Section 145 of the Delaware General Corporation
Law and any amendments thereto subsequent to the date of this Agreement that
increase the protection allowable thereunder.
-2-
<PAGE>
3. Conclusive Presumption Regarding Standards of Conduct. To the fullest
-----------------------------------------------------
extent permitted by applicable law, Indemnitee shall be conclusively presumed to
have met the relevant standards of conduct, as defined by the laws of the State
of Delaware or other applicable jurisdictions, for indemnification pursuant to
this Agreement, unless, as soon as is reasonably practicable following notice
from Indemnitee pursuant to Section 5.1 below, a determination is made that
Indemnitee has not met such standards by (i) a majority vote of the directors of
the Corporation who are not parties to the Proceeding with respect to which
indemnification is sought hereunder, even though less than a quorum, (ii) if
there are no such directors, or if such directors so direct, by independent
legal counsel in a written opinion, or (iii) by the stockholders of the
Corporation.
4. Advance of Expenses. Expenses incurred by Indemnitee in connection
-------------------
with any Proceeding shall be paid by the Corporation promptly as incurred and in
advance of any final disposition of such Proceeding. To the extent required
under the laws of Delaware or other applicable jurisdictions, Indemnitee hereby
agrees and undertakes to repay such advanced amounts if it is ultimately
determined by a court of competent jurisdiction that Indemnitee is not entitled
to be indemnified pursuant to this Agreement or otherwise.
5. Indemnification Procedure; Determination of Right to Indemnification.
--------------------------------------------------------------------
5.1 Notice. Indemnitee shall notify the Corporation in writing as
------
soon as reasonably practicable of any claim made against him or her for which
indemnification will or could be sought under the Corporation's or an
Affiliate's charter or Bylaws, this Agreement or otherwise. The omission to so
notify the Corporation will not relieve the Corporation from any liability which
it may have to Indemnitee otherwise under this Agreement except to the extent
the Corporation has been prejudiced by the failure to provide such notice.
Notice to the Corporation shall be directed to Channell Commercial Corporation,
26040 Ynez Road, Temecula, California 92591-9022, attention: President. Notice
shall be deemed received if sent by prepaid mail properly addressed, the date of
such notice being the date postmarked. In addition, Indemnitee shall give the
Corporation such information and cooperation as it may reasonably require to the
extent within Indemnitee's power.
5.2 Enforcement. If a claim for indemnification or advances under
-----------
this Agreement is not paid by the Corporation within 30 days of receipt of
written notice, the rights provided by this Agreement shall be enforceable by
Indemnitee in any court of competent jurisdiction. The burden of proving by
clear and convincing evidence that indemnification or advances are not
appropriate shall be on the Corporation.
-3-
<PAGE>
Neither the failure of the directors or stockholders of the Corporation or its
independent legal counsel to have made a determination prior to the commencement
of such action that indemnification or advances are proper under the
circumstances because Indemnitee has met the applicable standard of conduct, nor
an actual determination by the directors or stockholders of the Corporation or
independent legal counsel that Indemnitee has not met the applicable standard of
conduct shall be a defense to the action, affect the burden of proof, or create
a presumption that Indemnitee has not met the applicable standard of conduct;
rather, it is the parties' intention that if the Corporation contests
Indemnitee's right to indemnification or advances, the question of Indemnitee's
right to indemnification or advances shall be for the court to decide in
accordance with the foregoing.
5.3 Payment of Expenses. Expenses incurred by Indemnitee in
-------------------
connection with any Proceeding concerning his or her right to indemnification or
advances in whole or in part pursuant to this Agreement or otherwise shall also
be indemnified by the Corporation regardless of the outcome of such Proceeding,
unless a court of competent jurisdiction determines that each of the material
assertions made by Indemnitee in the Proceeding was not made in good faith or
was frivolous.
6. Choice of Indemnitee's Counsel in Indemnification Proceedings. With
-------------------------------------------------------------
respect to any Proceeding for which indemnification is requested, Indemnitee
shall have the right to select and employ his or her own counsel in his or her
sole and absolute discretion, and the Corporation shall advance the actual fees
and expenses of such counsel in accordance with the terms of this Agreement.
7. Miscellaneous.
-------------
7.1 Rights Not Exclusive. Nothing herein shall be deemed to
--------------------
diminish or otherwise restrict Indemnitee's right to indemnification under any
provision of the charter or Bylaws of the Corporation or any Affiliate, separate
contract (if applicable), or the laws of Delaware or other applicable
jurisdictions, including, without limitation, any amendments to such laws
subsequent to the date of this Agreement that increase the protection of
officers and directors allowable under such laws.
7.2 Successors, Assigns, etc.. This Agreement shall inure to the
-------------------------
benefit of and be binding upon (i) the Corporation, its successors and assigns,
including, without limitation, any entity which may acquire all or substantially
all of the Corporation's assets and business and any corporation with which the
Corporation may be merged and (ii) Indemnitee, regardless of whether Indemnitee
is then serving in any capacity with the Corporation or any Affiliate, and
-4-
<PAGE>
Indemnitee's heirs, executors, administrators and legal representatives.
7.3 No Waiver of Rights. All waivers hereunder must be made in
-------------------
writing and failure by either party hereto at any time to require the other
party's performance of any obligation under this Agreement shall not affect the
right subsequently to require performance of that obligation. Any waiver of any
breach of any provision of this Agreement shall not be construed as a waiver of
any continuing or succeeding breach of such provision or a waiver or
modification of the provision.
7.4 Severability. The parties hereto expressly agree and contract
------------
that it is not the intention of any of them to violate any public policy,
statutory or common laws, rules, regulations, treaties or decisions of any
government or agency thereof. If any paragraph, sentence, clause, word or
combination thereof in this Agreement is judicially or administratively
interpreted or construed as being in violation of any such provisions of any
jurisdiction, then (i) such paragraphs, sentences, words, clauses or
combinations thereof shall be inoperative in each such jurisdiction and the
remainder of this Agreement shall remain binding upon the parties hereto in each
such jurisdiction, (ii) to the fullest extent permitted under applicable law,
there shall be automatically added to this Agreement a provision or provisions
as similar to such invalid, illegal or unenforceable provision or provisions,
both in terms and in effect, as may be possible and be valid, legal and
enforceable, (iii) the Corporation shall indemnify Indemnitee to the fullest
extent permitted by any applicable portion of this Agreement that shall not have
been invalidated, and (iv) this Agreement as a whole shall be unaffected
elsewhere.
7.5 Continuation of Indemnification. The indemnification under
-------------------------------
this Agreement shall continue as to Indemnitee even though he or she may have
ceased to act in any capacity with the Corporation or any Affiliate.
7.6 Coverage of Indemnification. The indemnification under this
---------------------------
Agreement shall cover Indemnitee's service as a director, officer, employee
and/or agent of the Corporation or any Affiliate and all of his or her acts in
such capacity, whether prior to, on or after the date of this Agreement.
7.7 Amendments. No amendment, waiver, modification, termination or
----------
cancellation of this Agreement shall be effective unless in writing signed by
the party against whom enforcement is sought. The indemnification rights
afforded to Indemnitee hereby are contract rights and may not be diminished,
eliminated or otherwise affected by amendments to the Corporation's or its
Affiliates' charter,
-5-
<PAGE>
Bylaws, other agreements, including without limitation, directors and officers
insurance policies, or the laws of the state of Delaware or other applicable
jurisdictions.
7.8 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall constitute an original instrument, but all of which shall
constitute one and the same instrument.
7.9 Law to Govern. Notwithstanding the fact that Indemnitee's right
-------------
to indemnification may be governed by the laws of the state of Delaware or other
applicable law, the validity, construction and enforceability of this Agreement
shall be governed by the law of California, regardless of whether either of the
parties shall not be or hereafter becomes a resident of another state or
country, except as to any matters which are required to be governed by the laws
of any other jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"CORPORATION"
CHANNELL COMMERCIAL CORPORATION,
a Delaware corporation
By:__________________________________
Name:________________________________
Title:_______________________________
"INDEMNITEE"
_____________________________________
-6-
<PAGE>
EXHIBIT 10.18
AGREEMENT REGARDING INTELLECTUAL PROPERTY
This AGREEMENT REGARDING INTELLECTUAL PROPERTY (this "AGREEMENT") is
entered into this 15th day of April, 1996, by and among Channell Commercial
Corporation, a Delaware corporation (the "COMPANY", which term, unless the
context otherwise requires, includes the predecessor, Channell Commercial
Corporation, a California corporation), and William H. Channell, Sr., William H.
Channell, Jr., Carrie S. Rouveyrol and The Taylor Family Trust (each a "SELLER"
and collectively the "SELLERS"), with reference to the following:
A. The Sellers are the sole and exclusive owners of the patents set forth
on Schedule A of Exhibit A attached hereto and hereby incorporated herein by
---------- ---------
reference, the inventions disclosed and claimed therein, any letters patent that
may be granted for such inventions in the United States and throughout the
world, and any and all other intellectual property rights associated therewith,
including, without limitation, any trademarks, trade secrets or copyrights
related thereto (collectively, the "INTELLECTUAL PROPERTY").
B. The Company currently uses the Intellectual Property in the operation
of its business pursuant to license agreements (collectively, the "LICENSE
AGREEMENTS"), which License Agreements require the payment of license fees based
on the sale of certain products utilizing the inventions included in the
Intellectual Property (the "LICENSE FEES").
C. The Sellers desire to sell to the Company, and the Company desires to
purchase from the Sellers, the Intellectual Property, and each of the parties
hereto desires to terminate the License Agreements, in each case subject to the
terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
contained herein, each of the parties hereto hereby agrees as follows:
1. Purchase and Sale of Intellectual Property.
------------------------------------------
1.1 Agreement to Purchase and Sell. Subject to the terms and
------------------------------
conditions of this Agreement, the Sellers hereby agree to sell, assign and
transfer to the Company, and the Company hereby agrees to purchase from the
Sellers, all of the right, title and interest in and to the Intellectual
Property, for an aggregate purchase price of Three Million One Hundred Thousand
Dollars ($3,100,000) (the "PURCHASE PRICE"), which shall be divided among the
Sellers as follows:
<TABLE>
<CAPTION>
<S> <C>
William H. Channell, Sr.: $1,829,000
William H. Channell, Jr.: $ 775,000
Carrie S. Rouveyrol $ 248,000
The Taylor Family Trust: $ 248,000
</TABLE>
<PAGE>
1.2 Closing. The closing of the purchase and sale contemplated hereby
-------
(the "CLOSING") shall take place at the offices of Irell & Manella LLP, counsel
to the Company, located at 333 South Hope Street, Suite 3300, Los Angeles,
California 90071, on the business day immediately preceding the closing of the
initial public offering of the Company's common stock (the "CLOSING DATE"). The
Closing shall occur upon the Sellers' delivery to the Company of an Assignment
in substantially the form attached hereto as Exhibit A (the "ASSIGNMENT"), duly
---------
executed by William H. Channell, Sr. ("MR. CHANNELL"), and such other documents
as the Company may reasonably request in order to effect the purchase and sale
contemplated hereby, each duly executed by the Sellers, against the Company's
payment by check of the Purchase Price to the Sellers in the amounts specified
in Section 1.1 above.
2. Termination of License Agreements. Upon the Closing, each of the
---------------------------------
License Agreements shall be terminated and deemed of no further force or effect,
with the result that no License Fees will be paid or payable to any party after
the Closing Date, without regard to whether such License Fees have been accrued
by the Company.
3. Representations, Warranties and Agreements.
------------------------------------------
3.1 By the Company. As an inducement for the Sellers to enter into
--------------
this Agreement and the Assignment, as of the date hereof and as of the Closing
Date, the Company represents and warrants as follows:
3.1.1 This Agreement has been duly executed and delivered by the
Company and constitutes a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency, moratorium,
reorganization or similar laws affecting creditors' rights generally and by
limitations on the availability of equitable remedies).
3.1.2 The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby will not (i)
violate any of the terms of the Company's charter or bylaws, (ii) constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, lease, agreement or other material
instrument or obligation to which the Company is a party or by which the Company
is bound, or (iii) violate any judgment, order, injunction, decree, statute,
rule, law or regulation applicable to the Company.
3.2 By the Sellers. As an inducement for the Company to enter into
--------------
this Agreement, as of the date hereof
-2-
<PAGE>
and as of the Closing Date, the Sellers hereby represent, warrant and agree as
follows:
3.2.1 Each of this Agreement and the Assignment has been or, as
of the Closing Date, will have been duly executed and delivered by each of the
Sellers, in the case of this Agreement, and by Mr. Channell, in the case of the
Assignment, and constitutes or, upon execution, will constitute a legal, valid
and binding obligation of the Sellers, enforceable against each of them in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, moratorium, reorganization or similar laws
affecting creditors' rights generally and by limitations on the availability of
equitable remedies. Without limitation of the foregoing, the Sellers other than
Mr. Channell acknowledge and agree that they hereby authorize and empower Mr.
Channell to execute and deliver the Assignment and that such Assignment shall be
effective to transfer the entire right, title and interest of all of the Sellers
in and to the Intellectual Property, notwithstanding that such Assignment is
executed solely by Mr. Channell.
3.2.2 The execution, delivery and performance of this Agreement
and the Assignment and the consummation of the transactions contemplated hereby
and thereby will not (i) constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under the terms, conditions
or provisions of any note, bond, mortgage, indenture, license, lease, agreement
or other material instrument or obligation to which any Seller is a party or by
which any Seller is bound, or (ii) violate any judgment, order, injunction,
decree, statute, rule, law or regulation applicable to any Seller.
3.2.3 The Sellers have and, as of the Closing Date, will have
full power and right to transfer the Intellectual Property pursuant to the terms
of this Agreement and the Assignment. On the Closing Date, the Sellers will
transfer the Intellectual Property to the Company free and clear of any liens,
claims, security interests or other encumbrances.
3.2.4 The Intellectual Property represents all of the patents,
patent applications and inventions owned by the Sellers or any one of them that
are or have been used in the operation of the Company's business prior to the
Closing Date, except for any such patents or patent applications that have
expired, are unenforceable or have been abandoned.
4. Miscellaneous.
-------------
4.1 Further Assurances; Power of Attorney. On or prior to the
-------------------------------------
Closing Date or thereafter, each of the parties hereto shall execute any and all
further documents and
-3-
<PAGE>
writings and perform such other reasonable actions that may be or become
necessary or expedient to effectuate the purchase and sale of the Intellectual
Property as contemplated hereby. In furtherance thereof, provided that the
Company has paid or stands ready to pay the Purchase Price as provided herein,
if the Company is unable to secure any Seller's signature on the Assignment or
any other documents necessary or desirable in order to consummate the
transactions contemplated hereby or by the Assignment, whether because of such
Seller's physical or mental incapacity or for any other reason whatsoever, each
Seller hereby irrevocably designates and appoints the Company and its duly
authorized officers and agents as its agent and attorney-in-fact, to act for and
in its behalf and in its name and stead for the purpose of executing and filing
the Assignment and any such other documents and taking all other lawfully
permitted actions to consummate the transactions contemplated hereby and by the
Assignment, with the same legal force and effect as if executed by it.
4.2 Termination. Unless the Closing has occurred earlier, this
-----------
Agreement shall terminate and be of no further force or effect on January 1,
1997.
4.3 Entire Agreement. This Agreement constitutes the entire
----------------
agreement among the parties and supersedes all prior agreements,
representations, warranties, statements and understandings, whether oral or
written, with respect to the subject matter hereof, including, without
limitation, each of the License Agreements.
4.4 Notices. Any notices or other communications required hereunder
-------
shall be in writing and shall be delivered by personal service or overnight or
certified mail, postage prepaid, to such address as may be designated from time
to time by the relevant party, and which initially shall be as follows:
If to the Company:
Channell Commercial Corporation
26040 Ynez Road
Temecula, California 92591-9022
Attention: Chief Executive Officer
If to the Sellers:
William H. Channell, Sr.
c/o Channell Commercial Corporation
26040 Ynez Road
Temecula, California 92591-9022
4.5 Governing Law. This Agreement shall be governed by the laws of
-------------
the state of California, without giving effect to the conflict of laws
provisions thereof.
-4-
<PAGE>
4.6 Assignment. This Agreement shall be binding upon and inure to
----------
the benefit of the parties and their respective successors and assigns. This
Agreement and the rights and obligations of the parties hereto shall not be
assignable by either party hereto without the written consent of the other party
hereto.
4.7 Severability. The validity, legality or enforceability of the
------------
remainder of this Agreement shall not be affected even if one or more of the
provisions of this Agreement shall be held to be invalid, illegal or
unenforceable in any respect.
4.8 Amendments. None of the terms or provisions of this Agreement
----------
shall be modified, waived or amended, except by a written instrument signed by
the party against which any modification, waiver or amendment is to be enforced.
4.9 Captions. All section titles or captions contained in this
--------
Agreement or in any schedule annexed hereto or referred to herein are for
convenience only, shall not be deemed a part of this Agreement and shall not
affect the meaning or interpretation of this Agreement. All references herein
to sections shall be deemed references to such parts of this Agreement, unless
the context shall otherwise require.
4.10 Third Party Beneficiaries. This Agreement is intended solely
-------------------------
for the benefit of the parties hereto and shall not be for the benefit of any
other party, with the exception that the underwriters in connection with the
Company's initial public offering shall be entitled to rely upon the
representations and warranties contained in Section 3 hereof.
4.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first set forth above.
CHANNELL COMMERCIAL CORPORATION,
a Delaware corporation
By:_____________________________
William H. Channell, Jr.,
President
THE "SELLERS"
________________________________
William H. Channell, Sr.
___________________________________
William H. Channell, Jr.
___________________________________
Carrie S. Rouveyrol
THE TAYLOR FAMILY TRUST
By:________________________________
Michele Taylor, trustee
By:________________________________
Roy Taylor, trustee
-6-
<PAGE>
SCHEDULE A
----------
<TABLE>
<CAPTION>
Patent No. Issue Date Title
- ---------- ---------- -----
<S> <C> <C>
US 5,210,374 5/11/93 Terminal Housing for Buried
Communication Lines
US Des. 317,908 7/2/91 All Weather Covering for
Cable Television Equipment
US Des. 315,906 4/2/91 All Weather Covering for
Cable Television Equipment
US Des. 298,031 10/11/88 Housing for Electronic
Equipment for Cable
Television Installation
US Des. 267,228 12/14/82 Wedge Fastener
US 4,255,614 3/10/81 Method and Apparatus for
Enclosing a Cable Splice
</TABLE>
A-3
<PAGE>
State of California )
) ss.
County of ____________ )
On _______________________, before me, _________________, Notary Public,
personally appeared William H. Channell, Sr., personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he executed the
same in his authorized capacity, and that by his signature on the instrument,
the person, or the entity upon behalf of which the person acted, executed the
instrument.
WITNESS my hand and official seal.
___________________________________
Notary Public
A-4
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated May 9, 1996 (except for notes N and O, as to
which the date is June 14, 1996) accompanying the financial statements of
Channell Commercial Corporation contained in the Registration Statement and
Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts."
GRANT THORNTON LLP
Los Angeles, CA
June 17, 1996
<PAGE>
EXHIBIT 23.3
[LETTERHEAD OF HOULIHAN LOKEY HOWARD & ZUKIN]
June 14, 1996
To the Board of Directors of
Channell Commercial Corporation:
We have reviewed the disclosure contained under the caption "Reorganization
and Termination of S Corporation Status" in the Registration Statement on Form
S-1 of Channell Commercial Corporation pertaining to our appraisal of certain
patents used in the operation of such company's business and we hereby consent
to the use of our name in such Registration Statement and to the filing of our
appraisal as an exhibit to such Registration Statement.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
/s/ Houlihan, Lokey, Howard & Zukin
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS & NOTES THERETO CONTAIN IN THE COMPANY'S REGISTRATION STATEMENT ON
FORM S-1 FILED ON MAY 13, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 DEC-31-1995
<CASH> 390 1,375
<SECURITIES> 0 0
<RECEIVABLES> 6,688 4,122
<ALLOWANCES> 0 0
<INVENTORY> 2,584 2,584
<CURRENT-ASSETS> 10,004 8,502
<PP&E> 10,132 10,062
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 20,655 19,103
<CURRENT-LIABILITIES> 5,341 4,277
<BONDS> 0 0
0 0
0 0
<COMMON> 61 61
<OTHER-SE> 13,202 12,412
<TOTAL-LIABILITY-AND-EQUITY> 20,655 19,103
<SALES> 10,279 40,972
<TOTAL-REVENUES> 0 0
<CGS> 5,738 23,059
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 65 339
<INCOME-PRETAX> 2,124 8,832
<INCOME-TAX> 122 349
<INCOME-CONTINUING> 2,002 8,483
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,002 8,483
<EPS-PRIMARY> .17 .72
<EPS-DILUTED> .17 .72
</TABLE>
<PAGE>
EXHIBIT 99
[LETTERHEAD OF HOULIHAN LOKEY HOWARD & ZUKIN]
June 14, 1996
Mr. Gary Baker
Chief Financial Officer
Channell Commercial Corporation
26040 Ynez Road
P.O. Box 9022
Temecula, CA 92589-9022
Dear Mr. Baker:
At your request, we have analyzed certain financial information regarding six
patents (patent numbers 267,228, 298,031, 315,906, 317,908, 4,255,614 and
5,210,374) owned by Mr. William H. Channell, Sr. (the "Patents") and currently
licensed by him, as a private person, to Channell Commerical Corporation ("CCC"
or the "Company").
The purpose of this analysis was to express an opinion (the "Opinion") on the
aggregate fair market value, as of May 31, 1996, of the Patents to serve as a
valuation basis for general corporate planning purposes and estate tax planning
purposes.
The Patents are currently licensed to CCC for use in products sold by the
Company. The Patents have been valued without regard to any encumbrances
created by license agreements between Mr. Channell and CCC, as said parties are
not at arm's-length to each other with respect to said Patents.
CCC is a California corporation engaged in the design, manufacture and sale of
precision-molded thermoplastic enclosures used by cable television operators and
local telephone companies worldwide. Corporation headquarters and manufacturing
facilities are located in Temecula, California.
The term "fair market value," as used herein, is defined as the amount at which
the Patents would change hands between a willing buyer and a willing seller,
each having reasonable knowledge of all relevant facts, neither being under any
compulsion to act, with equity to both.
It is Houlihan Lokey's understanding, upon which it is relying, that the
Company's Board of Directors, Mr. Channell, and any other recipient of the
Opinion will consult with the rely solely
<PAGE>
Mr. Gary Baker
Channell Commercial Corporation
June 14, 1996 -2-
upon their own legal counsel with respect to said definitions. No
representation is made herein, or directly or indirectly by the Opinion, as to
any legal matter or as to the sufficiency of said definitions for any purpose
other than setting forth the scope of Houlihan Lokey's Opinion hereunder.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. held discussions with certain members of management of the Company to
discuss the uses, future prospects, marketability and descriptions of each
of the Patents;
2. reviewed the Company's S-1, filed May 13, 1996.
3. reviewed the Company's audited financial statements for the two fiscal
years ended December 31, 1995 and unaudited interim financial statements
for the three month period ended March 31, 1996 which the Company's
management has identified as being the most current financial statements
available;
4. reviewed projections prepared by the Company's management with respect to
sales of products using the Patents for the fiscal years ended December
31, 1996 through 2000 and held discussions with the Company's management
regarding sales of products using the Patents after fiscal year 2000;
5. reviewed historical sales figures involving products that use the Patents
for the five fiscal years ended December 31, 1995;
6. reviewed the U.S. Patent abstracts for each of the Patents;
7. reviewed the royalty calculation and payments paid by CCC to Mr. Channell,
Sr. in fiscal years 1991 through 1995 for the use of the Patents; and
8. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of the products using the Patents, and that
there has been no material change in the Patents or the financial condition,
business or prospects of the patented products between the date of the most
recent financial data made available to us and the date of this Opinion.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and the Patents and do
not assume any responsibility with respect
<PAGE>
Mr. Gary Baker
Channell Commercial Corporation
June 14, 1996 -3-
to it. Our opinion is necessarily based on business, economic, market and other
conditions as they exist and can be evaluated by us at the date of this letter.
In our analysis of the Patents, we have taken into consideration their
income- and cash-generating capability. Typically, an investor contemplating an
investment in an asset with income- and cash-generating capability similar to
Mr. Channell's Patents will evaluate the risks and returns of its investment on
a going-concern basis. Accordingly, the value of the Patents has been developed
primarily on the basis of the discounted cash flow approach.
Based upon the investigation, premises, provisos, and analyses outlined above,
it is our opinion that, as of May 31, 1996, the aggregate fair market value of
the Patents is reasonably stated in the amount of $4,000,000.
In accordance with recognized professional ethics, our fees for this service are
not contingent upon the opinion expressed herein, and neither Houlihan, Lokey,
Howard & Zukin, Inc. nor any of its employees have a present or intended
financial interest in the Company or the Patents.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
/s/ Houlihan, Lokey, Howard & Zukin, Inc.
