As filed with the Securities and Exchange Commission on March 18, 1998
- --------------------------------------------------------------------------------
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
Annual Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission file number 000-21153.
ALYN CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0709359
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16761 Hale Avenue, Irvine, CA 92606
- --------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(714) 475-1525
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.001 per share
Title of Each Class
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant as of February 24, 1998 was $41,333,049, based
on the closing price of $9.44 on that date.
As of February 24, 1998, the aggregate number of outstanding shares of
common stock of the Registrant was 10,750,000 shares.
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on June 3, 1998, is incorporated by reference into Part III
(Items 10, 11, 12 and 13) of this Form 10-K
<PAGE>
TABLE OF CONTENTS
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE SECURITIES
LITIGATION REFORM ACT OF 1995 .................................................
PART I.........................................................................
1. BUSINESS....................................................
2. PROPERTIES .................................................
3. LEGAL PROCEEDINGS ..........................................
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........
PART II........................................................................
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ........................................
6. SELECTED FINANCIAL DATA.....................................
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ........................
PART III.......................................................................
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........
11. EXECUTIVE COMPENSATION......................................
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............
PART IV........................................................................
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.................................................
SIGNATURES.....................................................................
Boralyn(R) is a registered trademark of Alyn Corporation
<PAGE>
PART I
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE SECURITIES LITIGATION
REFORM ACT OF 1995
Except for historical information contained herein, this Annual Report on
Form 10-K (the "Annual Report") contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements involve known and unknown risks and uncertainties that may cause the
Company's actual results or outcomes to be materially different from those
anticipated and discussed herein. Further, the Company operates in an industry
sector where securities values may be volatile and may be influenced by factors
beyond the Company's control. Important factors that the Company believes might
cause such differences are discussed in the cautionary statements accompanying
the forward-looking statements and in the risk factors detailed in this Annual
Report. In assessing forward-looking statements contained herein, readers are
urged to read carefully all cautionary statements and risk factors contained in
this Annual Report.
1. BUSINESS.
Unless otherwise indicated, all information in this Annual Report gives
effect to the merger, effective May 2, 1996, of Alyn Corporation, a California
corporation ("Old Alyn"), with and into Alyn Corporation, a Delaware corporation
formerly named AC Acquisition Corp. ("Alyn" or the "Company"). Unless the
context otherwise requires, the terms "Alyn" or the "Company", as used in this
Annual Report, includes the Company and its predecessor, Old Alyn.
Alyn designs, develops and manufactures consumer and industrial products
for its customers utilizing its proprietary advanced metal matrix composite
materials, which it believes have a superior combination of physical properties,
including strength, light weight, stiffness, hardness and fracture resistance,
for a variety of selected markets. The Company has developed technology, for
which it obtained its initial patent in January 1996, for the application of
boron carbide in combination with aluminum in lightweight metal matrix
composites under the name Boralyn. Boron carbide, a principal component of
Boralyn, is an advanced ceramic that is the third hardest material in the world,
and the hardest material available at a commercially reasonable cost. The
Company believes that no other material offers a range of properties comparable
to those Boralyn provides. Boralyn is lighter and can be more easily fabricated
than titanium; has a higher specific stiffness than aluminum and commonly used
titanium or steel alloys; is one-third the density of most steels; has a
resistance to wear greater than aluminum, specialty steel and titanium; and is
highly fracture resistant. Boralyn is available in a range of grades, with
varying properties, to satisfy specific customer requirements and can be
extruded, forged, cast, welded, bent and coated using conventional equipment and
tools. The Company believes that Boralyn is a highly effective replacement for
many premium-priced metal and composite products, such as those used in high-end
sporting goods, high-capacity disks for computer hard-disk drives, neutron
shielding and other applications. The Company also believes that Boralyn can be
an effective replacement for conventional aluminum alloys where greater
stiffness and wear properties are needed, such as those in the aerospace and
automotive industries.
The Company is currently focusing its marketing efforts on the use of
Boralyn in applications where its unique properties, combined with the Company's
manufacturing capabilities, justify an appropriate price premium. These
applications to date include (i) high-end sporting goods, such as premium priced
golf club heads and shafts, sticks and bats, and lightweight bicycle frames and
components, (ii) disks for computer hard-disk drives, (iii) aerospace
components, (iv) automotive parts, (v) personal accessories, such as sunglass
frames and high-end watches, and (vi) neutron shielding for both disposal
containers and reactor installations. The Company provides an in-house,
vertically integrated approach to manufacturing, including the development of
new metallurgical processes, the manufacture of billets and ingots, the
manufacture of cast and wrought fabricated shapes, and finishing for delivery to
original equipment manufacturer (OEM) customers.
<PAGE>
Development of the Company's Business
The growth of interest in metal matrix composites is a result of the
engineering properties of these composites. Metal matrix composites compare
favorably to other materials with respect to weight, stiffness and strength, and
can be relatively easily fabricated. Engineering analyses demonstrate that these
materials can provide significant savings in weight and greater stiffness,
compared to traditional metallic alloys, while still retaining key structural
and design properties. They also compare favorably with certain other composite
materials, namely polymer-matrix materials, that have temperature and strength
limitations, are sensitive to moisture and, in some cases, also release gases or
moisture.
The Company was founded in January 1990 by Robin A. Carden, who had
previously been a senior engineer at Ceradyne Inc., a company engaged in
advanced ceramics, where he developed civilian applications for advanced
ceramics originally developed for military use. At that time, boron carbide
technology had only recently been declassified by the U.S. Department of
Defense. In order to capitalize on the commercial possibilities of a boron
carbide/metallic alloy composite structure, the Company, under Mr. Carden's
direction, began to experiment with new techniques for bonding boron carbide to
different metals, creating new composite structures. From 1990 through 1993, the
Company continued development of metal matrix composites. These efforts led to
the filing of a patent application in January 1994, and the granting of the U.S.
patent for "Metal Matrix Compositions and Method of Manufacture Thereof" in
January 1996, which covers the Company's initial metal matrix composites and
methods for making them.
In May 1996, certain of the Company's stockholders provided additional
funding to the Company, in the form of debt (including a credit facility),
enabling the Company to begin the commercialization of its products. Following
the financing, the Company assembled a senior management team with experience in
areas such as operations, manufacturing, research and development and finance
and administration.
On October 22, 1996, the Company completed an initial public offering of
2,750,000 shares of its Common Stock at a price of $13.50 per share. The Company
received net proceeds of approximately $33.3 million after deducting
underwriting discounts and offering expenses. Subsequently, in October 1996,
$4.7 million of net proceeds from the initial public offering were used for
repayment of principal, accrued and unpaid interest thereon and all other
amounts owing in respect to the May 1996 credit facility, and the credit
facility was terminated. Following completion of the initial public offering,
the Company added personnel to its marketing, sales and engineering support
staff.
In October 1996, the Company moved its operations to a 48,000 square foot
facility in Irvine, California. That facility is fully operational and includes
extrusion, forging, casting (including soluble core) and sintering capabilities.
The Company has leased an additional 84,000 square foot facility in Irvine,
which is under refurbishment. The Company anticipates that construction will be
completed in the second quarter and that the additional facility will become
fully operational in the third quarter of 1998. This facility will expand
forging and extrusion capabilities, including the addition of a new 4,000-ton
extrusion press.
The Company is developing prototypes of products for a number of accounts.
For Taylor Made Golf Company ("Taylor Made"), a leading golf manufacturer, the
Company is developing product designs, molds and manufacturing tooling for
metalwood drivers and irons, manufactured by both forged and cast methods. For
True Temper Sports, Inc., a subsidiary of Black & Decker ("True Temper Sports"),
tubing material has been supplied for golf club shaft and bicycle frame
prototypes from which product designs and manufacturing processes are to be
developed.
In 1998, the Company is scheduled to produce the engine cradle for the EV-1
electric vehicle for the General Motors Electric Vehicle Division. The Company
also expects to produce watch components for Mersey Watch Co. and sunglass
frames for Bolle, Inc. ("Bolle") in 1998. A contract to produce components for
business aircraft was awarded to the Company by Cessna Aircraft, based on
prototype evaluation. In August 1997, the Company signed a Memorandum of
Understanding with Seagate Technology ("Seagate") for the development and joint
production of hard-disk substrates using Boralyn. Subject to successful
completion of the beta test phase and final acceptance of the Boralyn substrate,
production is expected to commence in the second half of 1998.
There can be no assurance with respect to whether or when the Company will
achieve production volumes, substantial revenues or profits under or from any or
all of the aforementioned arrangements.
Company Strategy
Alyn's objective is to become a leader in advanced metal matrix composite
(MMC) products and associated manufacturing processes, and to establish
significant market share and brand awareness for Boralyn in markets where
value-added premiums may be obtained. The Company intends to focus on
capitalizing on its existing proprietary technology and patented process for
producing MMCs through the direct manufacture and sale of MMC products to
industrial and consumer product manufacturers and distributors, and, to a lesser
extent, to producers of military products. The Company believes that its focus
on marketing Boralyn for use in higher-priced consumer and industrial products
and applications, where its properties provide performance advantages, will
maximize the opportunity for near and intermediate-term market penetration. The
Company has implemented a vertically integrated approach to manufacturing,
including emphasis on strong R&D and quality assurance, and has developed what
it believes to be superior manufacturing processes, which benefit from the
characteristics of Boralyn. One of these processes is the Company's soluble core
method of manufacturing MMC die-cast structures, which allows for forming
complex hollow chambers and passages, often within a one-piece structure,
without the need for welding together separate components or other secondary
manufacturing processes. The Company has filed various patent applications
pertaining to materials, processes and applications, of which six patents have
been issued to date. Application patents issued include the use of Boralyn for
nuclear shielding and computer hard-disks.
In the last two years, the Company has sought to address significant
material and manufacturing issues experienced by companies engaged in the
markets it has chosen -- high-end sporting goods, disks for computer hard-disk
drives, aerospace and automotive parts and components, high-end personal
accessories and neutron shielding -- through concentrated product development
and design efforts and the development of close working relationships with
participants whom the Company believes are leaders in those markets. In some
cases, the Company has elected to seek near-term market penetration and a better
understanding of technical requirements and other characteristics of key markets
by entering into product design, development, production and development
agreements that grant limited exclusivity to a given "spearhead" participant in
a specific market. Further, experience gained in 1997 has enabled the Company to
better identify the sequence in which it can enter markets and the factors that
are most likely to influence its timetable for such entry. Those factors
generally include the relative length of the introduction phase, which
encompasses the product specification phase, the design phase, and the prototype
and pre-production phase, and factors related to commercial production. For
example, the high-end sporting goods market has been found to be characterized
by short-term design cycles and "state-of-the-art" specifications that are
driven by frequently changing consumer preferences. The resultant design and
marketing issues experienced by the Company have delayed the timing of its
expected entry into those markets. The Company expects to be able to deal with
those and similar issues more readily and expeditiously as it gains design and
production experience. The Company has also found, however, that niches in
certain markets that are characterized by relatively short product design
cycles, because product specifications are known, such as the automotive and
aerospace industries, can be penetrated relatively quickly. Additionally, for
certain of the Company's chosen markets, such as the hard drive disk field, the
market penetration cycle is materially influenced by significant testing
requirements.
There can be no assurance that the Company will achieve its objectives,
that it will develop successful strategies to penetrate its chosen markets, that
it will enter markets in a timely and efficient manner, or that it will generate
significant revenues in any market it enters.
Characteristics of Boralyn
Boralyn is a metal matrix composite material principally composed of
aluminum and boron carbide. The Company believes that Boralyn compares favorably
to other materials with which it will compete in markets selected by the Company
with respect to density, specific strength, specific stiffness, hardness and
resistance to wear, fatigue and corrosion resistance, resonance and neutron
absorption.
Specific Strength/Specific Stiffness. The specific strength range
(dependent somewhat on the grade) of Boralyn is substantially higher than that
of aluminum and somewhat higher than that of many specialty steels and titanium.
Boralyn has greater specific stiffness compared to titanium alloy, aluminum
alloy and specialty steel. The combination of specific strength and specific
stiffness is important for many products, such as premium-priced golf clubs and
high-end bicycle frames and components, where the combination of strength,
stiffness and light weight is important. For many applications, far less Boralyn
is required to provide necessary strength and stiffness; conversely, for the
same weight, Boralyn provides significantly more strength and stiffness than
other competing materials. Many other applications, such as arrows, hockey
sticks, baseball bats, golf club shafts and automotive and aerospace components,
also benefit from these strength and stiffness advantages.
Resistance to Wear. Boralyn provides greater wear resistance than aluminum
or steel, and, therefore, can be used to advantage in applications where high
wear resistance is significant, such as in engine blocks, brake discs, pistons
and certain aircraft applications.
Fatigue and Corrosion Resistance. Boralyn, in a 5% salt moist environment,
endures a higher number of stress cycles than aluminum alloy. This property
makes Boralyn superior to aluminum alloy for applications in which many stress
cycles are encountered, particularly in certain corrosive environments. Any
structural support where stress is applied repeatedly needs high fatigue
characteristics. Bicycle frames and components, airplane structures, boat masts,
booms and other marine components, piston rods and satellite supports are some
of the applications where high fatigue resistance is necessary. Additionally,
many of those applications take place in salty and moist atmospheric conditions.
Resonance. Boralyn, due to its high stiffness, has lower resonance
characteristics than glass and aluminum computer hard-disk substrates over
rotational speeds ranging from 1,000 to 12,000 revolutions per minute. Boralyn
disks exhibit minimal vibration over the entire range of rotational speeds
experienced by current and planned hard-disk drives. The lower resonance of
Boralyn is particularly advantageous in computer hard-disk drives, where lower
resonance allows for closer head-to-disk distance at higher rotational speeds,
characteristics that allow for greater storage capabilities and faster data
transfer rates.
Neutron Absorption. Neutron absorption (attenuation) in boron carbide-based
materials such as Boralyn is primarily a function of the density (referred to as
areal density) and degree of uniformity of distribution (i.e., homogeneity) of
boron carbide particles within the material. The predictable homogeneity of
Boralyn allows for the design of structures specific to a customer's
requirements, without incorporating additional material. The Company believes
competing materials may require as much as 40% additional material to compensate
for irregular distribution of neutron-absorbing particles (i.e., relative lack
of homogeneity) to achieve adequate levels of uniform absorption. Accordingly,
Boralyn can produce the same neutron absorbing results as competing materials,
but with less Boralyn, thereby reducing the weight and cost of the structure.
Broad Range of Available Grades. Boralyn is available in various grades
depending principally on the aluminum alloy of choice and the percent of boron
carbide that is included. A specific grade can be matched to a specific
application where a specific property or properties are to be highlighted. For
example, in aerospace applications, where thermal expansion is a problem due to
the extremes of the environment, the percentage of boron carbide can be
increased to lower the thermal expansion. As another example, for better
wearability, 35% boron carbide can be used for harder surfaces.
Ease of Fabrication. In addition to the properties described above, Boralyn
can be readily extruded and forged, can be used in a variety of casting
processes, and has excellent brazing and welding capabilities. The Company has
also developed what it believes to be superior manufacturing processes that
benefit from the characteristics of Boralyn. The Company has filed a patent
application for its soluble core method of manufacturing metal matrix composite
die-cast structures, which allows for forming complex, hollow chambers and
passages, often within a one-piece structure, thereby eliminating the need for
welding together separate components or other secondary manufacturing processes.
The physical characteristics of a variety of Boralyn grades have been
subjected to, and were verified and supported by, studies and tests performed by
independent third parties. Tests included specific strength, homogeneity,
hardness, density, specific stiffness, chemical composition, neutron radiation
absorption characteristics, fatigue, high temperature tensile strength, thermal
expansion, thermal conductivity, compression strength and formability.
Products and Applications
The Company is focusing its initial marketing efforts on the use of Boralyn
in applications where its unique combination of properties, combined with its
manufacturing capabilities, justify an appropriate price premium. These
applications include the following:
Golf Club Heads and Shafts. The U.S. wholesale market for premium-priced
golf clubs was estimated by industry sources to be approximately $1 billion in
1996. The Company believes that the higher specific stiffness, higher specific
strength and ease of fabrication of Boralyn allow golf club heads to be designed
and manufactured with a larger "sweet spot" and better mass distribution,
compared with titanium heads, thus, yielding what golfers term a "more
forgiving" golf club. The higher specific stiffness of Boralyn enables the
production of a club shaft with the "feel" of steel (i.e. greater control), but
with a lighter weight.
In September 1996, the Company and Taylor Made entered into an agreement
providing for the development, production and purchase of Boralyn-based
metalwood golf club heads. The Company and Taylor Made are continuing to develop
the club head designs, tooling, production processes and promotional programs
for both metalwoods and irons.
In May 1997, the Company reached agreement with True Temper Sports to
market golf club shafts using Boralyn. The Company and True Temper Sports are
developing the related designs, tooling and production programs for the shafts.
Computer Hard-disks. The U.S. wholesale market for computer hard-disk
substrates was estimated by industry sources to be approximately 350 million
units in 1997. The Company believes that disks for high-speed, high-capacity
drives, which the Company is targeting in its marketing efforts, represent
between 5% and 10% of the total market. The Company has produced disk substrates
of Boralyn for, and has signed a Memorandum of Understanding with, Seagate
Technology. The Memorandum of Understanding provides for the joint development
of the Boralyn disk substrate and the joint manufacture of the disks. Compared
with conventional aluminum and glass substrates currently in use as disks in
computer hard drives, Boralyn disks exhibit higher stiffness, resulting in
minimal vibration over the entire range of rotational speeds, from initial
spin-up to current maximum speeds of existing substrates, as well as at
substantially higher rotational speeds. The higher stiffness disks permit
hard-disk drives to be designed for closer head-to-disk distances and higher
rotational speeds, characteristics that allow for greater storage capacities and
faster data transfer rates.
Aerospace/Defense. In September 1997, the Company received its first
aerospace production order for aircraft components from Cessna Aircraft Company.
Production is expected to commence in the first half of 1998. The Company
continues to produce samples and prototypes for other companies for a variety of
aerospace and defense applications. Product areas that are part of the Company's
initial focus include structural support for overhead luggage compartments,
galley components and flooring, housings, high wear resistant components,
components requiring vibration dampening and other parts not related to
safety-of-flight. Other areas of future opportunity are believed by the Company
to include aircraft structural members, nacelle components, low vibration
rotating parts, actuators, bearings and armor for the military.
Automotive. In October 1997, the Company received a production order for
engine cradles for General Motors' EV-1 electric vehicle, which represents the
Company's first order from the automotive industry. Production is expected to
commence in the first half of 1998. Vehicle components such as the engine cradle
benefit from decreased weight, improved material properties and the Company's
precision manufacturing capabilities. Other component capabilities currently
being marketed by the Company in the automotive field include frame and
suspension parts, brake calipers and discs, wheels, drive shafts and engine
components such as cylinder liners, pistons, connecting rods and cylinder heads.
Consumer and Other. In 1997, the Company concluded its first production
agreements for personal accessories. The agreements include production of watch
bezels and cases for Mersey Manufacturers Limited and sunglass and safetyglass
frames for Bolle Inc. Both agreements call for initial production to begin in
the first half of 1998. The Company's capability to tailor Boralyn's properties
to meet specialized product design requirements, the breadth of its
manufacturing capabilities, and the marketing opportunity for customers to
market their products using the Boralyn name provide the basis for the Company's
marketing efforts in this general product category. The Company believes that
the areas of specific opportunity include those where weight, high
strength-to-weight ratios and wear or impact resistance are important product
requirements.
Neutron Shielding. Materials traditionally used for neutron absorption in
nuclear reactors and disposal containers for radioactive products and waste
require a separate neutron-absorbing material, such as boron carbide, encased in
layers of metallic alloy, such as aluminum, supported by steel, in order to
provide stiffness and structural integrity. The metal matrix structure of
Boralyn, combined with its boron carbide ingredients, provides acceptable
neutron absorption characteristics as well as stiffness in a homogeneous, single
structure, with the advantages of ease of use and fabrication. The Company does
not anticipate production orders for neutron shielding applications until late
1998 at the earliest, and there can be no assurance that any production orders
will be obtained.
There can be no assurance with respect to whether or when the Company's
product will achieve meaningful market acceptance or whether or when the Company
will obtain material revenues or become profitable, if at all.
Marketing and Customer Support
The Company intends to achieve market penetration in selected markets
through a multi-step process usually consisting of (i) initial discussions of
the product application, highlighting the advantages of Boralyn, (ii) an
engineering and marketing evaluation by the prospective customer of sample
material and demonstration products, (iii) negotiation of appropriate agreements
allowing the customer to use and market Boralyn-based products in the relevant
application and market, and (iv) development of a production program where
appropriate expenditures are made for tooling, equipment and quality control
tests necessary to fulfill market requirements. The Company intends to sell
primarily to OEM customers, with distribution from the Company manufacturing
sites to customer facilities. The Company's policy is to seek to have its
customers absorb a significant portion of design and development-related direct
costs.
Consistent with its business plan, the Company has to date entered into
exclusive market arrangements with Taylor Made (with respect to metalwood golf
club heads), True Temper Sports (with respect to golf club shafts and certain
bicycle frames) and Bolle (with respect to sunglass and safety-glass frames).
The exclusive periods range from three years to five years, and each arrangement
imposes certain conditions on each party that affect, among other things, the
commencement and maintenance of exclusivity. There can be no assurance that the
conditions regarding exclusivity in the contracts to which the Company is a
party will be met by either or both of the parties to any of such contracts,
that the Company will extend or enter into any new contracts providing for
exclusivity, or that any such contracts will prove to be beneficial to the
Company.
The Company's sales and marketing activities are expected to include
substantial applications engineering support (to assist in the development of
products for specific customers and markets), evaluation of Boralyn by
institutions that specialize in technology and/or markets of this type,
development of appropriate sales materials (such as specification sheets and
corporate brochures) and promotion through participation at selected trade shows
and selective advertising in journals and the trade press. These activities,
even if successful, may not result in proportional or any revenue increases in
the same period in which those activities occur. The Company's marketing
activities have initially focused on prospective customers in the United States,
with international sales activities being conducted on a narrowly focused basis
in selected markets such as sports and neutron shielding. It is anticipated that
broadly based international sales efforts will develop over the next 18 months.
Competition
The materials industry in which the Company operates is highly competitive.
The Company competes in its chosen markets against several larger domestic and
multi-national companies, all of which are well established in those markets and
have substantially greater financial and other resources than those of the
Company. Competitive market conditions could adversely affect the Company's
results of operations if it were required to reduce product prices to remain
competitive or were unable to achieve significant sales of its products.
The Company competes at two levels. First, the Company competes with
material manufacturers, i.e. companies that manufacture and market a choice of
materials for specific applications. In this area, the Company competes with (i)
titanium, used widely today in premium-priced golf club heads, with the base
material being supplied by companies such as RMI Titanium Company, Tremont
Industries, Inc., and Titanium Metals Corporation of America (Timet); (ii)
aluminum alloys, supplied by companies such as the Aluminum Corporation of
America (Alcoa), Reynolds Metals Co., and Oregon Metallurgical Corporation; and
(iii) other metal matrix composites, such as that supplied by Duralcan Inc. For
neutron shielding, current disposal containers typically use Boral(R), a boron
and aluminum material supplied by AAR Brook & Perkins.
At the second level, the Company competes with product fabricators. In the
golf club market, companies fabricating clubs from titanium metal include
Coastcast Corp. and Sturm, Ruger & Co., Inc. In the sports market generally,
aluminum alloy and steel products are made by companies such as Easton Aluminum
Inc. and Sandvik Steel Co. In the computer disk drive market, the aluminum disks
are currently being made by Alcoa and Kobe Steel Company. In the automotive
industry, companies such as Teledyne Cast Products, Kelsey-Hayes Co., Die Cast
Products, Inc. and many others are competitors.
Patents and Trademarks
The Company believes that protection of its proprietary technology and
know-how is important to the development of its business. It seeks to protect
its interests through a combination of patent protection and confidentiality
agreements with key employees, as well as by limiting the availability of
certain critical information to a small number of key employees.
The Company intends to pursue a vigorous patent application program in the
United States and abroad. The Company has been issued six United States patents
to date. The Company believes the initial patent issued, (United States Patent
No. 5,486,223, originally issued to Robin A. Carden in January 1996, expiring in
January 2014), provides protection for its proprietary Boralyn technology and
contains claims that cover the use of Boralyn, particularly in high-end sporting
goods and in certain other markets targeted by the Company.
<PAGE>
The following table summarizes the patents issued to the Company to
date:
Patents Issued to Alyn Corporation
<TABLE>
<CAPTION>
Title Patent No. Issue Date Description
----- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1. Metal Matrix Composite and 5,486,223 1/23/96 Methods and processes for making
Method of Manufacture thereof Boralyn
2. Improved Metal Matrix 5,613,189 3/18/97 Divisional (extension) of 5,486,223
Compositions and Method of
Manufacture Thereof
3. Metal Matrix Composites and 5,669,059 9/16/97 Divisional (extension) of 5,486,223
Methods of Manufacture Thereof
4. Metal Matrix Compositions for 5,700,962 12/23/97 Use of boron carbide metal matrix
Nuclear Shielding Applications composites for neutron shielding
5. Metal Matrix Composition for 5,712,014 1/27/98 Use of boron carbide metal matrix
Substrates Used to make Magnetic composites for hard-disk
Disks for Hard Drives substrates
6. Fabrication Methods for Metal 5,722,033 2/24/98 Extrusion and casting composite
techniques for boron carbide metal
matrix composites
</TABLE>
The Company has filed other patent applications, which are pending. The
Company is not aware of any reason why its pending applications should not be
granted with claims that will provide adequate coverage and protection for its
anticipated business activities, although there can be no assurance in that
regard.
The Company believes that its current and anticipated business does not
infringe on any patent owned by others, although there can also be no assurance
that the Company's products will not infringe the patent rights of others or
that it will not be forced to expend substantial funds to defend against
infringement claims of, to obtain licenses from, or to enforce its patents
against third parties.
Research and Development
The Company continuously engages in the development of new products and
improvements to its existing formulations and maintains laboratory facilities
for these purposes, as well as a network of outside independent test
laboratories. The Company has opened a facility in Fremont, California, for the
purpose of research and development efforts in the computer hard-disk market.
The research and development department employed ten people on December 31,
1997, including four employees at the Fremont facility. The Company's past
research and development efforts focused on various applications for cast,
forged and extruded Boralyn products, the tooling and methods for product
production, and the formulation of other metal matrix composites using magnesium
and titanium.
It is expected that formulations and techniques will continue to be
developed and refined by the Company through empirical tests and prototype
development. The Company expects that it will continue to devote substantial
resources to research and development efforts. The costs of those efforts will
be recorded, for accounting purposes, as expenses as they are incurred,
notwithstanding that the benefits, if any, from the Company's research and
development efforts (in the form of increased revenues or decreased product
costs) may not be reflected in the Company's operating results, if at all, until
subsequent periods.
There can be no assurance that the Company's research and development
efforts will be successful in generating new or improved products or processes,
or that, if successful, such products or processes will lead to increased
revenues or profitability.
<PAGE>
Manufacturing and Supply
Raw materials used by Alyn are principally aluminum and boron carbide. The
Company is not dependent on the availability of supplies from any single source.
The Company presently purchases boron carbide from a limited number of
suppliers, including one supplier who provides approximately 50% of the
Company's current requirements. Although the Company believes that boron carbide
is available from other suppliers, there can be no assurance that the Company
will be able to continue to obtain desired quantities of boron carbide on a
timely basis or at prices and terms deemed reasonable by the Company. Alyn's
other principal raw material, aluminum, is available from several domestic
suppliers.
Boralyn is produced primarily by two methods. The first utilizes powder
technology. By this method, the various powdered elements are blended dry and
mixed uniformly to avoid stratification and settling. After the particulates
have sufficiently mixed, they are directed into a die and then into a
cylindrical container, where the particulates are subjected to up to 85,000
pounds per square inch (psi) of pressure, transforming the elements into a solid
billet. These Boralyn billets are used to extrude forms such as plate and tubes,
for use in various consumer products and other end uses. The second method
utilizes a molten process by which boron carbide powder is added into the molten
base alloy and then formed and cooled to create ingots for casting. Applications
include various automotive and consumer products.
The Company maintains a strict internal quality control system to monitor
the quality of production at its facility. Alyn's quality control laboratory is
capable of conducting both physical and chemical testing. The Company also
monitors the quality of processes that are completed by subcontractors through
frequent tests and material certification. The Company maintains product
liability insurance at levels it believes to be adequate.
The Company intends to maintain a sufficient inventory of raw materials and
Boralyn billets and ingots on site to meet its production requirements. Finished
goods are expected to be immediately shipped at the time of production to the
Company's customers by commercial carriers and not remain at the Company's
plant.
Government Regulations
The Company's manufacturing operations are subject to a wide range of
federal, state and local regulations, including those covering the discharge,
handling and disposal of hazardous waste regulations contained in the
environmental laws. Plant and laboratory safety requirements of various
occupational safety and health laws are also applicable to all the Company's
facilities and operations.
The Company believes it complies in all material respects with regard to
governmental regulations applicable to it. To date, those regulations have not
materially restricted or impeded the Company's operations.
Management Information Systems
The Company installed a software system designed for manufacturing
enterprises in April 1997. Management is currently planning to implement a fully
integrated system designed to meet management's future information and
accounting requirements. Such requirements are anticipated as a result of the
Company's manufacturing methodology and large-scale production of Boralyn
projected to meet future sales growth, should it materialize. The Company
believes its current management information systems are Year 2000 compliant. All
future systems purchased will likewise include requirements for compliance.
<PAGE>
Personnel
The Company employed 61 persons as of December 31, 1997, including three
Company executive officers, ten research and development personnel, 26
manufacturing personnel and eight persons engaged in sales and marketing
activities. None of the Company's employees is a member of a labor union. The
Company considers its relationship with its employees to be good.
Risk Factors
In addition to historical information, this Annual Report includes
forward-looking statements that involve known and unknown risks and
uncertainties that may cause the Company's actual results or outcomes to be
materially different from those anticipated and discussed herein. In evaluating
forward-looking statements and the Company's performance, readers are urged to
read carefully the following Risk Factors, as well as other cautionary
statements contained in this Annual Report.
Emerging Technology; Substantial Risk of Uncertain Market Acceptance. Since
commencement of operations in 1990, the Company has been engaged in the
formulation, development and fabrication of Boralyn for use in commercial and
consumer products. As with any new technology, there is substantial risk that
the marketplace may not be receptive to products based on it. Market acceptance
of the Company's products will depend, in large part, upon the pricing of those
products and the Company's ability to manufacture and deliver them on a timely
basis, as well as the ability of the Company to demonstrate the advantages of
its products over competing material methodologies and products. The Company has
experienced, and will continue to experience, long sales cycles and lengthy
customer product design times prior to production orders. There can be no
assurance that the Company will be able to market Boralyn successfully or that
any of the Company's future boron carbide-based or other products will be
accepted in the marketplace. The costs of the Company's marketing efforts will
be substantial and will be recorded as expenses as they are incurred,
notwithstanding that the benefits, if any, from those marketing efforts (in the
form of revenues) may not be reflected, if at all, until subsequent periods.
Limited Operating History; Prior Losses. The Company has a limited
operating history, having commenced its materials development and manufacturing
activities in 1990, and having had extremely limited revenues through 1997. The
Company had a net loss of $7,316,000 for the year ended December 31, 1997 and
$2,255,000 for the year ended December 31, 1996. The Company anticipates
incurring operating losses for the current fiscal year, and may continue to
incur losses thereafter. There can be no assurance that the Company will ever
achieve profitability or maintain profitability, if achieved, on a consistent
basis. Moreover, the Company has entered into a five-year lease for its main
facility in Irvine, California, and a ten-year lease for its additional
facility, also in Irvine, and the Company has committed substantial capital to
furnish both facilities with significant production capability. Unless and until
the Company achieves a significant level of sales of Boralyn-based products, the
Company will have substantial production overcapacity and underabsorbed costs
that would cause the Company to incur substantial additional operating losses.
No Manufacturing Experience; Reliance on Manufacturing Facilities. The
Company has only recently developed internal manufacturing capacity and has no
experience in manufacturing its products in commercial quantities. The Company
intends to manufacture its products at its facilities in Irvine, California. The
current facilities include casting (including soluble core), forging and
extrusion capabilities, although there can be no assurance that these
capabilities will be adequate for all of the Company's future fabrication
requirements, or, on the other hand, that the Company will be able to fully
utilize the plants' capacity. The manufacturing processes for Boralyn utilize
high temperature and high pressure and may be subject to volatile chemical
reactions. A mechanical or human failure or unforeseen condition, including
natural disasters such as earthquakes, characteristic of Southern California,
could result in temporary interruption of the Company's manufacturing capacity.
Moreover, the Company's manufacturing operations will use certain equipment
that, if damaged or otherwise rendered inoperable or unavailable, could result
in the disruption of the Company's manufacturing operations. Although the
Company has obtained business interruption insurance with coverage for lost
profits and out-of-pocket expenses up to $8 million per occurrence, and
presently maintains, and intends to continue to maintain, other property and
casualty coverage, an extended interruption of operations at the Company's
manufacturing facilities would have a material adverse effect on the business of
the Company.
Need for Future Capital. Future growth will be dependent, in part, upon the
capital resources available to the Company from time to time. The Company's
ability to obtain future debt financing will be dependent in part on the quality
and amount of the Company's trade receivables and inventory. The Company
believes that internally generated funds, cash on hand and debt financing
obtained in December 1997 should satisfy the Company's anticipated capital needs
through 1998. However, there can be no assurance that those funds will be
sufficient to support the Company's business strategy or that, if additional
financing is required, it will be available in amounts or on terms acceptable to
the Company, if at all.
Revenue Timing; Quarterly Fluctuations in Operating Results. The Company
has experienced, and will likely continue to experience, long sales cycle times,
lengthy customer design processes for new product introductions, and market
trends that may significantly limit management's ability to forecast accurately
time-to-market schedules or short-term results of operations. The Company's
operating results may vary significantly from quarter to quarter, in part
because of the costs associated with changes in the Company's products and
personnel and the size and actual delivery dates of orders. The Company's
operating results for any particular quarter are not necessarily indicative of
any future results. Fluctuations caused by variations in quarterly operating
results or the Company's failure to meet analysts' projections or public
expectations as to operating results may adversely affect the market price of
the Company's Common Stock.
Rapid Technological Change and New Product Development. The Company
operates in a rapidly evolving field - advanced composite materials - that is
likely to be affected by future technological developments. The Company's
ability to anticipate changes in technologies, markets and industry trends, and
to develop and introduce new and enhanced products on a timely basis will be
critical factors in its ability to grow and remain competitive. There can be no
assurance that new products will be completed or that any new products can be
marketed successfully. In addition, development schedules for new or improved
products are inherently difficult to predict and are subject to change as a
result of shifting priorities in response to customers' requirements and
competitors' new product introductions. Moreover, the Company expects that it
will devote substantial resources to research and development efforts. For
accounting purposes, the costs of those efforts will be recorded as expenses as
they are incurred, notwithstanding that the benefits, if any, from the Company's
research and development efforts (in the form of increased revenues or decreased
product costs) may not be reflected, if at all, until subsequent periods.
Possible Dependence on Significant Customers; Exclusivity Granted to
Certain Customers. In view of the early stage nature of the Company's business,
currently it has only a limited number of customers, several of whom are
material to the Company's near term results of operations. In an effort to
obtain market penetration quickly, the Company has granted market exclusivity to
certain of its material customers, thereby eliminating near-term market
competition for its products in certain fields. Even after the Company matures,
however, certain customers may be material to the business, operations and
future prospects of the Company. There can be no assurance that one or more
principal customers will not suffer business or financial setbacks resulting in
reduction or cancellation of product orders or the Company being unable to
obtain payment from such customers at any time or from time to time. The loss of
sales to one or more significant customers could have a material adverse effect
on the business and operations of the Company.
Dependence on Patents. The Company has been granted one United States
patent that it believes provides protection for its proprietary Boralyn
technology and contains claims that cover the use of Boralyn. The Company has
also been granted additional patents, including divisional (extension) patents
and continuation-in-part patents, that stem from the Company's original patent
application. The Company has also applied for additional patents. There can be
no assurance that the Company's existing patents or any other patents that may
be granted, will be valid and enforceable or provide the Company with meaningful
protection from competitors. Further, there can be no assurance that any pending
patent application will issue or that any claim thereof will provide protection
against infringement. If the Company's present or future patent rights are
ineffective in protecting the Company against infringement, the Company's
marketing efforts and future revenues could be materially and adversely
affected. Moreover, if a competitor were to infringe any patent issued to the
Company, the costs of enforcing the Company's patent rights may be substantial
or even prohibitive. There can also be no assurance that the Company's future
products will not infringe the patent rights of others or that the Company will
not be forced to expend substantial funds to defend against infringement claims
of, or to obtain licenses from, third parties. The Company currently has only
limited patent protection for its technology outside the Untied States, and may
be unable to obtain even limited protection for its proprietary technology in
certain foreign countries.
Competition. The materials industry is highly competitive. The Company
competes in its chosen markets against several larger domestic and
multi-national companies, all of which are well established in their respective
markets and have substantially greater financial and other resources than the
Company. Competitive market conditions could adversely affect the Company's
results of operations if it were required to reduce product prices to remain
competitive or were unable to achieve significant sales of its products.
Product Liability Risks. The Company faces an inherent business risk of
exposure to product liability claims in the event that any of its products are
alleged to be defective or cause harmful effects. The cost of defending or
settling product liability claims may be substantial. The Company currently
maintains, and intends to continue to maintain, product liability insurance
coverage. There can be no assurance that the Company will be able to obtain such
insurance on acceptable terms in the future or that such insurance will
adequately cover any claims.
Dependence on Principal Suppliers. The Company presently purchases its
principal raw material, boron carbide, from a limited number of suppliers,
including one supplier that provides approximately 50% of the Company's present
requirements. The Company's business would be materially and adversely affected
if it were unable to continue to purchase boron carbide at prices and on terms
comparable to those presently available from its principal suppliers. Although
the Company believes that boron carbide is available from other suppliers, there
can be no assurance that the Company will be able to continue to obtain desired
quantities of boron carbide on a timely basis or at prices and on terms deemed
reasonable by the Company.
Dependence on Management. The Company's future success and profitability is
substantially dependent upon the performance of its senior executives, including
Robin A. Carden, the Company's founder and principal stockholder, and Walter R.
Menetrey, its Chief Operating Officer. Each of the Company's senior executives
has an employment agreement with the Company and has a substantial equity
interest in the Company through ownership of shares of Common Stock or the grant
of options to purchase shares of Common Stock. The loss of Mr. Carden's or Mr.
Menetrey's services could have a material adverse effect on the Company.
Moreover, the Company does not maintain key-man life insurance on any of its
executives, other than a $5.0 million policy on the life of Mr. Carden. The
Company's future growth will also be dependent upon its ability to attract and
retain additional qualified management, technical, scientific, administrative
and other personnel. By reason both of its location and the nature of its
business, the Company believes it will experience significant competition for
qualified management, supervisory, engineering and other personnel. There can be
no assurance that the Company will be successful in hiring or retaining the
personnel it requires for continued growth.
Management Information Systems. The Company installed a software system
designed for manufacturing enterprises in April 1997. Management is currently
planning to implement a fully integrated system designed to meet management's
future information and accounting requirements. Such requirements are
anticipated as a result of the Company's manufacturing methodology and
large-scale production of Boralyn projected to meet future sales growth, should
it materialize. There can be no assurance that current or planned management
information systems will be adequate for the Company's future needs.
Dependence on Trademarks for Current and Future Markets. The market for the
Company's products is and will remain dependent in part upon the goodwill
engendered by its trademarks and trade names. Trademark protection is therefore
material to the Company's business. Although Boralyn is registered in the United
States, there can be no assurance that the Company will be successful in
asserting trademark or trade name protection for its significant marks and names
in the United States or other markets, and the costs to the Company of such
efforts could be substantial.
Control by Certain Stockholders; Anti-takeover Provisions. Certain of the
Company's present stockholders own a substantial majority of the outstanding
shares of Common Stock. Consequently, those stockholders have the ability to
elect all the Company's directors and to control the outcome of all other issues
submitted to the Company's stockholders. Additionally, the Company's Board of
Directors has the authority to issue up to 5,000,000 shares of Preferred Stock
and to determine the price, rights, preferences and privileges of those shares
without any further vote of, or action by, the Company's stockholders. The
rights of holders of Common Stock will be subject to, and may be adversely
affected by, the rights of holders of any Preferred Stock that may be issued in
the future. Although the Company has no present intention to issue shares of
Preferred Stock, any issuance of Preferred Stock, while potentially providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have an effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company.
Certain provisions of Delaware law applicable to the Company may also discourage
third-party attempts to acquire control.
Shares Eligible for Future Sale. Future sales of shares of Common Stock by
existing stockholders pursuant to Rule 144 promulgated under the Securities Act
of 1933, as amended, or otherwise, could have an adverse effect on the price of
the shares of Common Stock. In addition, the Company has contractually granted
certain of its existing stockholders, including, among others, Robin A. Carden
(the Company's President, Chief Executive Officer and a director); Walter R.
Menetrey (the Company's Executive Vice President and Chief Operating Officer);
M. Kingdon Offshore NV; Kingdon Associates, L.P.; and Kingdon Partners, L.P. (of
each of which Michael Markbreiter, a director of the Company, is an affiliate);
Udi Toledano (the Chairman of the Company's Board of Directors) and Edelson
Technology Partners III (of which Harry Edelson, a director of the Company, is
an affiliate), certain registration rights. No prediction can be made as to the
effect that future sales of Common Stock, or the availability of shares of
Common Stock for future sales, will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock, or
the perception that such sales could occur, could adversely affect prevailing
market prices for the Common Stock.
Possible Volatility of Stock Price. Trading volume and prices for the
Common Stock could be subject to wide fluctuations in response to quarterly
variations in operations, results, announcements with respect to sales and
earnings, as well as technological innovations, and new product developments and
other events or factors, which cannot be foreseen or predicted by the Company,
including the sale or attempted sale of a large amount of securities in the
public market, the registration for resale of any shares of Common Stock, and
the effect on the Company's earnings of existing or future equity-based
compensation awards to management. The market price of the Company's Common
Stock could also be influenced by developments or matters not related to the
Company.
2. PROPERTIES
The Company leases its current operating facility in Irvine, California,
under a five-year lease entered into in June 1996, with a five-year renewal
option. The 48,000 square foot, primarily single-story facility, is located on a
three-acre site at 16761 Hale Avenue in Irvine in an industrial park with close
proximity to truck, rail and air (John Wayne Airport, a major regional airport
in Orange County) connections and a highly trained labor pool. Of the total
48,000 square foot area of the facility, approximately 10,000 square feet are
used for office space and approximately 38,000 square feet are used for
manufacturing operations dedicated to Boralyn billet manufacturing, including
powder consolidation and sintering (approximately 10,000 square feet), extrusion
of tubes and other shapes and forging (approximately 8,000 square feet), die
casting (approximately 8,000 square feet), and secondary processes and
warehousing.
The Company has begun renovation and leasehold improvements on an
additional 84,000 square foot building located at 17021 Von Karman Ave, Irvine,
California, under a ten-year lease commencing on February 1, 1998, with a
five-year renewal option. This additional facility is located approximately one
half mile from the Company's main facility and will be dedicated to extrusion
and forging. The additional facility, which will house the Company's new
4,000-ton extrusion press, is expected to be completed in the second quarter and
fully operational in the third quarter of 1998.
These facilities are designed for expansion of capacity to match future
needs over the next several years, with additional warehousing to be leased at a
nearby location, if required. There can be no assurance that these facilities
will be adequate for the Company's entire future fabrication requirement, or,
alternatively, that the Company will be able to fully utilize the capacity of
its additional facility. The Company believes its current and additional
facility will be adequate for its contemplated needs.
A research and development facility dedicated to the development of
computer disk substrates used in hard-disk drives was established in February
1997 at 4576 Enterprise Street, Fremont, California, approximately 400 miles
from the Company's Irvine facilities. The three-year lease commenced on February
1, 1997 and will expire on January 31, 2000. The facility originally occupied
3,900 square feet of industrial space, but was expanded to 7,800 square feet in
October 1997.
3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending or, to the Company's best
knowledge, presently threatened against the Company.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to the vote of security holders of the Company
during the fourth quarter of the year ended December 31, 1997.
<PAGE>
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed for quotation under the symbol "ALYN"
on the National Market of The Nasdaq Stock Market, Inc. The following table sets
forth the high and low per share bid prices for the Company's Common Stock for
each quarterly period since the completion of the Company's initial public
offering on October 22, 1996.
Common Stock
Calendar Year High Low
1996
Fourth Quarter 16 10
1997
First Quarter 13.5 8.25
Second Quarter 12.62 8.38
Third Quarter 17.62 6.88
Fourth Quarter 16.62 9.5
As of February 24, 1998, there were 42 holders of record of the Company's
Common Stock. The Company believes that the number of beneficial owners as of
that date exceeds 750.
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. The Company presently intends to retain its earnings, if
any, to finance the development of its business. The payment of any dividends in
the future will depend on the evaluation by the Company's Board of Directors of
such factors as it deems relevant at the time. Currently, the Board of Directors
believes that all of the Company's earnings, if any, should be retained for the
development of the Company's business.
<PAGE>
6. Selected Financial Data
(In thousands except per share data)
<TABLE>
<CAPTION>
Alyn Old Alyn
---------------------------------- -----------------------------------------------
Period from Period from
May 2, 1996 January 1,
Year ended to 1996
December 31, December 31, to May 1, Years ended December 31,
---------------------------------- ------------- ---------------------------------
1997 1996 1996 1995 1994 1993
---------------------------------- ------------- --------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net revenue $364 $90 $104 $319 $309 $540
---------------------------------- ------------- --------------------- -----------
Costs and expenses:
Cost of goods sold 323 80 34 203 92 265
Establishment of manufacturing facilities 1,809 262
General and administrative expenses 2,633 1,257 53 219 352 259
Selling and marketing 1,371 587 23 52 143 114
Research and development 2,338 283 7 79 180 24
---------------------------------- ------------- --------------------- -----------
Total costs and expenses 8,474 2,469 117 553 767 662
---------------------------------- ------------- --------------------- -----------
Operating loss (8,110) (2,379) (13) (234) (458) (122)
Other income (expense), net 806 141 (2) (10) (11) (3)
---------------------------------- ------------- --------------------- -----------
Loss before provision for income taxes (7,304) (2,238) (15) (244) (469) (125)
Provision for income taxes 12 1 1 1 1 1
---------------------------------- ------------- --------------------- -----------
Net loss ($7,316) ($2,239) ($16) ($245) ($470) ($126)
================================== ============= ===================== ===========
Per Share Data:
Basic and diluted net loss per share ($0.68) ($0.25)
==================================
Common shares used in computing 10,750 8,800
==================================
net loss per share (Note 1)
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: 1997 1996 1995 1994 1993
---------------- ------------- --------------------- -----------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $11,717 $23,494 ($382) ($133) $18
Total assets 31,127 32,203 128 193 219
Long-term obligations 5,501 0 128 128 128
Total stockholders' equity (deficit) 23,750 31,066 (490) (245) (99)
</TABLE>
<PAGE>
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Since its inception in 1990, the Company has been engaged in research,
development, testing and prototype production of advanced metal matrix composite
materials and products, utilizing proprietary technology for the application of
boron carbide in combination with aluminum alloys, under the name Boralyn. The
Company was granted a patent regarding Boralyn in January 1996. In 1995 and
1996, Boralyn sales were primarily the result of prototype orders. In September
1996, the Company and Taylor Made entered into an agreement that provides for
the production and purchase of Boralyn-based metalwood golf club heads through
June 30, 1999 and an exclusive license through that date should specific minimum
volume requirements be met. In May 1997, the Company and True Temper Sports
entered into an agreement that provides for the production and purchase of
Boralyn-based golf club shafts through August 31, 2003 and an exclusive license
through that date should specific minimum volume requirements be met. Under a
five-year agreement entered into in September 1997, the Company is to supply
True Temper Sports with tubing for bicycle frame sets and components. The
Company and Bolle Inc. have entered into an agreement that provides for the
purchase of approximately $5 million of sunglass frames over a three-year
period, with the first deliveries scheduled for mid-1998. Under a multi-year
agreement entered into in October 1997, the Company will be the sole supplier of
the engine cradle for General Motors Corporation's new consumer electric
vehicle, EV-1, commencing in mid-1998. The Company has also entered into a joint
development effort with Seagate Technology to produce alternative computer
hard-disk substrates. The Company does not expect to achieve sales of Boralyn
prior to the first quarter of 1998, and there can be no assurance that any
significant sales will be achieved. The Company was unprofitable through
December 31, 1997, incurring a loss of $7,316,000 for the full year 1997, as a
result of start-up expenses in anticipation of production orders. The Company
may continue to incur losses.
Results of Operations
For purposes of comparison with the results of operations for the year
ended December 31, 1997, the results of operations for the period January 1,
1996 through May 1, 1996 and the period from May 2, 1996 through December 31,
1996 have been aggregated.
Total revenues for 1997 increased 88% to $364,000 from $194,000 in 1996.
The increase was the result of additional prototype sales of Boralyn-based
products and revenue on custom-built tooling. In 1996, total revenue decreased
39% to $194,000 from $319,000 in 1995. The decrease was the result of
management's decision to focus its efforts on sales of Boralyn-based products
and to reduce its efforts to sell boron carbide powders and ceramic products.
Cost of goods sold increased 183% to $323,000 in 1997 from $114,000 in
1996. Cost of goods sold for 1997 increased as a percentage of total revenue to
89% from 59% in 1996. The increase was primarily attributable to the lower
margin on sales of custom-built tooling and prototype sales. Certain customers
have renegotiated tooling contracts, where future tooling payments are to be
treated as a reimbursement of tooling expenses as opposed to being recorded as
revenue. In 1996 cost of goods sold decreased 44% to $114,000 from $203,000 in
1995, reflecting primarily the reduction in revenues. Cost of goods sold as a
percentage of total revenue decreased in 1996 to 59% from 64% in 1995. The
decrease reflected the change in product mix which included a greater proportion
of higher margin Boralyn-based products in 1995.
Expenses incurred in 1997 in establishing a manufacturing facility
increased 591% to $1,809,000 from $262,000 in 1996. The increase was primarily
attributable to the additional manufacturing management and related
pre-operating costs incurred by the Company in building its infrastructure and
installed machinery and equipment to produce Boralyn-based products. The
increase in 1997 was the result of occupying the building for the entire year as
compared to only the fourth quarter in 1996. The Company expects to begin
production in 1998 and anticipates reaching normal production levels by the end
of 1998. There were no expenses incurred during 1995 for establishment of
manufacturing facilities.
General and administrative expenses for 1997 increased 101% to $2,633,000
from $1,310,000 in 1996. The increase was primarily the result of doubling the
Company's staff in preparation for production, including professional services
and other administrative costs. In 1996, general and administrative expenses
increased 498% to $1,310,000 from $219,000 in 1995. The increase was the result
of additional staff and administrative costs associated with the transition of
the Company to fully commercialize Boralyn.
Selling and marketing expenses in 1997 increased 125% to $1,371,000 from
$610,000 in 1996. The increase was the result of an increase in marketing
expenses incurred in the expanding marketing efforts for Boralyn-based products.
These expenses will continue to increase to support anticipated Company growth.
Selling and marketing expenses increased 1,073% to $610,000 in 1996 from $52,000
in 1995. This increase was the result of increased sales staff, including
specialists in sporting goods, computers, and transportation industries,
marketing staff and an increase in marketing expenses incurred in the start-up
marketing efforts for Boralyn-based products.
Research and development expenses in 1997 increased 706% to $2,338,000 from
$290,000 in 1996. This increase was attributable to an increase in ongoing
development programs, including establishment of the research facility in
Fremont, California, which focuses solely on the computer hard-disk substrate
market. Research and development expenses are expected to increase as the
Company expands programs to support the development of Boralyn-based products.
In 1996, research and development expenses increased 267% to $290,000 from
$79,000 in 1995. The increase was attributed to an increase in research staff
and ongoing development programs associated with the Company's transition for
Boralyn commercialization.
The Company's customer sales contracts are quoted in U.S. Dollars, such
that there is no current foreign exchange exposure. However, there can be no
assurance that market conditions will allow continued pricing in U.S. Dollars
and may require pricing in local currencies. The Company's agreements for the
purchase of raw materials and tooling which are obtained from sources outside
the United States are also quoted in U.S. Dollars, although current purchase
agreements do not exceed one year. Raw material and tooling prices may be
affected materially and adversely by currency value fluctuations.
Liquidity and Capital Resources
At December 31, 1997, the Company had working capital of $11,717,000 as a
direct result of the completed initial public offering in October 1996 of
2,750,000 shares of its Common Stock at a price of $13.50 per share, which
generated net proceeds to the Company of approximately $33.3 million after
expenses, and the debt financing of $6.5 million completed in December 1997.
Working capital at December 31, 1996 was $23,494,000. During 1997, the Company
invested approximately $7.3 million in new machinery, equipment and production
facilities and $3.1 million in deposits on equipment. In 1996, the Company
invested approximately $5.1 million in capital equipment for new production
facilities, equipment and tooling and $1.7 million in deposits on equipment. In
accordance with investment guidelines approved by the Company's Board of
Directors, cash balances in excess of those required to fund operations have
been invested in interest-bearing high quality short-term investment grade
corporate and government securities.
The Company's future liquidity and capital funding requirements will depend
on numerous factors, including principally results of marketing its
Boralyn-based products, their acceptance in the market, and the costs and timing
of growth in sales, marketing and manufacturing activities. The Company intends
to use debt financing for some of its existing and future capital equipment
needs. The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations, that its existing cash resources and
future capital equipment financing will be sufficient to satisfy its
contemplated cash requirements through 1998.
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 for a list of the Alyn Corporation Financial Statements and
Schedules and Supplementary Information filed as part of this Annual Report.
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
<PAGE>
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item, insofar as it relates to Directors,
is incorporated herein by reference to the Company's definitive Proxy Statement
with respect to the Company's Annual Meeting of Stockholders scheduled to be
held on June 3, 1998.
The current Directors and Executive Officers of the Company, each of whom
is expected to continue in his respective position immediately following the
1998 Annual Meeting, are:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Robin A. Carden 40 President, Chief Executive Officer and a Director
Walter R. Menetrey 64 Executive Vice President, Chief Operating Officer and a Director
Richard L. Little 53 Vice President, Finance and Administration and Chief Financial Officer
Harry Edelson 61 Director
Michael Markbreiter 36 Director
Udi Toledano 47 Chairman of the Board and a Director
</TABLE>
The business experience, principal occupations and employment, as well as
the periods of service, of each of the Directors and Executive Officers of the
Company during at least the last five years are set forth below.
Robin A. Carden is the founder of the Company and has been the President,
Chief Executive Officer and a director since its formation in 1990. Prior to
1990, Mr. Carden was employed by Ceradyne Inc., a company engaged in the
development and production of advanced ceramics products, as Senior Sales
Engineer, and was engaged in developing civilian applications for advanced
ceramics products originally developed for military use. Mr. Carden graduated
from Long Beach State University with a Bachelor of Science degree. A number of
United States patents have been issued to Mr. Carden.
Walter R. Menetrey has been the Executive Vice President, Chief Operating
Officer and a Director of the Company since May 1996. From August 1992 to April
1996, he worked as an independent management consultant to numerous companies
engaged in, among other things, the security and software industries. Prior to
July 1992, Mr. Menetrey was Chief Executive Officer of Meret, Inc., a company
engaged in the manufacture and sale of fiber optics communications equipment. In
July 1995, Mr. Menetrey filed for personal bankruptcy under Chapter 7 of the
Bankruptcy Code, and was granted a discharge of the claims of certain creditors
pursuant to Section 727 of the Bankruptcy Code in November 1995. Mr. Menetrey
received a Bachelor of Science in Physics and a Master of Science degree in
Electrical Engineering from the California Institute of Technology.
Richard L. Little has been the Vice President, Finance and Administration
and Chief Financial Officer of the Company since May 1997. Mr. Little was
Executive Vice President of d'essence Designer Fragrances, a marketer of fine
perfumes and related products from 1995 to 1997 and President of d'essence
International from 1996 to 1997. From 1994 to 1995 he was Chief Operating
Officer and Chief Financial Officer of Graphix Zone, a publicly traded producer
of CD-ROMS. In 1989, Mr. Little co-founded Bainbridge International Holdings, a
merchant bank specializing in acquiring middle market companies. From 1986 to
1989, Mr. Little was Chief Financial Officer, Vice President Finance, Treasurer
and Secretary of Teradata Corporation, a publicly traded manufacturer and
marketer of supercomputers for managing very large data bases. Before Teradata,
Mr. Little was Chief Financial Officer of Quotron Systems, a publicly traded
provider of on-line financial information services. Mr. Little has a Bachelor of
Science degree in Engineering and Masters of Business Administration in Finance
from the University of California, Los Angeles. He is also a CPA.
Harry Edelson has been a Director of the Company since May 1996. Mr.
Edelson has been the Managing Partner of Edelson Technology Partners, a venture
capital fund that is an affiliate of Edelson Technology Partners III, a
principal stockholder of the Company, for more than ten years. Edelson
Technology Partners and its related funds have invested in more than 70
companies involved in a wide range of technologies, including
telecommunications, computers, semiconductors, specialty chemicals,
environmental and publishing, with a focus on funding technologies that could
assist its corporate partners. Mr. Edelson was a financial analyst for over 12
years, covering technology companies for Merrill Lynch & Co., Drexel Burnham
Lambert and First Boston Corporation. He has consulted for dozens of companies
and is a frequent speaker and contributor to leading business magazines in
Europe, Asia and the United States.
Michael Markbreiter has been a Director of the Company since May 1996.
Since August 1995, Mr. Markbreiter has been a portfolio manager for private
equity investments for Kingdon Capital Management Corp., a manager of investment
funds. In April 1994, he co-founded Ram Investment Corp., a venture capital
company. From March 1993 to January 1994, he served as a portfolio manager for
Kingdon Capital Management Corp. Prior to February 1993, he worked as an analyst
at Alliance Capital Management Corp. Since December 1997, Mr. Markbreiter has
been a Director of Global Pharmaceutical Corporation, a publicly traded generic
pharmaceutical manufacturing company. Mr. Markbreiter graduated from Cambridge
University with a degree in Engineering.
Udi Toledano has been a Director of the Company since May 1996 and Chairman
of the Board since January 1997. Mr. Toledano has been the President of
Andromeda Enterprises, Inc., a private investment company, since December 1993.
Prior to that he was the president of CR Capital Inc., a private investment
company, for more than five years. He has been an advisor to various public and
private corporations, none of which competes with the Company. Since May 1996,
Mr. Toledano has been a Director of HumaScan Inc., a publicly traded medical
device company, and since April 1995 he has been a Director of Global
Pharmaceutical Corporation, a publicly traded generic pharmaceutical
manufacturing company. Since July 1994, Mr. Toledano has been a Director of
Universal Stainless & Alloy Products, Inc., a publicly traded specialty steel
producing company.
All Directors hold office until the Annual Meeting of Stockholders,
scheduled to be held on June 3, 1998, and the election and qualification of
their successors.
11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the Company's definitive Proxy Statement with respect to the Company's Annual
Meeting of Stockholders scheduled to be held on June 3, 1998.
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the Company's definitive Proxy Statement with respect to the Company's Annual
Meeting of Stockholders scheduled to be held on June 3, 1998.
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the Company's definitive Proxy Statement with respect to the Company's Annual
Meeting of Stockholders scheduled to be held on June 3, 1998.
<PAGE>
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed with this Report.
The following statements, schedules and documents are filed as part of this
report.
1. Financial Statements
The financial statements listed in the accompanying List of
Financial Statements covered by Report of Independent
Accountants.
2. Financial Statement Schedules
None
3. Exhibits
Exhibit
Number Description
3.1* Restated Certificate of Incorporation.
3.2* By-Laws of the Registrant.
4.1* Specimen Copy of Stock Certificate for shares of Common
Stock.
4.2* Stockholder Agreement, dated as of May 1, 1996, by and
among the Company and certain stockholders of the
Registrant.
10.1* 1996 Stock Incentive Plan of the Registrant.
10.2* Employment Agreement between the Company and Robin A.
Carden, dated as of April 1, 1996, as amended by
Amendment Number One, dated as of April 30, 1996.
10.3* Form of Employment Agreement between the Company and
certain senior executives.
10.4* Lease, dated as of June 12, 1996, between the Registrant
and Taylor-Longman, with respect to premises at 16761
Hale Avenue, Irvine, California.
10.5* Sale of Goods Agreement and Exclusive License, dated as
of September 10, 1996, by and between Taylor Made Golf
Company, Inc. and the Registrant (for which confidential
treatment has been granted with respect to certain
provisions).
10.6** Exclusive Customer Agreement, dated as of May 13, 1997,
by and between True Temper Sports and the Registrant
(for which confidential treatment has been granted with
respect to certain provisions).
10.7 Lease, dated as of July 1, 1997, as amended by First
Amendment to Lease, dated as of December 23, 1997,
between the Registrant and the Irvine Company, with
respect to premises at 17021 Von Karman Avenue, Irvine,
California.
23 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule for the year ended December 31,
1997.
99.1* U.S. Patent Number 5,496,223, dated January 23, 1996.
(b) Reports on Form 8-K.
The Registrant filed no reports on Form 8-K during the fourth quarter of
the year ended December 31, 1997.
- --------------
* Incorporated by reference to the Registrant's Registration Statement of
Form S-1 (File no. 333-09143) and any amendments thereto.
** Incorporated by reference to the Registrant's Current Report on Form 8-K,
dated August 13, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALYN CORPORATION
By: /s/ Robin A. Carden
---------------------
Robin A. Carden
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Robin A, Carden President, Chief Executive March 10, 1998
- --------------------------- Officer and Director
Robin A. Carden (principal executive officer)
/s/ Richard L. Little Vice President, Finance and March 10, 1998
- --------------------------- Administration and Chief
Richard L. Little Financial Officer (principal
financial and accounting officer)
/s/ Walter R. Menetrey Executive Vice President, Chief March 10, 1998
- --------------------------- Operating Officer and Director
Walter R. Menetrey
/s/ Harry Edelson Director March 10, 1998
- ---------------------------
Harry Edelson
/s/ Michael Markbreiter Director March 10, 1998
- ----------------------------
Michael Markbreiter
/s/ Udi Toledano Chairman of the Board and March 10, 1998
- ---------------------------- a Director
Udi Toledano
</TABLE>
<PAGE>
FORM 10-K ITEM 14 (a)(1)
ALYN CORPORATION
LIST OF FINANCIAL STATEMENTS
The following financial statements of
Alyn Corporation are included in Item 8:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . .F-2
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Statement of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . .
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . .
Schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Alyn Corporation
We have audited the accompanying balance sheet of Alyn Corporation (the
"Company") as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity and of cash flows for the year ended December
31, 1997 and for the period from May 2, 1996 through December 31, 1996. We have
also audited the statements of operations, stockholders' equity (deficit) and of
cash flows of Old Alyn for the period from January 1, 1996 through May 1, 1996
and the year 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 audited by us present fairly, in
all material respects, the financial position of the Company at December 31,
1997 and 1996, and the results of operations and cash flows of the Company and
of Old Alyn for the periods described in the first paragraph above, in
conformity with generally accepted accounting principles.
PRICE WATERHOUSE LLP
Costa Mesa, California
January 16, 1998
F-2
<PAGE>
ALYN CORPORATION
BALANCE SHEET
December 31, December 31,
1997 1996
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $13,126,000 $24,411,000
Accounts receivable, net of allowance
for doubtful accounts of $25,000 in 1997
and $4,000 in 1996 94,000 57,000
Inventories 172,000 41,000
Other current assets 201,000 122,000
----------- ------------
Total current assets 13,593,000 24,631,000
Equipment, furniture and fixtures, net 13,302,000 5,027,000
Other assets, net 3,454,000 1,771,000
Intangibles, net of accumulated amortization
of $152,000 in 1997 and $56,000 in 1996 778,000 774,000
---------- ------------
$31,127,000 $32,203,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $551,000 $945,000
Current portion of long term debt 999,000 -
Accrued and other current liabilities 326,000 192,000
-------- --------
Total current liabilities 1,876,000 1,137,000
Long term debt (Note 4) 5,501,000
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $0.001 par value;
5,000,000 shares authorized;
no shares issued and outstanding
Common stock, $0.01 par value;
20,000,000 shares authorized;
10,750,000 shares issued and
outstanding 11,000 11,000
Additional paid-in capital 33,294,000 33,294,000
Accumulated deficit (9,555,000) (2,239,000)
----------- -----------
Total stockholders' equity 23,750,000 31,066,000
----------- -----------
$31,127,000 $32,203,000
=========== ===========
See accompanying notes to financial statements
<PAGE>
ALYN CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Alyn Old Alyn
-------------------------------- ----------------------------------
Year Period From Period From Year
Ended May 2, 1996 to January 1, 1996 Ended
December 31, December 31, to May 1, December 31,
1997 1996 1996 1995
-------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Net sales $305,000 $25,000 $104,000 $261,000
Contract revenue 59,000 65,000 - 58,000
------- ------- -------- -------
Total revenue 364,000 90,000 104,000 319,000
Costs and expenses:
Cost of goods sold 323,000 80,000 34,000 203,000
Establishment of manufacturing facilities 1,809,000 262,000 - -
General and administrative expenses 2,633,000 1,257,000 53,000 219,000
Selling and marketing 1,371,000 587,000 23,000 52,000
Research and development 2,338,000 283,000 7,000 79,000
--------- ------- ----- ------
Total costs and expenses 8,474,000 2,469,000 117,000 553,000
--------- --------- ------- -------
Operating loss (8,110,000) (2,379,000) (13,000) (234,000)
Interest expense (3,000) (141,000) (3,000) (12,000)
Interest income 809,000 282,000 1,000 2,000
------- ------- ----- -----
Loss before provision for income taxes (7,304,000) (2,238,000) (15,000) (244,000)
Provision for income taxes 12,000 1,000 1,000 1,000
------ ----- ----- -----
Net loss ($7,316,000) ($2,239,000) ($16,000) ($245,000)
=========== =========== ======== =========
Basic and diluted net loss per share ($0.68) ($0.25)
Common shares used in computing
net loss per share (Note 1) 10,750,000 8,800,205
</TABLE>
<PAGE>
ALYN CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Common Stock - Class A Common Stock - Class B Accumulated
Shares Amount Shares Amount Shares Amount Deficit
--------------------- --------------------------- ------------------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Old Alyn (Notes 1 and 5)
Balance at December 31, 1994 - - 1,700,000 $1,000 300,000 $ 325,000 $ (571,000)
Net loss (245,000)
--------------------- ------------------------ ----------------------- ----------
Balance at December 31, 1995 - - 1,700,000 1,000 300,000 325,000 (816,000)
Repurchase of common stock (200,000) (217,000) (43,000)
Net loss (16,000)
--------------------- ----------------------- -------------- ---------- ---------------
Balance May 1, 1996 - - 1,700,000 $1,000 100,000 $ 108,000 $ (875,000)
===================== ======================== ========================== ===============
</TABLE>
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
------------------------- ----------------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Alyn (Note 1)
Issuance of common stock 4,240,000 $ 4,000 $ 1,000
Common stock issued in exchange
for Old Alyn common stock 3,760,000 4,000 (4,000)
Common stock issued in initial
public offering, net of
offering costs 2,750,000 3.000 33,297,000
Net loss $ (2,239,000)
------------------------- -------------------------- -------------- -----------------
Balance at December 31, 1996 10,750,000 11,000 33,294,000 (2,239,000)
- -
Net loss (7,316,000)
------------------------- -------------------------- -------------- -------------
Balance at December 31, 1997 - - 10,750,000 $ 11,000 $ 33,294,000 $ (9,555,000)
========================= ========================== ============== =================
</TABLE>
<PAGE>
ALYN CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Alyn Old Alyn
----------------------------------- -----------------------------------
Year Period From Period From Year
Ended May 2, 1996 to January 1, 1996 Ended
December 31, December 31, to May 1, December 31,
1997 1996 1996 1995
----------------------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net Loss ($7,316,000) ($2,239,000) ($16,000) ($245,000)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 856,000 111,000 1,000 2,000
Provision for allowance for doubtful accounts 95,000 2,000 8,000 -
(Increase) decrease in operating assets and liabilities:
Accounts receivable (158,000) (22,000) (30,000) (7,000)
Inventories (131,000) (32,000) 7,000 138,000
Other current assets (54,000) (122,000) - -
Deferred offering costs - - (128,000) -
Other assets (3,385,000) (1,624,000) - -
Intangible assets (99,000) (60,000) (1,000) (6,000)
Accounts payable (394,000) 884,000 (4,000) 22,000
Accrued and other current liabilities 134,000 (588,000) 94,000 158,000
----------------------------------- ----------------- ----------------
Net cash used in operating activities (10,452,000) (3,690,000) (69,000) 62,000
----------------------------------- ----------------- ----------------
Cash flows from investing activities:
Capital expenditures (7,333,000) (5,075,000) (4,000)
----------------------------------- ----------------- ----------------
Net cash used in investing activities (7,333,000) (5,075,000) (4,000)
----------------------------------- ----------------- ----------------
Cash flows from financing activities:
Proceeds from initial stock offering 33,300,000
Payment of stockholder note payable (128,000)
Proceeds from stockholder credit facility 4,650,000
Repayment of stockholder credit facility (4,650,000)
Proceeds from long term debt 6,500,000
----------------------------------- ----------------- ----------------
Net cash provided by financing activities 6,500,000 33,172,000
----------------------------------- ----------------- ----------------
Net (decrease) increase in cash (11,285,000) 24,407,000 (73,000) 62,000
Cash and cash equivalents at beginning of period 24,411,000 4,000 77,000 15,000
----------------------------------- ----------------- ----------------
Cash and cash equivalents at end of period $13,126,000 $24,411,000 $4,000 $77,000
=================================== ================= ================
Supplemental cash flow information:
Cash paid during the period for income taxes $12,000 $1,000 $1,000 $1,000
=================================== ================= ================
Cash paid during the period for interest $3,000 $144,000
===================================
Noncash investing and financining activities:
Liability recorded for repurchase of common
stock from stockholder $260,000
=================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
ALYN CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Description of business and summary of significant accounting policies
Description of business
Alyn designs, develops, and manufactures industrial and consumer products
utilizing its proprietary advanced metal matrix composite materials. Old Alyn
had developed technology, for which it obtained a patent in January 1996, for
the application of Boron Carbide in combination with aluminum in lightweight
metal matrix composites under the name Boralyn(R).
Alyn Corporation (Alyn or the Company) was incorporated in Delaware on
April 9, 1996. In May 1996, the Company acquired Alyn Corporation (Old Alyn), a
California corporation, whereby all of the 1,800,000 outstanding shares of
common stock of Old Alyn were exchanged at a ratio of 2.1-to-one for 3,760,000
shares of common stock of the Company (0.02611-to-one for 47,000 shares
pre-split discussed below). Subsequent to the acquisition, Old Alyn stockholders
owned forty-seven percent of Alyn. As a result of the change in control of Old
Alyn, the acquisition was accounted for as a purchase.
In July 1996, the Company's Board of Directors amended its Articles of
Incorporation to increase the number of shares authorized of common stock from
110,000 to 20,000,000 and to authorize 5,000,000 shares of preferred stock and
declared an 80-for-one split of its common stock. All share amounts presented
for Alyn have been adjusted to give retroactive effect for this split.
On October 22, 1996, the Company completed its initial public offering of
2,750,000 shares of common stock at a price of $13.50 per share. The Company
received net proceeds of approximately $33.3 million after underwriting
discounts and offering expenses. Subsequently, in October 1996, approximately
$4.7 million of net proceeds from the initial public offering were used for
repayment of principal, accrued interest thereon and all other amounts owing
with respect to a credit facility provided by stockholders, and the credit
facility was terminated.
In December 1997, the Company completed a $2,500,000 term loan and
established, subject to a collateral audit, a $5,000,000 revolving credit
facility, based upon an advance against accounts receivable, with a commercial
bank. As of December 31, 1997, no advances had been made under the revolving
credit facility. Also in December 1997, the Company established an $8,000,000
secured term loan credit facility with a large financial institution. Advances
under the facility are secured by specific Company owned manufacturing
equipment. As of December 31, 1997, $4,000,000 was outstanding under this credit
facility.
Summary of accounting policies
Inventories
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis.
Equipment, furniture and fixtures
Equipment, furniture and fixtures, including tooling, are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of individual assets, which range from 18 months to 10 years.
Amortization of leasehold improvements is recorded using the straight-line
method over the shorter of the life of the improvement or the term of the
related lease.
Intangible assets
Intangible assets consisting of patents for the Boralyn(R)technology and
goodwill are amortized on a straight-line basis over the estimated economic life
of 10 years. Intangible assets are periodically reviewed for impairment to
ensure that they are fairly stated. The Company reviews the recoverability of
intangible assets by comparing cash flows on an undiscounted basis to the net
book value of the assets. In the event the projected undiscounted cash flows are
less than the net book value of the assets, the carrying value of the assets
will be written-down to their fair value, less cost to sell.
Revenue
The Company recognizes sales of product at the time of shipment. Contract
revenue of $59,000 in 1997 was recognized as the related research and
development costs of $59,000 were incurred. Contract revenue of $65,000 in 1996
was recognized as the related research and development costs of $39,000 were
incurred. Contract revenue of $58,000 in 1995 was recognized as the related
research and development costs of $58,000 were incurred. Amounts received prior
to performance are classified as customer advances and recognized as earned. The
Company performs on-going credit evaluations and maintains reserves for
potential credit losses. In 1997, three customers accounted for 74% of prototype
and tooling sales, individually 48%, 14% and 12%. In 1996, two customers
accounted for 38% of product sales, individually 19% and 19%. In 1995, two
customers accounted for 54% of product sales, individually 40% and 14%.
Research and development
Expenditures for research and development costs are charged to expense as
incurred.
Net loss per share
Effective in the fourth quarter of fiscal year 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128") and the related interpretations. FAS 128 requires dual presentation of
Basic Earnings per Share ("Basic EPS") and Diluted Earnings per Share ("Diluted
EPS"). Basic EPS excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding during the reported period.
Diluted EPS reflects the potential dilution that could occur if stock options
were exercised. For all periods presented, stock options have been excluded from
the calculation as they produce an anti-dilutive effect. Basic and diluted net
loss per share for 1997 is based upon the weighted average number of common
stock shares outstanding during the year. Basic and diluted net loss per share
for 1996 is based upon the weighted average number of common stock shares
outstanding during the period from May 2, 1996 to December 31, 1996 after giving
retroactive effect to the 80-for-one stock split.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
Concentrations of credit risk
The Company sells its products and services to various companies across
several industries, and therefore management believes that no material
concentrations of credit risk exist.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and held in banks, money
market funds, commercial paper and other short-term investments with a remaining
or original maturity of twelve months or less when purchased.
Fair value of financial instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, and accrued and other
current liabilities. These financial instruments are stated at current value,
which approximates fair value.
Long-lived assets
The Financial Accounting Standards Board ("FASB") issued Statement 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS No. 121") which is effective for fiscal years beginning
after December 15, 1995. SFAS No. 121 was adopted January 1, 1996 and did not
have a material impact on the Company's financial position, results of
operations or liquidity.
2. Balance sheet components
December 31,
-----------------------------
1997 1996
---- ----
Inventories:
Raw materials $ 157,000 $ 24,000
Finished goods 15,000 17,000
---------- ---------
$ 172,000 $ 41,000
=========== ===========
Equipment, furniture and fixtures:
Machinery, equipment and tooling $ 9,262,000 $ 42,000
Furniture and office equipment 1,239,000 656,000
Leasehold improvements 3,353,000 2,000
Construction in progress -
Machinery and equipment - 2,055,000
Leasehold improvements 276,000 2,339,000
---------- ----------
14,130,000 5,094,000
Less: accumulated depreciation and
amortization ( 828,000) ( 67,000)
---------- ----------
$13,302,000 $5,027,000
=========== ==========
Other assets
Deposits on machinery and equipment $3,139,000 $1,702,000
Other 315,000 69,000
---------- -----------
$3,454,000 $1,771,000
========== ==========
Accrued and other current liabilities:
Accrued compensation $ 81,000 $ -
Accrued professional fees 138,000 82,000
Other 107,000 110,000
---------- -------
$ 326,000 $ 192,000
========= =========
3. Income taxes
The Company accounts for income taxes under the liability method.
Accordingly, deferred tax assets and liabilities are measured each year based on
the difference between the financial statement and tax bases of all assets and
liabilities at the current expected income tax rates. Deferred tax assets and
liabilities are not material to the financial position of the Company at
December 31, 1997 and 1996, with the exception of net operating loss
carryforwards of $4,465,000 and $918,000 at December 31, 1997 and 1996,
respectively, against which full valuation allowances were recorded. In 1994,
Old Alyn elected to become an S-Corporation for Federal and California income
tax purposes. As a result of these elections, Federal and California tax
attributes of Old Alyn passed to the Old Alyn stockholders. Alyn is a
C-Corporation for income tax purposes and is taxed accordingly. The provision
for income taxes for the three years ended December 31, 1997 is comprised
primarily of the annual minimum California franchise tax.
4. Long term debt
Long term debt at December 31, 1997 comprised:
(i) A 46-month term loan at 9.5% interest with a
commercial bank. Payments are interest only from
January 31, 1998 to April 30, 1998. From May 31,
1998 to October 31, 2001, monthly payments are
principal of $60,000, plus interest. The loan is
secured by substantially all the Company's tangible
personal property including inventory and
unencumbered equipment. $2,500,000
(ii) An $8,000,000, 72 month term facility with a major
financial institution. The interest rate, which is
fixed at the time of each advance under the line, is
set at 3.5% over like-term U.S. Treasuries. At such
time as the Company achieves a specified level of
profitability for two consecutive quarters, the
previously fixed rate decreases by 1.0% for the
remaining term of that advance. Each advance under
the facility is secured by manufacturing equipment
owned by the Company, based upon a 75% advance rate.
As of December 31, 1997, the Company had drawn a
single advance of $4,000,000 under the credit
facility, at a rate of 9.29%, payable in monthly
installments of $73,000, including principal and
interest beginning February 1, 1998 to January 1,
2004. 4,000,000
---------
6,500,000
Less current portion of long-term debt ( 999,000)
---------
$5,501,000
==========
The aggregate maturities of long-term debt are as
follows:
Fiscal Year Amount
----------- ------
1998 $ 999,000
1999 1,237,000
2000 1,338,000
2001 1,279,000
2002 751,000
Thereafter 896,000
----------
$6,500,000
==========
In December 1997, the Company also established, subject to a collateral
audit, a $5,000,000 secured revolving credit facility with the same commercial
bank. The credit facility is secured by substantially all the Company's tangible
personal property including accounts receivable, inventory and unencumbered
equipment. Advances under the credit facility are based upon an advance rate of
80% of eligible accounts receivable with a floating interest rate option, chosen
at the time of each advance, of the bank's Prime Rate or 2.25% over the
like-term LIBOR rate. There have been no advances under the facility to date.
The credit facility expires one year from the initial advance under the
facility.
The provisions of the credit facilities require the Company to maintain
certain covenants including minimum cash and equivalents balances of $5,000,000
and other financial ratios and restrict the Company from incurrence of new
indebtedness, disposition of assets, payment of dividends and the redemption or
retirement of stock.
5. Stock transactions - Old Alyn
In June 1994, Old Alyn's Articles of Incorporation were amended authorizing
10,000,000 shares of Series A common stock and 10,000,000 shares of Series B
common stock. The stockholders of Old Alyn exchanged their existing shares of
common stock for 1,700,000 shares of Series A common stock. Old Alyn received
$75,000 cash in exchange for an option to acquire Series B common stock of Old
Alyn. Pursuant to this option agreement, Old Alyn issued 300,000 shares of the
new Series B common stock for an additional $250,000 in cash. In April 1996, Old
Alyn executed an agreement to repurchase 200,000 shares of the Series B common
stock for $260,000 in cash. The cash was paid to the stockholder in May 1996.
6. Related party transactions
The Company paid $60,000 in 1997 and $100,000 in 1996 to a firm managed by
the Chairman of the Board for sales, marketing and consulting services.
7. Stock options
In July 1996, the Company established a stock incentive plan (the "Plan")
for key employees, non-employee directors and consultants to the Company who are
expected to contribute to the Company's future growth and success. Under the
Plan, the Company may grant options with respect to a maximum of 1,000,000
shares of common stock. The options will be granted at not less than fair market
value and vest ratably over three or four-year periods with the exception of
certain non-employee director options that will be fully vested at the date of
grant or vest over a two-year period. No award may be granted under the plan
after June 30, 2006. At December 31, 1996, there were 617,000 shares of common
stock reserved under the plan for the future granting of stock options. At
December 31, 1997 there were 475,500 shares of common stock reserved under the
Plan for future stock option grants.
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS NO. 123), effective for 1996,
the Company continues to account for stock compensation costs in accordance with
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". Had compensation cost been determined based on the
fair value at the grant dates for awards under the Company's incentive stock
plan in accordance with SFAS No. 123, net loss would have been increased by
$773,000 ($0.07 per share) in 1997 and the net loss would have been increased by
$167,000 ($0.02 per share) in 1996. As required by SFAS No. 123, the fair value
of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with historical volatility of 56.92% and a weighted average
risk-free rate of return of 6.28%; for 1996: historical dividend yield of 0.0%,
an expected life of five years, historical volatility of 58.09% and a risk-free
rate of return of 6.34%. The weighted-average fair value of the options granted
during 1997 was $5.44 and in 1996 was $7.62.
The following table summarizes the Company's Plan as of December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------------------- ---------------------------
Shares Weighted-Average Shares Weighted-Average
(000) Exercise Price (000) Exercise Price
----------------------------- ---------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 383 $13.50 -- --
Granted 261 $ 9.41 383 $13.50
Forfeited (119) $13.16 -- --
----- ---
Outstanding, end of year 525 $11.72 383 $13.50
=== ===
Options exercisable at year end 139 25
==== ===
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------
Number Weighted-Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 8 to 9 145,000 3.4 years $ 8.63 -- --
9 to 10 36,000 3.2 9.66 -- --
11 to 12 47,500 2.6 11.28 10,000 $11.00
12 to 13 6,000 1.0 12.57 3,000 12.25
13 to 14 275,000 1.5 13.50 125,904 13.50
14 to 15 15,000 3.9 14.88 -- --
-------- -------
$ 8 to 15 524,500 2.3 11.72 138,904 13.29
======= =======
</TABLE>
8. Commitments and contingencies
Commitments and leases
Future minimum lease payments required under non-cancelable operating
leases are as follows: $787,000 in 1998, $854,000 in 1999, $811,000 in 2000, and
$719,000 in 2001, $531,000 in 2002 and $2,700,000 thereafter.
Rent expense totaled $336,000 in 1997, $84,000 in 1996, and $17,000 in
1995.
Litigation and claims
In the ordinary course of business, the Company is generally subject to
claims, complaints, and legal actions. The litigation process is inherently
uncertain and it is possible that the resolution of such matters might have a
material adverse effect upon the financial position of the Company. As of
December 31, 1997, there was no pending or threatened litigation against the
Company, which could have a material adverse effect upon the financial position
of the Company.
INDEX TO INDUSTRIAL LEASE
(Single Tenant; Net; Stand-Alone)
ARTICLE I. BASIC LEASE PROVISIONS
ARTICLE II. PREMISES
Section 2.1 Leased Premises
Section 2.2 Acceptance of Premises
Section 2.3 Building Name and Address
Section 2.4 Landlord's Responsibilities
ARTICLE III. TERM
Section 3.1 Commencement Date / Option to Extend
Section 3.2 Delay in Possession
ARTICLE IV. RENT AND OPERATING EXPENSES
Section 4.1 Basic Rent
Section 4.2 Operating Expenses
Section 4.3 Security Deposit
Section 4.4 Additional Security Deposit
ARTICLE V. USES
Section 5.1 Use
Section 5.2 Signs
Section 5.3 Hazardous Materials
ARTICLE VI. SERVICES
Section 6.1 Utilities and Services
Section 6.2 Parking
ARTICLE VII. MAINTAINING THE PREMISES
Section 7.1 Tenant's Maintenance and Repair
Section 7.2 Landlord's Maintenance and Repair
Section 7.3 Alterations
Section 7.4 Mechanic's Liens
Section 7.5 Entry and Inspection
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
ARTICLE IX. ASSIGNMENT AND SUBLETTING
Section 9.1 Rights of Parties
Section 9.2 Effect of Transfer
Section 9.3 Sublease Requirements
Section 9.4 Certain Transfers
ARTICLE X. INSURANCE AND INDEMNITY
Section 10.1 Tenant's Insurance
Section 10.2 Landlord's Insurance
Section 10.3 Tenant's Indemnity
Section 10.4 Landlord's Nonliability
Section 10.5 Waiver of Subrogation
ARTICLE XI. DAMAGE OR DESTRUCTION
Section 11.1 Restoration
Section 11.2 Lease Governs
ARTICLE XII. EMINENT DOMAIN
Section 12.1 Total or Partial Taking
Section 12.2 Temporary Taking
Section 12.3 Taking of Parking Area
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIAL
Section 13.1 Subordination
Section 13.2 Estoppel Certificate
Section 13.3 Financials
ARTICLE XIV. DEFAULTS AND REMEDIES
Section 14.1 Tenant's Defaults
Section 14.2 Landlord's Remedies
Section 14.3 Late Payments
Section 14.4 Right of Landlord to Perform
Section 14.5 Default by Landlord
Section 14.6 Expenses and Legal Fees
Section 14.7 Waiver of Jury Trial
Section 14.8 Satisfaction of Judgment
Section 14.9 Limitation of Actions Against Landlord
ARTICLE XV. END OF TERM
Section 15.1 Holding Over
Section 15.2 Merger on Termination
Section 15.3 Surrender of Premises; Removal of Property
ARTICLE XVI. PAYMENTS AND NOTICES
ARTICLE XVII. RULES AND REGULATIONS
ARTICLE XVIII BROKER'S COMMISSION
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
ARTICLE XX. INTERPRETATION
Section 20.1 Gender and Number
Section 20.2 Headings
Section 20.3 Joint and Several Liability
Section 20.4 Successors
Section 20.5 Time of Essence
Section 20.6 Controlling Law
Section 20.7 Severability
Section 20.8 Waiver and Cumulative Remedies
Section 20.9 Inability to Perform
Section 20.10 Entire Agreement
Section 20.11 Quiet Enjoyment
Section 20.12 Survival
ARTICLE XXI. EXECUTION AND RECORDING
Section 21.1 Counterparts
Section 21.2 Corporate and Partnership Authority
Section 21.3 Execution of Lease; No Option or Offer
Section 21.4 Recording
Section 21.5 Amendments
Section 21.6 Executed Copy
Section 21.7 Attachments
ARTICLE XXII. MISCELLANEOUS
Section 22.1 Nondisclosure of Lease Terms
Section 22.2 Guaranty
Section 22.3 Changes Requested by Lender
Section 22.4 Mortgagee Protection
Section 22.5 Covenants and Conditions
Section 22.6 Security Measures
EXHIBITS
Exhibit A Description of Premises
Exhibit A-1 Description of the Site
Exhibit B Environmental Questionnaire
Exhibit C Landlord's Disclosures
Exhibit D Insurance Requirements
Exhibit E Rules and Regulations
Exhibit X Work Letter
<PAGE>
INDUSTRIAL LEASE
(Single Tenant; Net; Stand-Alone)
THIS LEASE is made as of the day of , 19 , by and between The Irvine
Company, a Michigan corporation, hereafter called "Landlord," and ALYN
CORPORATION, a Delaware corporation, hereinafter called "Tenant."
ARTICLE I. BASIC LEASE PROVISIONS
Each reference in this Lease to the "Basic Lease Provisions" shall mean and
refer to the following collective terms, the application of which shall be
governed by the provisions in the remaining Articles of this Lease.
1. Premises: The Premises are more particularly described in Section 2.1.
2. Address of Building: 17021 Von Karman Avenue, Irvine, CA 92614
3. Use of Premises: General administrative office use, manufacturing and
distribution, and any other uses allowable under current zoning
ordinances, provided that no retail uses shall be permitted.
4. Commencement Date: February 1, 1998
5. Lease Term: Sixty (60) months, plus such additional days as may be
required to cause this Lease to terminate on the final day of the
calendar month.
6. Basic Rent: Thirty-Nine Thousand Three Hundred Ninety-Four Dollars
($39,394.00) per month.
Basic Rent is subject to adjustment as follows:
Commencing on the first day of the thirteenth (13th) month of the Lease
Term, the Basic Rent shall be Forty Thousand Five Hundred Sixty-Seven
Dollars ($40,567.00) per month.
Commencing on the first day of the twenty-fifth (25th) month of the Lease
Term, the Basic Rent shall be Forty-One Thousand Eight Hundred Twenty-Five
Dollars ($41,825.00) per month.
Commencing on the first day of the thirty-seventh (37th) month of the Lease
Term, the Basic Rent shall be Forty-Three Thousand Eighty-Two Dollars
($43,082.00) per month.
Commencing on the first day of the forty-ninth (49th) month of the Lease
Term, the Basic Rent shall be Forty-Four Thousand Three Hundred Thirty-Nine
Dollars ($44,339.00) per month.
7. Guarantor(s): None
8. Floor Area of Premises: approximately 83,817 rentable square feet
9. Security Deposit: $ 48,773.00
10. Broker(s): Voit Commercial
11. Additional Insureds: Insignia Commercial Group, Inc.
12. Address for Payments and Notices:
LANDLORD TENANT
INSIGNIA COMMERCIAL GROUP, INC. ALYN CORPORATION
One Technology Drive, Suite F-207 17021 Von Karman Avenue
Irvine, CA 92618 Irvine, CA 92614
with a copy of notices to: with a copy of notices to:
IRVINE INDUSTRIAL COMPANY BERGER, KAHN, SHAFTON, MOSS,
P.O. Box 6370 FIGLER, SIMON & GLADSTONE
Newport Beach, CA 92658-6370 2 Park Plaza, Suite 650
Attn: Vice President, Industrial Operations Irvine, CA 92614
Attn: Harri J. Keto, Esq.
13. Tenant's Liability Insurance Requirement: $ 2,000,000.00
<PAGE>
ARTICLE II. PREMISES
SECTION 2.1. LEASED PREMISES. Landlord leases to Tenant and Tenant leases
from Landlord the premises shown in EXHIBIT A (the "Premises"), including the
building identified in Item 2 of the Basic Lease Provisions (which together with
the underlying real property, is called the "Building"), and containing
approximately the floor area set forth in Item 8 of the Basic Lease Provisions.
The Building is located on the site (the "Site") shown on EXHIBIT A-1 attached
hereto.
SECTION 2.2. ACCEPTANCE OF PREMISES. Tenant acknowledges that neither
Landlord nor any representative of Landlord has made any representation or
warranty with respect to the Premises or the Building or the suitability or
fitness of either for any purpose, including without limitation any
representations or warranties regarding zoning or other land use matters. Tenant
further acknowledges that neither Landlord nor any representative of Landlord
has agreed to undertake any alterations or additions or construct any
improvements to the Premises except as expressly provided in this Lease. The
taking of possession or use of the Premises by Tenant for any purpose other than
construction shall conclusively establish that the Premises and the Building
were in satisfactory condition and in conformity with the provisions of this
Lease in all respects, except for those matters which Tenant shall have brought
to Landlord's attention on a written punch list. The list shall be limited to
any items required to be accomplished by Landlord under the Work Letter attached
as Exhibit X, and shall be delivered to Landlord within thirty (30) days after
the term ("Term") of this Lease commences as provided in Article III below. If
no items are required of Landlord under the Work Letter, by taking possession of
the Premises Tenant accepts the improvements in their existing condition, and
waives any right or claim against Landlord arising out of the condition of the
Premises. Nothing contained in this Section shall affect Landlord's
responsibilities under Section 2.4 below, or the commencement of the Term or the
obligation of Tenant to pay rent. Landlord shall diligently complete all punch
list items of which it is notified as provided above.
SECTION 2.3. BUILDING NAME AND ADDRESS. Landlord shall have the right to
change the name, address, number or designation of the Building without
liability to Tenant.
SECTION 2.4. LANDLORD'S RESPONSIBILITIES. It shall be Landlord's
responsibility, at its sole cost and expense and not as an Operating Expense, to
repair or replace any structural elements of the Building, footings, walls or
roof systems which shall fail during the Term. The foregoing responsibility,
however, shall not apply to any maintenance of, or needed periodic repairs to,
any of the foregoing structural elements. Landlord shall make any such required
repairs or replacements promptly following notice from Tenant.
ARTICLE III. TERM
SECTION 3.1. COMMENCEMENT DATE/OPTION TO EXTEND.
(a) Commencement Date. The Term shall be for the period shown in
Item 5 of the Basic Lease Provisions. The Term shall commence ("Commencement
Date"), and possession of the Premises (subject to Tenant's early entry rights
contained in the Work Letter) shall be tendered to Tenant, on the date set forth
in Item 4 of the Basic Lease Provisions. Within ten (10) days after possession
of the Premises is tendered to Tenant, the parties shall memorialize on a form
provided by Landlord the actual Commencement Date and the expiration date
("Expiration Date") of this Lease. Tenant's failure to execute that form shall
not affect the validity of Landlord's determination of those dates.
(b) Option to Extend. Provided that Tenant is not in default under
any provision of this Lease, either at the time of exercise of the extension
right granted herein or at the time of the commencement of such extension, and
provided further that Tenant has not sublet more than fifty percent (50%) of the
floor area of the Premises and/or has not assigned its interest under this Lease
other than to a "Tenant Affiliate" (as defined in Section 9.4 of this Lease),
Tenant may extend the Term of this Lease for one (1) period of sixty (60)
months. Tenant shall exercise its right to extend the Term by and only by
delivering to Landlord, not more than four hundred fifty (450) days nor less
than three hundred sixty (360) days prior to the expiration date of the Term,
Tenant's irrevocable written notice of its commitment to extend (the "Commitment
Notice"). The Basic Rent payable under the Lease during any extension of the
Term shall be at the fair market rental, including subsequent adjustments, for
comparable industrial space in the Irvine Business Complex; provided that such
rate shall in no event be less than the rate payable by Tenant during the final
month of the initial Term. In the event that the parties are not able to agree
on the fair market rental within one hundred eighty (180) days prior to the
expiration date of the Term, then either party may elect, by written notice to
the other party, to cause said rental, including subsequent adjustments, to be
determined by appraisal as follows.
Within ten (10) days following receipt of such appraisal election, the
parties shall attempt to agree on an appraiser to determine the fair market
rental. If the parties are unable to agree in that time, then each party shall
designate an appraiser within ten (10) days thereafter. Should either party fail
to so designate an appraiser within that time, then the appraiser designated by
the other party shall determine the fair rental value. Should each of the
parties timely designate an appraiser, then the two appraisers so designated
shall appoint a third appraiser who shall, acting alone, determine the fair
rental value of the Premises. Any appraiser designated hereunder shall have an
M.A.I. certification with not less than five (5) years experience in the
valuation of commercial industrial buildings in Orange County, California.
Within thirty (30) days following the selection of the appraiser, such
appraiser shall determine the fair market rental value, including subsequent
adjustments of the Premises. In no event shall the appraiser attribute factors
for market tenant improvement allowances or brokerage commissions to reduce said
fair market rental. The fees of the appraiser(s) shall be shared equally by both
parties.
Within twenty (20) days after the determination of the fair market rental,
Landlord shall prepare a reasonably appropriate amendment to this Lease for the
extension period and Tenant shall execute and return same to Landlord within ten
(10) days. Should the fair market rental not be established by the commencement
of the extension period, then Tenant shall continue paying rent at the rate in
effect during the last month of the initial Term, and a lump sum adjustment
shall be made promptly upon the determination of such new rental.
If Tenant fails to timely comply with any of the provisions of this
paragraph, Tenant's right to extend the Term shall be extinguished and the Lease
shall automatically terminate as of the expiration date of the Term, without any
extension and without any liability to Landlord. Any attempt to assign or
transfer any right or interest created by this paragraph shall be void from its
inception. Tenant shall have no other right to extend the Term beyond the single
sixty (60) month extension created by this paragraph. Unless agreed to in a
writing signed by Landlord and Tenant, any extension of the Term, whether
created by an amendment to this Lease or by a holdover of the Premises by
Tenant, or otherwise, shall be deemed a part of, and not in addition to, any
duly exercised extension period permitted by this paragraph.
SECTION 3.2. DELAY IN POSSESSION. If Landlord, for any reason whatsoever,
cannot deliver possession of the Premises to Tenant on or before the
Commencement Date, this Lease shall not be void or voidable nor shall Landlord
be liable to Tenant for any resulting loss or damage. However, Tenant shall not
be liable for any rent and the Commencement Date shall not occur until Landlord
delivers possession of the Premises and the Premises are in fact available for
Tenant's occupancy with any Tenant Improvements that have been approved as per
Section 2.2 above, except that if Landlord's failure to so deliver possession on
the Commencement Date is attributable to any action or inaction by Tenant, then
the Commencement Date shall not be advanced to the date on which possession of
the Premises is tendered to Tenant, and Landlord shall be entitled to full
performance by Tenant (including the payment of rent) from the date Landlord
would have been able to deliver the Premises to Tenant but for Tenant's
delay(s). In the event of any such delay in possession, if requested by Tenant,
Landlord shall make any storage space then available for rent to Tenant at
market rates, for the duration of any such delay in possession. Notwithstanding
anything to the contrary contained in this Section 3.2, however, if for any
reason other than delays due to the action or inaction of Tenant, Landlord
cannot deliver possession of the Premises to Tenant by that date which is one
hundred twenty (120) days after the date set forth in Item 4 of the Basic Lease
Provisions for the Commencement Date, then Tenant may, by written notice to
Landlord given at any time thereafter but prior to the actual tender of
possession to Tenant and the occurrence of the Commencement Date, elect to
terminate this Lease.
ARTICLE IV. RENT AND OPERATING EXPENSES
SECTION 4.1. BASIC RENT. From and after the Commencement Date, Tenant shall
pay to Landlord without deduction or offset, Basic Rent for the Premises in the
total amount shown (including subsequent adjustments, if any) in Item 6 of the
Basic Lease Provisions. Any rental adjustment shown in Item 6 shall be deemed to
occur on the specified monthly anniversary of the Commencement Date, whether or
not that date occurs at the end of a calendar month. The rent shall be due and
payable in advance commencing on the Commencement Date (as prorated for any
partial month) and continuing thereafter on the first day of each successive
calendar month of the Term. No demand, notice or invoice shall be required for
the payment of Basic Rent. An installment of rent in the amount of one (1) full
month's Basic Rent at the initial rate specified in Item 6 of the Basic Lease
Provisions shall be delivered to Landlord concurrently with Tenant's execution
of this Lease and shall be applied against the Basic Rent first due hereunder.
SECTION 4.2. OPERATING EXPENSES.
(a) Tenant shall pay to Landlord, as additional rent, "Building Costs" and
"Property Taxes," as those terms are defined below, incurred by Landlord in the
operation of the Building. For convenience of reference, Property Taxes and
Building Costs shall be referred to collectively as "Operating Expenses".
(b) Commencing prior to the start of the first full "Expense Recovery
Period" (as defined below) of the Lease, and prior to the start of each full or
partial Expense Recovery Period thereafter, Landlord shall give Tenant a written
estimate of the amount of Operating Expenses for the Expense Recovery Period.
Tenant shall pay the estimated amounts of Building Costs to Landlord in equal
monthly installments, in advance, with Basic Rent, and shall pay the estimated
amounts of Property Taxes to Landlord, semi-annually, not more than thirty (30)
days prior to the delinquency date for payment of Property Taxes. If Landlord
has not furnished its written estimate for any Expense Recovery Period by the
time set forth above, Tenant shall continue to pay cost reimbursements at the
rates established for the prior Expense Recovery Period, if any; provided that
when the new estimate is delivered to Tenant, Tenant shall, at the next monthly
payment date, pay any accrued cost reimbursements based upon the new estimate.
For purposes hereof, "Expense Recovery Period" shall mean every twelve month
period during the Term (or portion thereof for the first and last lease years)
commencing July 1 and ending June 30.
(c) Within one hundred twenty (120) days after the end of each Expense
Recovery Period, Landlord shall furnish to Tenant a statement showing in
reasonable detail the actual or prorated Operating Expenses incurred by Landlord
during the period, and the parties shall within thirty (30) days thereafter make
any payment or allowance necessary to adjust Tenant's estimated payments, if
any, to Tenant's actual owed amounts as shown by the annual statement. Any delay
or failure by Landlord in delivering any statement hereunder shall not
constitute a waiver of Landlord's right to require Tenant to pay Operating
Expenses pursuant hereto. Any amount due Tenant shall be credited against
installments next coming due under this Section 4.2, and any deficiency shall be
paid by Tenant together with the next installment. If Tenant has not made
estimated payments during the Expense Recovery Period, any amount owing by
Tenant pursuant to subsection (a) above shall be paid to Landlord in accordance
with Article XVI. Should Tenant fail to object in writing to Landlord's
determination of actual Operating Expenses within sixty (60) days following
delivery of Landlord's expense statement, Landlord's determination of actual
Operating Expenses for the applicable Expense Recovery Period shall be
conclusive and binding on the parties and any future claims to the contrary
shall be barred.
(d) Even though the Lease has terminated and the Tenant has vacated the
Premises, when the final determination is made of Operating Expenses for the
Expense Recovery Period in which the Lease terminates, Tenant shall upon notice
pay the entire increase due over the estimated expenses paid. Conversely, any
overpayment made in the event expenses decrease shall be rebated by Landlord to
Tenant.
(e) If, at any time during any Expense Recovery Period, any one or more of
the Operating Expenses are increased to a rate(s) or amount(s) in excess of the
rate(s) or amount(s) used in calculating the estimated expenses for the year,
then the estimate of Operating Expenses shall be increased for the month in
which such rate(s) or amount(s) becomes effective and for all succeeding months
by an amount equal to the increase. Landlord shall give Tenant written notice of
the amount or estimated amount of the increase, the month in which the increase
will become effective, and the month for which the payments are due. Tenant
shall pay the increase to Landlord as a part of Tenant's monthly payments of
estimated expenses as provided in paragraph (b) above, commencing with the month
in which effective.
(f) The term "Building Costs" shall include all reasonable expenses of
operation and maintenance of the Building and all landscaping, walkways, parking
areas and lighting of the Site to the extent such expenses are not billed to and
paid directly by Tenant, and shall include the following charges by way of
illustration but not limitation: water and sewer charges; insurance premiums or
reasonable premium equivalents should Landlord elect to self-insure any risk
that Landlord is authorized to insure hereunder; license, permit, and inspection
fees; heat; light; power; air conditioning; supplies; materials; equipment;
tools; the cost of any environmental, insurance, tax or other consultant
utilized by Landlord in connection with the Building; costs incurred in
connection with compliance of any laws or changes in laws applicable to the
Building (provided that, if the foregoing costs are incurred for purposes other
than in connection with Tenant's particular use of the Building and are costs of
capital investments as determined by generally accepted accounting principles
consistently applied, then the foregoing costs shall be included as Building
Costs only to the extent of the amortized amount thereof over the useful life of
such capital investment, calculated at a market cost of funds as reasonably
determined by Landlord, for each year of useful life during the Term); the cost
of any capital investments (other than tenant improvements for specific tenants)
to the extent of the amortized amount thereof over the useful life of such
capital investments calculated at a market cost of funds, all as determined by
Landlord, for each such year of useful life during the Term; labor; reasonably
allocated wages and salaries, fringe benefits, and payroll taxes for personnel
directly applicable to the Building, including both Landlord's personnel and
outside personnel; any expense incurred pursuant to Sections 6.1, 6.2, 7.2, and
10.2; and a reasonable (or reasonably allocated) overhead/management fee for the
professional operation of the Building. It is understood that Building Costs may
include reasonable competitive charges for direct services provided by a
subsidiary or division of Landlord, and may include the Building's or the Site's
proportionate share of the cost of maintenance or repair contracts which cover
the Building and/or the Site and other buildings and/or projects in Landlord's
portfolio, as reasonably allocated by Landlord.
(g) The term "Property Taxes" as used herein shall include the following:
(i) all real estate taxes or personal property taxes, as such property taxes may
be reassessed from time to time; and (ii) other taxes, charges and assessments
which are levied with respect to this Lease, to the Building or to the Site, and
any improvements, fixtures and equipment and other property of Landlord located
in the Building or on the Site, except that general net income and franchise
taxes imposed against Landlord shall be excluded; and (iii) all assessments and
fees for public improvements, services, and facilities and impacts thereon,
including without limitation arising out of any Community Facilities Districts,
"Mello Roos" districts, similar assessment districts, and any traffic impact
mitigation assessments or fees; and (iv) any tax, surcharge or assessment which
shall be levied in addition to or in lieu of real estate or personal property
taxes, other than taxes covered by Article VIII; and (v) costs and expenses
incurred in contesting the amount or validity of any Property Tax by appropriate
proceedings.
SECTION 4.3. SECURITY DEPOSIT. Concurrently with Tenant's delivery of this
Lease, Tenant shall deposit with Landlord the sum, if any, stated in Item 9 of
the Basic Lease Provisions, to be held by Landlord as security for the full and
faithful performance of Tenant's obligations under this Lease (the "Security
Deposit"). Subject to the last sentence of this Section, the Security Deposit
shall be understood and agreed to be the property of Landlord upon Landlord's
receipt thereof, and may be utilized by Landlord in its discretion towards the
payment of all prepaid expenses by Landlord for which Tenant would be required
to reimburse Landlord under this Lease, including without limitation brokerage
commissions and Tenant Improvement costs. Upon any default by Tenant, including
specifically Tenant's failure to pay rent or to abide by its obligations under
Sections 7.1 and 15.3 below, whether or not Landlord is informed of or has
knowledge of the default, the Security Deposit shall be deemed to be
automatically and immediately applied, without waiver of any rights Landlord may
have under this Lease or at law or in equity as a result of the default, as a
setoff for full or partial compensation for that default. If any portion of the
Security Deposit is applied after a default by Tenant, Tenant shall within five
(5) days after written demand by Landlord deposit cash with Landlord in an
amount sufficient to restore the Security Deposit to its original amount.
Landlord shall not be required to keep this Security Deposit separate from its
general funds, and Tenant shall not be entitled to interest on the Security
Deposit. If Tenant fully performs its obligations under this Lease, the Security
Deposit or any balance thereof shall be returned to Tenant (or, at Landlord's
option, to the last assignee of Tenant's interest in this Lease) after the
expiration of the Term, provided that Landlord may retain the Security Deposit
to the extent and until such time as all amounts due from Tenant in accordance
with this Lease have been determined and paid in full.
SECTION 4.4. ADDITIONAL SECURITY DEPOSIT. In addition to the foregoing and
as additional security hereunder, Tenant shall deliver to Landlord, concurrently
with its execution and delivery of this Lease, either a letter of credit in the
amount of One Hundred Eighty-Five Thousand Five Hundred Seventy-Two Dollars
($185,572.00), or the irrevocable pledge of a certificate of deposit in said
amount. Said pledge or letter of credit shall be in form and substance
acceptable to Landlord and issued by a financial institution with a branch in
Orange County, California. The letter of credit or pledge shall provide for
automatic yearly renewal throughout the Term of this Lease. Should Tenant commit
a default under the Lease or should Tenant fail to cause the letter of credit or
pledge to be continuously renewed as required above, then Landlord shall be
entitled to draw upon said letter of credit or negotiate said certificate of
deposit. Landlord shall, upon the written request of Tenant (given at any time
after one (1) year following the Commencement Date), authorize the full
exoneration and release of the letter of credit or pledge of certificate of
deposit on the following conditions: (i) Tenant is not then and has not been in
default under the Lease, and (ii) Tenant provides with such request its most
recently filed financial statement which is reasonably acceptable to Landlord.
ARTICLE V. USES
SECTION 5.1. USE. Tenant shall use the Premises only for the purposes
stated in Item 3 of the Basic Lease Provisions, all in accordance with
applicable laws and restrictions and pursuant to approvals to be obtained by
Tenant from all relevant and required governmental agencies and authorities. The
parties agree that any contrary use shall be deemed to cause material and
irreparable harm to Landlord and shall entitle Landlord to injunctive relief in
addition to any other available remedy. Tenant, at its expense, shall procure,
maintain and make available for Landlord's inspection throughout the Term, all
governmental approvals, licenses and permits required for the proper and lawful
conduct of Tenant's permitted use of the Premises. Tenant shall not use or allow
the Premises to be used for any unlawful purpose, nor shall Tenant permit any
nuisance or commit any waste in the Premises. Tenant shall not do or permit to
be done anything which will invalidate or increase the cost of any insurance
policy(ies) covering the Building or its contents, and shall comply with all
applicable insurance underwriters rules and the requirements of the Pacific Fire
Rating Bureau or any other organization performing a similar function. Tenant
shall comply at its expense with all present and future laws, ordinances,
restrictions, regulations, orders, rules and requirements of all governmental
authorities that pertain to Tenant or its use of the Premises, including without
limitation all federal and state occupational health and safety requirements,
whether or not Tenant's compliance will necessitate expenditures or interfere
with its use and enjoyment of the Premises, provided that, if the foregoing
compliance costs are incurred for purposes other than in connection with
Tenant's particular use of the Building and are costs of a capital nature (as
determined by generally accepted accounting principles consistently applied),
then Tenant shall only be responsible for such costs to the extent of the
amortized amount thereof over the useful life of such capital investment,
calculated at a market cost of funds, all as reasonably determined by Landlord,
for each year of useful life during the Term. Tenant shall comply at its expense
with all present and future covenants, conditions, easements or restrictions now
or hereafter affecting or encumbering the Building, and any amendments or
modifications thereto, including without limitation the payment by Tenant of any
periodic or special dues or assessments charged against the Premises or Tenant
which may be allocated to the Premises or Tenant in accordance with the
provisions thereof. Tenant shall promptly upon demand reimburse Landlord for any
additional insurance premium charged by reason of Tenant's failure to comply
with the provisions of this Section, and shall indemnify Landlord from any
liability and/or expense resulting from Tenant's noncompliance.
SECTION 5.2 SIGNS. Tenant shall have the right to install signage on the
exterior of the Building (the "Exterior Signage").The Exterior Signage shall
consist only of the name "Alyn Corporation" and such other names of Tenant's
assignees or sublessees as Landlord shall approve in writing (provided that
Landlord's approval may be withheld if Landlord determines, in its sole and
absolute discretion, that any such other names shall materially impair the value
of the Building and/or Landlord's industrial building portfolio). The number of
signs, size, design, graphics, material, style, color and other physical aspects
of the Exterior Signage shall comply with any covenants, conditions or
restrictions encumbering the Premises, Landlord's signage program for the
Building, as in effect from time to time and approved by the City of Irvine
("Signage Criteria"), and any applicable municipal or other governmental permits
and approvals. Landlord shall review and approve that any Exterior Signage is so
in compliance prior to installation. Tenant acknowledges having received and
reviewed a copy of the current Signage Criteria for the Building. Tenant shall
be solely responsible for the cost of the Exterior Signage, including the
fabrication, installation, insurance, and maintenance thereof. If Tenant fails
to maintain its Exterior Signage, Landlord may do so at Tenant's expense. In the
event Tenant, exclusive of any subtenant(s), fails to occupy the entire
Premises, then Tenant shall, within thirty (30) days following notice from
Landlord, remove the Exterior Signage at Tenant's expense. Tenant shall also
remove the Exterior Signage promptly following the expiration or earlier
termination of this Lease. Any such removal shall be at Tenant's sole expense,
and Tenant shall bear the cost of any resulting repairs to the Building that are
reasonably necessary due to the removal. Except for the foregoing, Tenant shall
have no right to maintain identification signs in any location in, on or about
the Premises or the Building and shall not place or erect any signs, displays or
other advertising materials that are visible from the exterior of the Building
without the prior written approval of Landlord.
SECTION 5.3 HAZARDOUS MATERIALS.
(a) For purposes of this Lease, the term "Hazardous Materials"
includes (i) any "hazardous materials" as defined in Section 25501(n) of the
California Health and Safety Code, (ii) any other substance or matter which
results in liability to any person or entity from exposure to such substance or
matter under any statutory or common law theory, and (iii) any substance or
matter which is in excess of permitted levels set forth in any federal,
California or local law or regulation pertaining to any hazardous or toxic
substance, material or waste.
(b) Tenant shall not cause or permit any Hazardous Materials to be
brought upon, stored, used, generated, released or disposed of on, under, from
or about the Premises or the Site (including without limitation the soil and
groundwater thereunder) without the prior written consent of Landlord.
Notwithstanding the foregoing, Tenant shall have the right, without obtaining
prior written consent of Landlord, to utilize within the Premises standard
office products that may contain Hazardous Materials (such as photocopy toner,
"White Out", and the like), provided however, that (i) Tenant shall maintain
such products in their original retail packaging, shall follow all instructions
on such packaging with respect to the storage, use and disposal of such
products, and shall otherwise comply with all applicable laws with respect to
such products, and (ii) all of the other terms and provisions of this Section
5.3 shall apply with respect to Tenant's storage, use and disposal of all such
products. Landlord may, in its reasonable discretion, place such conditions as
Landlord deems appropriate with respect to any such Hazardous Materials, and may
further require that Tenant demonstrate that any such Hazardous Materials are
necessary or useful to Tenant's business and will be generated, stored, used and
disposed of in a manner that complies with all applicable laws and regulations
pertaining thereto and with good business practices. Tenant understands that
Landlord may utilize an environmental consultant to assist in determining
conditions of approval in connection with the storage, generation, release,
disposal or use of Hazardous Materials by Tenant on or about the Premises,
and/or to conduct periodic inspections of the storage, generation, use, release
and/or disposal of such Hazardous Materials by Tenant on and from the Premises,
and Tenant agrees that any costs incurred by Landlord in connection therewith
shall be reimbursed by Tenant to Landlord as additional rent hereunder upon
demand.
(c) Prior to the execution of this Lease, Tenant shall complete,
execute and deliver to Landlord an Environmental Questionnaire and Disclosure
Statement (the "Environmental Questionnaire") in the form of Exhibit B attached
hereto. The completed Environmental Questionnaire shall be deemed incorporated
into this Lease for all purposes, and Landlord shall be entitled to rely fully
on the information contained therein. On each anniversary of the Commencement
Date until the expiration or sooner termination of this Lease, Tenant shall
disclose to Landlord in writing the names and amounts of all Hazardous Materials
which were stored, generated, used, released and/or disposed of on, under or
about the Premises for the twelve-month period prior thereto, and which Tenant
desires to store, generate, use, release and/or dispose of on, under or about
the Premises for the succeeding twelve-month period. In addition, to the extent
Tenant is permitted to utilize Hazardous Materials upon the Premises, Tenant
shall promptly provide Landlord with complete and legible copies of all the
following environmental documents relating thereto: reports filed pursuant to
any self-reporting requirements; permit applications, permits, monitoring
reports, workplace exposure and community exposure warnings or notices and all
other reports, disclosures, plans or documents (even those which may be
characterized as confidential) relating to water discharges, air pollution,
waste generation or disposal, and underground storage tanks for Hazardous
Materials; orders, reports, notices, listings and correspondence (even those
which may be considered confidential) of or concerning the release,
investigation of, compliance, cleanup, remedial and corrective actions, and
abatement of Hazardous Materials; and all complaints, pleadings and other legal
documents filed by or against Tenant related to Tenant's use, handling, storage,
release and/or disposal of Hazardous Materials.
(d) Landlord and its agents shall have the right (which shall be
exercised in Landlord's reasonable discretion), but not the obligation, to
inspect, sample and/or monitor the Premises, the Site and/or the soil or
groundwater thereunder at any time to determine whether Tenant is complying with
the terms of this Section 5.3, and in connection therewith Tenant shall provide
Landlord with full access to all relevant facilities, records and personnel
(subject to Tenant's reasonable confidentiality and security requirements). If
Tenant is not in compliance with any of the provisions of this Section 5.3, or
in the event of a release of any Hazardous Material on, under or about the
Premises and/or the Site caused or permitted by Tenant, its agents, employees,
contractors, licensees or invitees, Landlord and its agents shall have the
right, but not the obligation, without limitation upon any of Landlord's other
rights and remedies under this Lease, to immediately enter upon the Premises
and/or the Site (with reasonable notice to Tenant except in cases of emergency
where no notice shall be required), and to discharge Tenant's obligations under
this Section 5.3 at Tenant's expense, including without limitation the taking of
emergency or long-term remedial action. Landlord and its agents shall endeavor
to minimize interference with Tenant's business in connection therewith, but
shall not be liable for any such interference. In addition, Landlord, at
Tenant's expense, shall have the right, but not the obligation, to join and
participate in any legal proceedings or actions initiated in connection with any
claims arising out of the storage, generation, use, release and/or disposal by
Tenant or its agents, employees, contractors, licensees or invitees of Hazardous
Materials on, under, from or about the Premises and/or the Site.
(e) If the presence of any Hazardous Materials on, under, from or
about the Premises and/or the Site caused or permitted by Tenant or its agents,
employees, contractors, licensees or invitees results in (i) injury to any
person, (ii) injury to or any contamination of the Premises and/or the Site, or
(iii) injury to or contamination of any real or personal property wherever
situated, Tenant, at its expense, shall promptly take all actions necessary to
return the Premises, the Site and any other affected real or personal property
owned by Landlord to the condition existing prior to the introduction of such
Hazardous Materials and to remedy or repair any such injury or contamination,
including without limitation, any cleanup, remediation, removal, disposal,
neutralization or other treatment of any such Hazardous Materials.
Notwithstanding the foregoing, Tenant shall not, without Landlord's prior
written consent, take any remedial action in response to the presence of any
Hazardous Materials on, under or about the Premises, the Site or any other
affected real or personal property owned by Landlord or enter into any similar
agreement, consent, decree or other compromise with any governmental agency with
respect to any Hazardous Materials claims; provided however, Landlord's prior
written consent shall not be necessary in the event that the presence of
Hazardous Materials on, under or about the Premises, the Site or any other
affected real or personal property owned by Landlord (i) imposes an immediate
threat to the health, safety or welfare of any individual or (ii) is of such a
nature that an immediate remedial response is necessary and it is not possible
to obtain Landlord's consent before taking such action. To the fullest extent
permitted by law, Tenant shall indemnify, hold harmless, protect and defend
(with attorneys acceptable to Landlord) Landlord and any successors to all or
any portion of Landlord's interest in the Premises, the Site and any other real
or personal property owned by Landlord from and against any and all liabilities,
losses, damages, diminution in value, judgments, fines, demands, claims,
recoveries, deficiencies, costs and expenses (including without limitation
attorneys' fees, court costs and other professional expenses), whether
foreseeable or unforeseeable, arising directly or indirectly out of the use,
generation, storage, treatment, release, on- or off-site disposal or
transportation of Hazardous Materials on, into, from, under or about the
Premises, the Site and any other real or personal property owned by Landlord
caused or permitted by Tenant, its agents, employees, contractors, licensees or
invitees, specifically including without limitation the cost of any required or
necessary repair, restoration, cleanup or detoxification of the Premises, the
Site and any other real or personal property owned by Landlord, and the
preparation of any closure or other required plans, whether or not such action
is required or necessary during the Term or after the expiration of this Lease.
If Landlord at any time discovers that Tenant or its agents, employees,
contractors, licensees or invitees may have caused or permitted the release of a
Hazardous Material on, under, from or about the Premises, the Site or any other
real or personal property owned by Landlord, Tenant shall, at Landlord's
request, immediately prepare and submit to Landlord a comprehensive plan,
subject to Landlord's approval, specifying the actions to be taken by Tenant to
return the Premises, the Site or any other real or personal property owned by
Landlord to the condition existing prior to the introduction of such Hazardous
Materials. Upon Landlord's approval of such cleanup plan, Tenant shall, at its
expense, and without limitation of any rights and remedies of Landlord under
this Lease or at law or in equity, immediately implement such plan and proceed
to cleanup such Hazardous Materials in accordance with all applicable laws and
as required by such plan and this Lease. The provisions of this subsection (e)
shall expressly survive the expiration or sooner termination of this Lease.
(f) Landlord hereby discloses to Tenant, and Tenant hereby
acknowledges, certain facts relating to Hazardous Materials at the Premises
and/or the Site known by Landlord to exist as of the date of this Lease, as more
particularly described in Exhibit C attached hereto. Tenant shall have no
liability or responsibility with respect to the Hazardous Materials facts
described in Exhibit C, nor with respect to any Hazardous Materials which Tenant
proves were not caused or permitted by Tenant, its agents, employees,
contractors, licensees or invitees. Further, the requirement in this Section 5.3
that Tenant not "permit" any Hazardous Materials (or indemnify or be responsible
to the extent Tenant "permits" any Hazardous Materials) to be brought upon,
stored, used, generated, released or disposed of on, under, from or about the
Premises, shall not include or apply to Hazardous Materials whose existence
predated the Commencement Date of this Lease, nor to Hazardous Materials
migrating on, under or about the Premises prior to or after the Commencement
Date which are not caused by Tenant, its agents, employees, contractors,
licensees or invitees. Notwithstanding the preceding three sentences, Tenant
agrees to notify its agents, employees, contractors, licensees, and invitees of
any exposure or potential exposure to Hazardous Materials at the Premises and/or
the Site that Landlord brings to Tenant's attention.
ARTICLE VI. SERVICES
SECTION 6.1. UTILITIES AND SERVICES. Tenant shall be responsible for and
shall pay promptly, directly to the appropriate supplier, all charges for water,
gas, electricity, sewer, heat, light, power, telephone, refuse pickup,
janitorial service, interior landscape maintenance and all other utilities,
materials and services furnished directly to Tenant or the Premises or used by
Tenant in, on or about the Premises during the Term, together with any taxes
thereon. Landlord shall not be liable for damages or otherwise for any failure
or interruption of any utility or other service furnished to the Premises, and
no such failure or interruption shall be deemed an eviction or entitle Tenant to
terminate this Lease or withhold or abate any rent due hereunder. Landlord shall
at all reasonable times have free access to all electrical and mechanical
installations of Landlord, subject to reasonable notice and Tenant's reasonable
security and confidentiality requirements.
SECTION 6.2. PARKING. Tenant shall not permit or allow any vehicles that
belong to or are controlled by Tenant or Tenant's employees, suppliers,
shippers, customers or invitees to be loaded, unloaded or parked in areas other
than those designated by Landlord for such activities. If Tenant permits or
allows any of the prohibited activities described above, then Landlord shall
have the right, without notice, in addition to such other rights and remedies
that Landlord may have, to remove or tow away the vehicle involved and charge
the costs to Tenant. Parking shall be limited to striped parking stalls, and no
parking shall be permitted in any driveways, access ways or in any similar area.
Nothing contained in this Lease shall be deemed to create liability upon
Landlord for any damage to motor vehicles of visitors or employees, for any loss
of property from within those motor vehicles, or for any injury to Tenant, its
visitors or employees, unless ultimately determined to be caused by the sole
active negligence or willful misconduct of Landlord, its agents, servants and
employees. Landlord shall have the right to establish, and from time to time
amend, and to enforce against all users all reasonable rules and regulations
(including the designation of areas for employee parking) that Landlord may deem
necessary and advisable for the proper and efficient operation and maintenance
of parking. Landlord shall have the right to construct, maintain and operate
lighting facilities within the parking areas; to change the area, level,
location and arrangement of the parking areas and improvements therein; and to
do and perform such other acts in and to the parking areas and improvements
therein as, in the use of good business judgment, Landlord shall determine to be
advisable. Parking areas shall be used only for parking vehicles. Except for
Tenant-owned vehicles, the washing, waxing, cleaning or servicing of vehicles,
or the storage of vehicles for 24-hour periods, is prohibited unless otherwise
authorized by Landlord. Tenant shall be liable for any damage to the parking
areas caused by Tenant or Tenant's employees, suppliers, shippers, customers or
invitees, including without limitation damage from excess oil leakage. Tenant
shall have no right to install any fixtures, equipment or personal property in
the parking areas, without first obtaining Landlord's consent.
ARTICLE VII. MAINTAINING THE PREMISES
SECTION 7.1. TENANT'S MAINTENANCE AND REPAIR. Subject to the limitation on
"capital" expenditures contained in Section 4.2(f) and to the provisions for
Landlord's responsibilities contained in Section 2.4 hereof, Tenant at its sole
expense shall make all repairs necessary to keep the Premises in the condition
as existed on the Commencement Date (or on any later date that the improvements
may have been installed), excepting ordinary wear and tear, including without
limitation the electrical and mechanical systems, any air conditioning,
ventilating or heating equipment which serves the Premises, all walls, glass,
windows, doors, door closures, hardware, fixtures, electrical, plumbing, fire
extinguisher equipment and other equipment. Any damage or deterioration of the
Premises shall not be deemed ordinary wear and tear if the same could have been
prevented by good maintenance practices by Tenant. As part of its maintenance
obligations hereunder, Tenant shall, at Landlord's request, provide Landlord
with copies of all maintenance schedules, reports and notices prepared by, for
or on behalf of Tenant. Tenant shall obtain preventive maintenance contracts
from a licensed heating and air conditioning contractor to provide for regular
inspection and maintenance of the heating, ventilating and air conditioning
systems servicing the Premises, all subject to Landlord's approval. All repairs
shall be at least equal in quality to the original work, shall be made only by a
licensed contractor approved in writing in advance by Landlord and shall be made
only at the time or times approved by Landlord. Any contractor utilized by
Tenant shall be subject to Landlord's standard requirements for contractors, as
modified from time to time. Subject to Tenant's reasonable security and
confidentiality requirements, Landlord shall have the right at all times to
inspect Tenant's maintenance of all equipment (including without limitation air
conditioning, ventilating and heating equipment), and may impose reasonable
restrictions and requirements with respect to repairs, as provided in Section
7.3, and the provisions of Section 7.4 shall apply to all repairs.
Alternatively, Landlord may elect to make any repair or maintenance required
hereunder on behalf of Tenant and at Tenant's expense, and Tenant shall,
following reasonable notice, promptly reimburse Landlord for all costs incurred
upon submission of an invoice.
SECTION 7.2. LANDLORD'S MAINTENANCE AND REPAIR. Subject to Section 7.1 and
Article XI, Landlord shall provide service, maintenance and repair with respect
to the roof, foundations, and footings of the Building, all landscaping,
walkways, parking areas, exterior lighting of the Site, and the exterior
surfaces of the exterior walls of the Building, except that Tenant at its
expense shall make all repairs which Landlord deems reasonably necessary as a
result of the act or negligence of Tenant, its agents, employees, invitees,
subtenants or contractors. Landlord shall have the right to employ or designate
any reputable person or firm, including any employee or agent of Landlord or any
of Landlord's affiliates or divisions, to perform any service, repair or
maintenance function. Landlord need not make any other improvements or repairs
except as specifically required under this Lease, and nothing contained in this
Section shall limit Landlord's right to reimbursement from Tenant for
maintenance, repair costs and replacement costs as provided elsewhere in this
Lease. Tenant understands that it shall not make repairs at Landlord's expense
or by rental offset. Tenant further understands that Landlord shall not be
required to make any repairs to the roof, foundations or footings unless and
until Tenant has notified Landlord in writing of the need for such repair and
Landlord shall have a reasonable period of time thereafter to commence and
complete said repair, if warranted. Subject to the liabilities on "capital"
expenditures contained in Section 4.2(f) and to the provisions for Landlord's
responsibilities contained in Section 2.4 hereof, all costs of any maintenance
and repairs on the part of Landlord provided hereunder shall be considered part
of Building Costs.
SECTION 7.3. ALTERATIONS. Tenant shall make no alterations, additions or
improvements to the Premises without the prior written consent of Landlord,
which consent may be given or withheld in Landlord's sole discretion.
Notwithstanding the foregoing, Tenant may make any alterations, additions or
improvements to the Premises which cost less than One Dollar ($1.00) per square
foot of the improved portions of the Premises (excluding warehouse square
footage) so long as such improvements or additions do not (i) affect the
exterior of the Building or outside areas (or be visible from adjoining sites),
or (ii) affect or penetrate any of the structural portions of the Building,
including but not limited to the roof, or (iii) require any change to the basic
floor plan of the Premises, any change to any structural or mechanical systems
of the Premises, or any governmental permit as a prerequisite to the
construction thereof, or (iv) interfere in any manner with the proper
functioning of or Landlord's access to any mechanical, electrical, plumbing or
HVAC systems, facilities or equipment located in or serving the Building, or (v)
diminish the value of the Premises. Landlord may impose, as a condition to its
consent, any requirements that Landlord in its discretion may deem reasonable or
desirable, including but not limited to a requirement that all work be covered
by a lien and completion bond satisfactory to Landlord and requirements as to
the manner, time, and contractor for performance of the work. Tenant shall
obtain all required permits for the work and shall perform the work in
compliance with all applicable laws, regulations and ordinances, all covenants,
conditions and restrictions affecting the Premises, and the Rules and
Regulations (hereafter defined). Tenant understands and agrees that Landlord
shall be entitled to a supervision fee in the amount of five percent (5%) of the
cost of any alterations work which exceeds One Dollar ($1.00) per square foot of
the improved portions of the Premises, provided that such fee shall only be
imposed in the event that the alteration work changes the basic floor plan of
the Premises, and shall not be imposed for the initial improvement work,
approved by Landlord, to be installed by Tenant in the Premises. If any
governmental entity requires, as a condition to any proposed alterations,
additions or improvements to the Premises by Tenant, that improvements be made
to the outside areas, and if Landlord consents to such improvements to the
outside areas, then Tenant shall, at Tenant's sole expense, make such required
improvements to the outside areas in such manner, utilizing such materials, and
with such contractors as Landlord shall reasonably approve. Under no
circumstances shall Tenant make any improvement which incorporates any Hazardous
Materials, including without limitation asbestos-containing construction
materials into the Premises. Any request for Landlord's consent shall be made in
writing and shall contain architectural plans describing the work in detail
reasonably satisfactory to Landlord. Unless Landlord otherwise agrees in
writing, all alterations, additions or improvements affixed to the Premises
(excluding moveable trade fixtures and furniture) shall become the property of
Landlord and shall be surrendered with the Premises at the end of the Term,
except that Landlord may, by notice to Tenant, require Tenant to remove by the
Expiration Date, or sooner termination date of this Lease, all or any
alterations, decorations, fixtures, additions, improvements and the like
installed either by Tenant or by Landlord at Tenant's request and to repair any
damage to the Premises arising from that removal. Except as otherwise provided
in this Lease or in any Exhibit to this Lease, should Landlord make any
alteration or improvement to the Premises for Tenant, Landlord shall be entitled
to prompt reimbursement from Tenant for all costs incurred.
SECTION 7.4. MECHANIC'S LIENS. Tenant shall keep the Premises free from any
liens arising out of any work performed, materials furnished, or obligations
incurred by or for Tenant. Upon request by Landlord, Tenant shall promptly cause
any such lien to be released by posting a bond in accordance with California
Civil Code Section 3143 or any successor statute. In the event that Tenant shall
not, within thirty (30) days following the imposition of any lien, cause the
lien to be released of record by payment or posting of a proper bond, Landlord
shall have, in addition to all other available remedies, the right to cause the
lien to be released by any means it deems proper, including payment of or
defense against the claim giving rise to the lien. All expenses so incurred by
Landlord, including Landlord's attorneys' fees, and any consequential or other
damages incurred by Landlord arising out of such lien, shall be reimbursed by
Tenant promptly following Landlord's demand, together with interest from the
date of payment by Landlord at the maximum rate permitted by law until paid.
Tenant shall give Landlord no less than twenty (20) days' prior notice in
writing before commencing construction of any kind on the Premises so that
Landlord may post and maintain notices of nonresponsibility on the Premises.
SECTION 7.5. ENTRY AND INSPECTION. Subject to Tenant's reasonable security
and confidentiality requirements, Landlord shall at all reasonable times, upon
written or oral notice (except in emergencies, when no notice shall be required)
have the right to enter the Premises to inspect them, to supply services in
accordance with this Lease, to protect the interests of Landlord in the
Premises, and to submit the Premises to prospective or actual purchasers or
encumbrance holders (or, during the last one hundred and eighty (180) days of
the Term or when an uncured Tenant default exists, to prospective tenants), all
without being deemed to have caused an eviction of Tenant and without abatement
of rent except as provided elsewhere in this Lease. Landlord shall have the
right to use any and all means which Landlord may deem proper to open the doors
in an emergency in order to obtain entry to the Premises, and any entry to the
Premises obtained by Landlord shall not under any circumstances be deemed to be
a forcible or unlawful entry into, or a detainer of, the Premises, or any
eviction of Tenant from the Premises.
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay, at least ten (10) days before
delinquency, all taxes and assessments levied against all personal property of
Tenant located in the Premises, and against any alterations, additions or like
improvements made to the Premises by or on behalf of Tenant. When possible
Tenant shall cause its personal property and alterations to be assessed and
billed separately from the real property of which the Premises form a part. If
any taxes on Tenant's personal property and/or alterations are levied against
Landlord or Landlord's property and if Landlord pays the same, or if the
assessed value of Landlord's property is increased by the inclusion of a value
placed upon the personal property and/or alterations of Tenant and if Landlord
pays the taxes based upon the increased assessment, Tenant shall pay to Landlord
the taxes so levied against Landlord or the proportion of the taxes resulting
from the increase in the assessment. In calculating what portion of any tax bill
which is assessed against Landlord separately, or Landlord and Tenant jointly,
is attributable to Tenant's alterations and personal property, Landlord's
reasonable determination shall be conclusive.
ARTICLE IX. ASSIGNMENT AND SUBLETTING
SECTION 9.1. RIGHTS OF PARTIES.
(a) Notwithstanding any provision of this Lease to the contrary,
Tenant will not, either voluntarily or by operation of law, assign, sublet,
encumber, or otherwise transfer all or any part of Tenant's interest in this
lease, or permit the Premises to be occupied by anyone other than Tenant,
without Landlord's prior written consent, which consent shall not unreasonably
be withheld in accordance with the provisions of Section 9.1.(b). No assignment
(whether voluntary, involuntary or by operation of law) and no subletting shall
be valid or effective without Landlord's prior written consent and, at
Landlord's election, any such assignment or subletting or attempted assignment
or subletting shall constitute a material default of this Lease. Landlord shall
not be deemed to have given its consent to any assignment or subletting by any
other course of action, including its acceptance of any name for listing in the
Building directory. To the extent not prohibited by provisions of the Bankruptcy
Code, 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"), including Section
365(f)(1), Tenant on behalf of itself and its creditors, administrators and
assigns waives the applicability of Section 365(e) of the Bankruptcy Code unless
the proposed assignee of the Trustee for the estate of the bankrupt meets
Landlord's standard for consent as set forth in Section 9.1(b) of this Lease. If
this Lease is assigned to any person or entity pursuant to the provisions of the
Bankruptcy Code, any and all monies or other considerations to be delivered in
connection with the assignment shall be delivered to Landlord, shall be and
remain the exclusive property of Landlord and shall not constitute property of
Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any
person or entity to which this Lease is assigned pursuant to the provisions of
the Bankruptcy Code shall be deemed to have assumed all of the obligations
arising under this Lease on and after the date of the assignment, and shall upon
demand execute and deliver to Landlord an instrument confirming that assumption.
(b) If Tenant desires to transfer an interest in this Lease, it
shall first notify Landlord of its desire and shall submit in writing to
Landlord: (i) the name and address of the proposed transferee; (ii) the nature
of any proposed subtenant's or assignee's business to be carried on in the
Premises; (iii) the terms and provisions of any proposed sublease or assignment,
including a copy of the proposed assignment or sublease form; (iv) evidence of
insurance of the proposed assignee or subtenant complying with the requirements
of Exhibit D hereto; (v) a completed Environmental Questionnaire from the
proposed assignee or subtenant; and (vi) any other information requested by
Landlord and reasonably related to the transfer. Except as provided in
Subsection (e) of this Section, Landlord shall not unreasonably withhold its
consent, provided: (1) the use of the Premises will be consistent with the
provisions of this Lease; (2) the proposed assignee or subtenant has not been
required by any prior landlord, lender or governmental authority to take
remedial action in connection with Hazardous Materials contaminating a property
arising out of the proposed assignee's or subtenant's actions or use of the
property in question and is not subject to any enforcement order issued by any
governmental authority in connection with the use, disposal or storage of a
Hazardous Material; (3) at Landlord's election, insurance requirements shall be
brought into conformity with Landlord's then current leasing practice; (4) any
proposed subtenant or assignee demonstrates that it is financially responsible
by submission to Landlord of all reasonable information as Landlord may request
concerning the proposed subtenant or assignee, including, but not limited to, a
balance sheet of the proposed subtenant or assignee as of a date within ninety
(90) days of the request for Landlord's consent and statements of income or
profit and loss of the proposed subtenant or assignee for the two-year period
preceding the request for Landlord's consent, and/or a certification signed by
the proposed subtenant or assignee that it has not been evicted or been in
arrears in rent at any other leased premises for the 3-year period preceding the
request for Landlord's consent; and (5) the proposed transfer will not impose
additional material burdens or adverse tax effects on Landlord.
If Landlord consents to the proposed transfer, Tenant may within ninety
(90) days after the date of the consent effect the transfer upon the terms
described in the information furnished to Landlord; provided that any material
change in the terms shall be subject to Landlord's consent as set forth in this
Section. Landlord shall approve or disapprove any requested transfer within
fifteen (15) business days following receipt of Tenant's written request, the
information set forth above, and the fee set forth below.
(c) Notwithstanding the provisions of Subsection (b) above, in
lieu of consenting to a proposed assignment or a proposed subletting of more
than fifty percent (50%) of the floor area of the Premises, Landlord may elect
to (i) sublease the Premises (or the portion proposed to be subleased), or take
an assignment of Tenant's interest in this Lease, upon the same terms as offered
to the proposed subtenant or assignee (excluding terms relating to the purchase
of personal property, the use of Tenant's name or the continuation of Tenant's
business), or (ii) terminate this Lease in its entirety effective on the date
that the proposed sublease or assignment would have become effective, in which
event Tenant shall be released from further obligation or liability under this
Lease, except to the extent of any indemnity and/or hold harmless obligations on
Tenant's part contained in this Lease accruing prior to the effective date of
such termination. Landlord may thereafter, at its option, assign or re-let any
space so recaptured to any third party, including without limitation the
proposed transferee of Tenant.
(d) Tenant agrees that fifty percent (50%) of any amounts paid by
the assignee or subtenant, however described, in excess of the sum of (i) the
Basic Rent payable by Tenant hereunder, or in the case of a sublease of a
portion of the Premises, in excess of the Basic Rent reasonably allocable to
such portion, plus (ii) Tenant's direct out-of-pocket costs which Tenant
certifies to Landlord have been paid to provide occupancy related services to
such assignee or subtenant of a nature commonly provided by landlords of similar
space, shall be the property of Landlord and such amounts shall be payable
directly to Landlord by the assignee or subtenant or, at Landlord's option, by
Tenant. At Landlord's request, a written agreement shall be entered into by and
among Tenant, Landlord and the proposed assignee or subtenant confirming the
requirements of this subsection.
(e) Tenant shall pay to Landlord a fee of Five Hundred Dollars
($500.00) if and when any transfer hereunder is requested by Tenant, provided
that such fee shall be waived for any sublease of which Tenant shall notify
Landlord prior to the Commencement Date of this Lease. Such fee is hereby
acknowledged as a reasonable amount to reimburse Landlord for its costs of
review and evaluation of a proposed assignee/sublessee, and Landlord shall not
be obligated to commence such review and evaluation unless and until such fee is
paid.
SECTION 9.2. EFFECT OF TRANSFER. No subletting or assignment, even with the
consent of Landlord, shall relieve Tenant of its obligation to pay rent and to
perform all its other obligations under this Lease. Moreover, Tenant shall
indemnify and hold Landlord harmless, as provided in Section 10.3, for any act
or omission by an assignee or subtenant. Each assignee, other than Landlord,
shall be deemed to assume all obligations of Tenant under this Lease and shall
be liable jointly and severally with Tenant for the payment of all rent, and for
the due performance of all of Tenant's obligations, under this Lease. No
transfer shall be binding on Landlord unless any document memorializing the
transfer is delivered to Landlord and both the assignee/subtenant and Tenant
deliver to Landlord an executed consent to transfer instrument prepared by
Landlord and consistent with the requirements of this Article. The acceptance by
Landlord of any payment due under this Lease from any other person shall not be
deemed to be a waiver by Landlord of any provision of this Lease or to be a
consent to any transfer. Consent by Landlord to one or more transfers shall not
operate as a waiver or estoppel to the future enforcement by Landlord of its
rights under this Lease.
SECTION 9.3. SUBLEASE REQUIREMENTS. The following terms and conditions
shall apply to any subletting by Tenant of all or any part of the Premises and
shall be deemed included in each sublease:
(a) Each and every provision contained in this Lease (other than
with respect to the payment of rent hereunder) is incorporated by reference into
and made a part of such sublease, with "Landlord" hereunder meaning the
sublandlord therein and "Tenant" hereunder meaning the subtenant therein.
(b) Tenant hereby irrevocably assigns to Landlord all of Tenant's
interest in all rentals and income arising from any sublease of the Premises,
and Landlord may collect such rent and income and apply same toward Tenant's
obligations under this Lease; provided, however, that until a default occurs in
the performance of Tenant's obligations under this Lease, Tenant shall have the
right to receive and collect the sublease rentals. Landlord shall not, by reason
of this assignment or the collection of sublease rentals, be deemed liable to
the subtenant for the performance of any of Tenant's obligations under the
sublease. Tenant hereby irrevocably authorizes and directs any subtenant, upon
receipt of a written notice from Landlord stating that an uncured default exists
in the performance of Tenant's obligations under this Lease, to pay to Landlord
all sums then and thereafter due under the sublease. Tenant agrees that the
subtenant may rely on that notice without any duty of further inquiry and
notwithstanding any notice or claim by Tenant to the contrary. Tenant shall have
no right or claim against the subtenant or Landlord for any rentals so paid to
Landlord.
(c) In the event of the termination of this Lease, Landlord may,
at its sole option, take over Tenant's entire interest in any sublease and, upon
notice from Landlord, the subtenant shall attorn to Landlord. In no event,
however, shall Landlord be liable for any previous act or omission by Tenant
under the sublease or for the return of any advance rental payments or deposits
under the sublease that have not been actually delivered to Landlord, nor shall
Landlord be bound by any sublease modification executed without Landlord's
consent or for any advance rental payment by the subtenant in excess of one
month's rent. The general provisions of this Lease, including without limitation
those pertaining to insurance and indemnification, shall be deemed incorporated
by reference into the sublease despite the termination of this Lease.
SECTION 9.4. CERTAIN TRANSFERS. The sale of all or substantially all of
Tenant's assets (other than bulk sales in the ordinary course of business) shall
be deemed an assignment within the meaning and provisions of this Article.
Notwithstanding the foregoing, Landlord's consent shall not be required for the
assignment of this Lease to an entity controlling or under common control with
Tenant, or as a result of a merger by Tenant with or into another entity, so
long as (i) the net worth of the successor entity after such assignment or
merger ("Tenant Affiliate" herein) is at least equal to the net worth of Tenant
immediately prior to the date of such assignment or merger, evidence of which,
satisfactory to Landlord, shall be presented to Landlord prior to such
assignment or merger, (ii) Tenant shall provide to Landlord, prior to such
assignment or merger, written notice of such assignment or merger and such
assignment documentation and other information as Landlord may request in
connection therewith, and (iii) all of the other terms and requirements of this
Article shall apply with respect to such assignment.
ARTICLE X. INSURANCE AND INDEMNITY
SECTION 10.1. TENANT'S INSURANCE. Tenant, at its sole cost and expense,
shall provide and maintain in effect the insurance described in Exhibit D.
Evidence of that insurance must be delivered to Landlord prior to the
Commencement Date.
SECTION 10.2. LANDLORD'S INSURANCE. Landlord may, at its election, provide
any or all of the following types of insurance, with or without deductible and
in amounts and coverages as may be determined by Landlord in its discretion:
"all risk" property insurance, subject to standard exclusions, covering the
Building, and such other risks as Landlord or its mortgagees may from time to
time deem appropriate, including leasehold improvements made by Landlord, and
commercial general liability coverage. Landlord shall not be required to carry
insurance of any kind on Tenant's property, including leasehold improvements,
trade fixtures, furnishings, equipment, plate glass, signs and all other items
of personal property, and shall not be obligated to repair or replace that
property should damage occur. All proceeds of insurance maintained by Landlord
upon the Building shall be the property of Landlord, whether or not Landlord is
obligated to or elects to make any repairs. At Landlord's option, Landlord may
self-insure all or any portion of the risks for which Landlord elects to provide
insurance hereunder.
SECTION 10.3. TENANT'S INDEMNITY. To the fullest extent permitted by law,
Tenant shall defend, indemnify, protect, save and hold harmless Landlord, its
agents, and any and all affiliates of Landlord, including, without limitation,
any corporations or other entities controlling, controlled by or under common
control with Landlord, from and against any and all claims, liabilities, costs
or expenses arising either before or after the Commencement Date from Tenant's
use or occupancy of the Premises or the Building, or from the conduct of its
business, or from any activity, work, or thing done, permitted or suffered by
Tenant or its agents, employees, invitees or licensees in or about the Premises
or the Building, or from any default in the performance of any obligation on
Tenant's part to be performed under this Lease, or from any act or negligence of
Tenant or its agents, employees, visitors, patrons, guests, invitees or
licensees. Landlord may, at its option, require Tenant to assume Landlord's
defense in any action covered by this Section through counsel satisfactory to
Landlord. The provisions of this Section shall expressly survive the expiration
or sooner termination of this Lease.
SECTION 10.4. LANDLORD'S NONLIABILITY. Landlord shall not be liable to
Tenant, its employees, agents and invitees, and Tenant hereby waives all claims
against Landlord for loss of or damage to any property, or any injury to any
person, or loss or interruption of business or income, or any other loss, cost,
damage, injury or liability whatsoever (including without limitation any
consequential damages and lost profit or opportunity costs) resulting from, but
not limited to, Acts of God, acts of civil disobedience or insurrection, fire,
explosion, falling plaster, steam, gas, electricity, water or rain which may
leak or flow from or into any part of the Building or from the breakage,
leakage, obstruction or other defects of the pipes, sprinklers, wires,
appliances, plumbing, air conditioning, electrical works or other fixtures in
the Building. It is understood that any such condition may require the temporary
evacuation or closure of all or a portion of the Building. Except as provided in
Sections 11.1 and 12.1 below, there shall be no abatement of rent and no
liability of Landlord by reason of any injury to or interference with Tenant's
business (including without limitation consequential damages and lost profit or
opportunity costs) arising from the making of any repairs, alterations or
improvements to any portion of the Building, including repairs to the Premises,
nor shall any related activity by Landlord constitute an actual or constructive
eviction; provided, however, that in making repairs, alterations or
improvements, Landlord shall interfere as little as reasonably practicable with
the conduct of Tenant's business in the Premises. Neither Landlord nor its
agents shall be liable for interference with light or other similar intangible
interests. Tenant shall immediately notify Landlord in case of fire or accident
in the Premises or the Building and of defects in any improvements or equipment.
SECTION 10.5. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waives
all rights of recovery against the other and the other's agents on account of
loss and damage occasioned to the property of such waiving party to the extent
only that such loss or damage is required to be insured against under any "all
risk" property insurance policies required by this Article X; provided however,
that (i) the foregoing waiver shall not apply to the extent of Tenant's
obligations to pay deductibles under any such policies and this Lease, and (ii)
if any loss is due to the act, omission or negligence or willful misconduct of
Tenant or its agents, employees, contractors, guests or invitees, Tenant's
liability insurance shall be primary and shall cover all losses and damages
prior to any other insurance hereunder. By this waiver it is the intent of the
parties that neither Landlord nor Tenant shall be liable to any insurance
company (by way of subrogation or otherwise) insuring the other party for any
loss or damage insured against under any "all-risk" property insurance policies
required by this Article, even though such loss or damage might be occasioned by
the negligence of such party, its agents, employees, contractors, guests or
invitees. The provisions of this Section shall not limit the indemnification
provisions elsewhere contained in this Lease.
ARTICLE XI. DAMAGE OR DESTRUCTION
SECTION 11.1. RESTORATION.
(a) If the Building is damaged, Landlord shall repair that damage
as soon as reasonably possible, at its expense, unless: (i) Landlord reasonably
determines that the cost of repair is not covered by Landlord's fire and
extended coverage insurance plus such additional amounts Tenant elects, at its
option, to contribute, excluding however the deductible (for which Tenant shall
be responsible for Tenant's proportionate share); (ii) Landlord reasonably
determines that the Premises cannot, with reasonable diligence, be fully
repaired by Landlord (or cannot be safely repaired because of the presence of
hazardous factors, including without limitation Hazardous Materials, earthquake
faults, and other similar dangers) within two hundred seventy (270) days after
the date of the damage; (iii) a material default by Tenant has occurred and is
continuing at the time of such damage; or (iv) the damage occurs during the
final twelve (12) months of the Term. Should Landlord elect not to repair the
damage for one of the preceding reasons, Landlord shall so notify Tenant in
writing within sixty (60) days after the damage occurs and this Lease shall
terminate as of the date of that notice.
(b) Unless Landlord elects to terminate this Lease in accordance
with subsection (a) above, this Lease shall continue in effect for the remainder
of the Term; provided that so long as Tenant is not in default under this Lease,
if the damage is so extensive that Landlord reasonably determines that the
Premises cannot, with reasonable diligence, be repaired by Landlord (or cannot
be safely repaired because of the presence of hazardous factors, earthquake
faults, and other similar dangers) so as to allow Tenant's substantial use and
enjoyment of the Premises within two hundred seventy (270) days after the date
of damage, then Tenant may elect to terminate this Lease by written notice to
Landlord within the sixty (60) day period stated in subsection (a).
(c) Commencing on the date of any damage to the Building, and
ending on the sooner of the date the damage is repaired or the date this Lease
is terminated, the rental to be paid under this Lease shall be abated in the
same proportion that the floor area of the Building that is rendered unusable by
the damage from time to time bears to the total floor area of the Building, but
only to the extent that any business interruption insurance proceeds are
received by Landlord therefor from Tenant's insurance described in Exhibit D.
(d) Notwithstanding the provisions of subsections (a), (b) and (c)
of this Section, and subject to the provisions of Section 10.5 above, the cost
of any repairs shall be borne by Tenant, and Tenant shall not be entitled to
rental abatement or termination rights, if the damage is due to the fault or
neglect of Tenant or its employees, subtenants, invitees or representatives. In
addition, the provisions of this Section shall not affect the provisions for
Landlord's responsibilities pursuant to Section 2.4 of this Lease, nor be deemed
to require Landlord to repair any improvements or fixtures that Tenant is
obligated to repair or insure pursuant to any other provision of this Lease.
(e) Tenant shall fully cooperate with Landlord in removing
Tenant's personal property and any debris from the Premises to facilitate all
inspections of the Premises and the making of any repairs. Notwithstanding
anything to the contrary contained in this Lease, if Landlord in good faith
believes there is a risk of injury to persons or damage to property from entry
into the Building or Premises following any damage or destruction thereto,
Landlord may restrict entry into the Building or the Premises by Tenant, its
employees, agents and contractors in a non-discriminatory manner, without being
deemed to have violated Tenant's rights of quiet enjoyment to, or made an
unlawful detainer of, or evicted Tenant from, the Premises. Upon request,
Landlord shall consult with Tenant to determine if there are safe methods of
entry into the Building or the Premises solely in order to allow Tenant to
retrieve files, data in computers, and necessary inventory, subject however to
all indemnities and waivers of liability from Tenant to Landlord contained in
this Lease and any additional indemnities and waivers of liability which
Landlord may require.
SECTION 11.2. LEASE GOVERNS. Tenant agrees that the provisions of this
Lease, including without limitation Section 11.1, shall govern any damage or
destruction and shall accordingly supersede any contrary statute or rule of law.
ARTICLE XII. EMINENT DOMAIN
SECTION 12.1. TOTAL OR PARTIAL TAKING. If all or a material portion of the
Premises is taken by any lawful authority by exercise of the right of eminent
domain, or sold to prevent a taking, either Tenant or Landlord may terminate
this Lease effective as of the date possession is required to be surrendered to
the authority. In the event title to a portion of the Premises is taken or sold
in lieu of taking, and if Landlord elects to restore the Premises in such a way
as to alter the Premises materially, either party may terminate this Lease, by
written notice to the other party, effective on the date of vesting of title. In
the event neither party has elected to terminate this Lease as provided above,
then Landlord shall promptly, after receipt of a sufficient condemnation award,
proceed to restore the Premises to substantially their condition prior to the
taking, and a proportionate allowance shall be made to Tenant for the rent
corresponding to the time during which, and to the part of the Premises of
which, Tenant is deprived on account of the taking and restoration. In the event
of a taking, Landlord shall be entitled to the entire amount of the condemnation
award without deduction for any estate or interest of Tenant; provided that
nothing in this Section shall be deemed to give Landlord any interest in, or
prevent Tenant from seeking any award against the taking authority for, the
taking of personal property and fixtures belonging to Tenant or for relocation
or business interruption expenses recoverable from the taking authority.
SECTION 12.2. TEMPORARY TAKING. No temporary taking of the Premises shall
terminate this Lease or give Tenant any right to abatement of rent, and any
award specifically attributable to a temporary taking of the Premises shall
belong entirely to Tenant. A temporary taking shall be deemed to be a taking of
the use or occupancy of the Premises for a period of not to exceed one hundred
eighty (180) days.
SECTION 12.3. TAKING OF PARKING AREA. In the event there shall be a taking
of the parking area such that Landlord can no longer provide sufficient parking
to comply with this Lease, Landlord may substitute reasonably equivalent parking
in a location reasonably close to the Building; provided that if Landlord fails
to make that substitution within ninety (90) days following the taking and if
the taking materially impairs Tenant's use and enjoyment of the Premises, Tenant
may, at its option, terminate this Lease by written notice to Landlord. If this
Lease is not so terminated by Tenant, there shall be no abatement of rent and
this Lease shall continue in effect.
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS
SECTION 13.1. SUBORDINATION. At the option of Landlord, this Lease shall be
either superior or subordinate to all ground or underlying leases, mortgages and
deeds of trust, if any, which may hereafter affect the Premises, and to all
renewals, modifications, consolidations, replacements and extensions thereof;
provided, that so long as Tenant is not in default under this Lease, this Lease
shall not be terminated or Tenant's quiet enjoyment of the Premises disturbed in
the event of termination of any such ground or underlying lease, or the
foreclosure of any such mortgage or deed of trust, to which Tenant has
subordinated this Lease pursuant to this Section. In the event of a termination
or foreclosure, Tenant shall become a tenant of and attorn to the
successor-in-interest to Landlord upon the same terms and conditions as are
contained in this Lease, and shall execute any instrument reasonably required by
Landlord's successor for that purpose. Tenant shall also, upon written request
of Landlord, execute and deliver all instruments as may be required from time to
time to subordinate the rights of Tenant under this Lease to any ground or
underlying lease or to the lien of any mortgage or deed of trust (provided that
such instruments include the nondisturbance and attornment provisions set forth
above), or, if requested by Landlord, to subordinate, in whole or in part, any
ground or underlying lease or the lien of any mortgage or deed of trust to this
Lease.
SECTION 13.2. ESTOPPEL CERTIFICATE.
(a) Tenant shall, at any time upon not less than ten (10) days
prior written notice from Landlord, execute, acknowledge and deliver to
Landlord, in any form that Landlord may reasonably require, a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of the modification and certifying
that this Lease, as modified, is in full force and effect) and the dates to
which the rental, additional rent and other charges have been paid in advance,
if any, and (ii) acknowledging that, to Tenant's knowledge, there are no uncured
defaults on the part of Landlord, or specifying each default if any are claimed,
and (iii) setting forth all further information that Landlord may reasonably
require. Tenant's statement may be relied upon by any prospective purchaser or
encumbrancer of the Premises.
(b) Notwithstanding any other rights and remedies of Landlord,
Tenant's failure to deliver any estoppel statement within the provided time
shall be conclusive upon Tenant that (i) this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) there are no
uncured defaults in Landlord's performance, and (iii) not more than one month's
rental has been paid in advance.
SECTION 13.3 FINANCIALS.
(a) Tenant shall deliver to Landlord, prior to the execution of
this Lease and thereafter at any time upon Landlord's request, Tenant's current
tax returns and most recently filed financial statements, certified true,
accurate and complete by the chief financial officer of Tenant, including a
balance sheet and profit and loss statement for the most recent prior year
(collectively, the "Statements"), which Statements shall accurately and
completely reflect the financial condition of Tenant. Landlord agrees that it
will keep the Statements confidential, except that Landlord shall have the right
to deliver the same to any proposed purchaser or encumbrancer of the Premises.
(b) Tenant acknowledges that Landlord is relying on the Statements
in its determination to enter into this Lease, and Tenant represents to
Landlord, which representation shall be deemed made on the date of this Lease
and again on the Commencement Date, that no material change in the financial
condition of Tenant, as reflected in the Statements, has occurred since the date
Tenant delivered the Statements to Landlord. The Statements are represented and
warranted by Tenant to be correct and to accurately and fully reflect Tenant's
true financial condition as of the date of submission by any Statements to
Landlord.
ARTICLE XIV. DEFAULTS AND REMEDIES
SECTION 14.1. TENANT'S DEFAULTS. In addition to any other event of default
set forth in this Lease, the occurrence of any one or more of the following
events shall constitute a default by Tenant:
(a) The failure by Tenant to make any payment of rent or
additional rent required to be made by Tenant, as and when due, where the
failure continues for a period of three (3) days after written notice from
Landlord to Tenant; provided, however, that any such notice shall be in lieu of,
and not in addition to, any notice required under California Code of Civil
Procedure Section 1161 and 1161(a) as amended. For purposes of these default and
remedies provisions, the term "additional rent" shall be deemed to include all
amounts of any type whatsoever other than Basic Rent to be paid by Tenant
pursuant to the terms of this Lease.
(b) Assignment, sublease, encumbrance or other transfer of the
Lease by Tenant, either voluntarily or by operation of law, whether by judgment,
execution, transfer by intestacy or testacy, or other means, without the prior
written consent of Landlord.
(c) The discovery by Landlord that any financial statement
provided by Tenant, or by any affiliate, successor or guarantor of Tenant, was
materially false.
(d) The failure of Tenant to timely and fully provide any
subordination agreement, estoppel certificate or financial statements in
accordance with the requirements of Article XIII.
(e) The failure or inability by Tenant to observe or perform any
of the express or implied covenants or provisions of this Lease to be observed
or performed by Tenant, other than as specified in any other subsection of this
Section, where the failure continues for a period of thirty (30) days after
written notice from Landlord to Tenant or such shorter period as is specified in
any other provision of this Lease; provided, however, that any such notice shall
be in lieu of, and not in addition to, any notice required under California Code
of Civil Procedure Section 1161 and 1161(a) as amended. However, if the nature
of the failure is such that more than thirty (30) days are reasonably required
for its cure, then Tenant shall not be deemed to be in default if Tenant
commences the cure within thirty (30) days, and thereafter diligently pursues
the cure to completion.
(f) (i) The making by Tenant of any general assignment for the
benefit of creditors; (ii) the filing by or against Tenant of a petition to have
Tenant adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts
discharged or a petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition filed against Tenant,
the same is dismissed within thirty (30) days); (iii) the appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, if possession is
not restored to Tenant within thirty (30) days; (iv) the attachment, execution
or other judicial seizure of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease, where the seizure is not
discharged within thirty (30) days; or (v) Tenant's convening of a meeting of
its creditors for the purpose of effecting a moratorium upon or composition of
its debts. Landlord shall not be deemed to have knowledge of any event described
in this subsection unless notification in writing is received by Landlord, nor
shall there be any presumption attributable to Landlord of Tenant's insolvency.
In the event that any provision of this subsection is contrary to applicable
law, the provision shall be of no force or effect.
SECTION 14.2. LANDLORD'S REMEDIES.
(a) In the event of any default by Tenant, or in the event of the
abandonment of the Premises by Tenant, then in addition to any other remedies
available to Landlord, Landlord may exercise the following remedies:
(i) Landlord may terminate Tenant's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Premises to Landlord. Such termination
shall not affect any accrued obligations of Tenant under this Lease. Upon
termination, Landlord shall have the right to reenter the Premises and remove
all persons and property. Landlord shall also be entitled to recover from
Tenant:
(1) The worth at the time of award of the unpaid rent and additional rent
which had been earned at the time of termination;
(2) The worth at the time of award of the amount by which the unpaid rent
and additional rent which would have been earned after termination until the
time of award exceeds the amount of such loss that Tenant proves could have been
reasonably avoided;
(3) The worth at the time of award of the amount by which the unpaid rent
and additional rent for the balance of the Term after the time of award exceeds
the amount of such loss that Tenant proves could be reasonably avoided;
(4) Any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to result from
Tenant's default, including, but not limited to, the cost of recovering
possession of the Premises, refurbishment of the Premises, marketing costs,
commissions and other expenses of reletting, including necessary repair, the
unamortized portion of any tenant improvements and brokerage commissions funded
by Landlord in connection with this Lease, reasonable attorneys' fees, and any
other reasonable costs; and
(5) At Landlord's election, all other amounts in addition to or in lieu of
the foregoing as may be permitted by law. The term "rent" as used in this Lease
shall be deemed to mean the Basic Rent and all other sums required to be paid by
Tenant to Landlord pursuant to the terms of this Lease. Any sum, other than
Basic Rent, shall be computed on the basis of the average monthly amount
accruing during the twenty-four (24) month period immediately prior to default,
except that if it becomes necessary to compute such rental before the
twenty-four (24) month period has occurred, then the computation shall be on the
basis of the average monthly amount during the shorter period. As used in
subparagraphs (1) and (2) above, the "worth at the time of award" shall be
computed by allowing interest at the rate of ten percent (10%) per annum. As
used in subparagraph (3) above, the "worth at the time of award" shall be
computed by discounting the amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%).
(ii) Landlord may elect not to terminate Tenant's right to possession of
the Premises, in which event Landlord may continue to enforce all of its rights
and remedies under this Lease, including the right to collect all rent as it
becomes due. Efforts by the Landlord to maintain, preserve or relet the
Premises, or the appointment of a receiver to protect the Landlord's interests
under this Lease, shall not constitute a termination of the Tenant's right to
possession of the Premises. In the event that Landlord elects to avail itself of
the remedy provided by this subsection (ii), Landlord shall not unreasonably
withhold its consent to an assignment or subletting of the Premises subject to
the reasonable standards for Landlord's consent as are contained in this Lease.
(b) Landlord shall be under no obligation to observe or perform
any covenant of this Lease on its part to be observed or performed which accrues
after the date of any default by Tenant unless and until the default is cured by
Tenant, it being understood and agreed that the performance by Landlord of its
obligations under this Lease are expressly conditioned upon Tenant's full and
timely performance of its obligations under this Lease. The various rights and
remedies reserved to Landlord in this Lease or otherwise shall be cumulative
and, except as otherwise provided by California law, Landlord may pursue any or
all of its rights and remedies at the same time.
(c) No delay or omission of Landlord to exercise any right or
remedy shall be construed as a waiver of the right or remedy or of any default
by Tenant. The acceptance by Landlord of rent shall not be a (i) waiver of any
preceding breach or default by Tenant of any provision of this Lease, other than
the failure of Tenant to pay the particular rent accepted, regardless of
Landlord's knowledge of the preceding breach or default at the time of
acceptance of rent, or (ii) a waiver of Landlord's right to exercise any remedy
available to Landlord by virtue of the breach or default. The acceptance of any
payment from a debtor in possession, a trustee, a receiver or any other person
acting on behalf of Tenant or Tenant's estate shall not waive or cure a default
under Section 14.1. No payment by Tenant or receipt by Landlord of a lesser
amount than the rent required by this Lease shall be deemed to be other than a
partial payment on account of the earliest due stipulated rent, nor shall any
endorsement or statement on any check or letter be deemed an accord and
satisfaction and Landlord shall accept the check or payment without prejudice to
Landlord's right to recover the balance of the rent or pursue any other remedy
available to it. No act or thing done by Landlord or Landlord's agents during
the Term shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accept a surrender shall be valid unless in writing and signed by
Landlord. No employee of Landlord or of Landlord's agents shall have any power
to accept the keys to the Premises prior to the termination of this Lease, and
the delivery of the keys to any employee shall not operate as a termination of
the Lease or a surrender of the Premises.
SECTION 14.3. LATE PAYMENTS.
(a) Any rent due under this Lease that is not received by Landlord
within ten (10) days of the date when due shall bear interest at the maximum
rate permitted by law from the date due until fully paid. The payment of
interest shall not cure any default by Tenant under this Lease. In addition,
Tenant acknowledges that the late payment by Tenant to Landlord of rent will
cause Landlord to incur costs not contemplated by this Lease, the exact amount
of which will be extremely difficult and impracticable to ascertain. Those costs
may include, but are not limited to, administrative, processing and accounting
charges, and late charges which may be imposed on Landlord by the terms of any
ground lease, mortgage or trust deed covering the Premises. Accordingly, if any
rent due from Tenant shall not be received by Landlord or Landlord's designee
within ten (10) days after the date due, then Tenant shall pay to Landlord, in
addition to the interest provided above, a late charge in a sum equal to the
greater of five percent (5%) of the amount overdue or Two Hundred Fifty Dollars
($250.00) for each delinquent payment. Acceptance of a late charge by Landlord
shall not constitute a waiver of Tenant's default with respect to the overdue
amount, nor shall it prevent Landlord from exercising any of its other rights
and remedies.
(b) Following each second consecutive installment of rent that is
not paid within ten (10) days following notice of nonpayment from Landlord,
Landlord shall have the option (i) to require that beginning with the first
payment of rent next due, rent shall no longer be paid in monthly installments
but shall be payable quarterly three (3) months in advance and/or (ii) to
require that Tenant increase the amount, if any, of the Security Deposit by one
hundred percent (100%). Should Tenant deliver to Landlord, at any time during
the Term, two (2) or more insufficient checks, the Landlord may require that all
monies then and thereafter due from Tenant be paid to Landlord by cashier's
check.
SECTION 14.4. RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to
be performed by Tenant under this Lease shall be performed at Tenant's sole cost
and expense and without any abatement of rent or right of set-off. If Tenant
fails to pay any sum of money, other than rent, or fails to perform any other
act on its part to be performed under this Lease, and the failure continues
beyond any applicable grace period set forth in Section 14.1, then in addition
to any other available remedies, Landlord may, at its election make the payment
or perform the other act on Tenant's part. Landlord's election to make the
payment or perform the act on Tenant's part shall not give rise to any
responsibility of Landlord to continue making the same or similar payments or
performing the same or similar acts. Tenant shall, promptly upon demand by
Landlord, reimburse Landlord for all sums paid by Landlord and all necessary
incidental costs, together with interest at the maximum rate permitted by law
from the date of the payment by Landlord. Landlord shall have the same rights
and remedies if Tenant fails to pay those amounts as Landlord would have in the
event of a default by Tenant in the payment of rent.
SECTION 14.5. DEFAULT BY LANDLORD. Landlord shall not be deemed to be in
default in the performance of any obligation under this Lease unless and until
it has failed to perform the obligation within thirty (30) days after written
notice by Tenant to Landlord specifying in reasonable detail the nature and
extent of the failure; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for its
performance, then Landlord shall not be deemed to be in default if it commences
performance within the thirty (30) day period and thereafter diligently pursues
the cure to completion.
SECTION 14.6. EXPENSES AND LEGAL FEES. All sums reasonably incurred by
Landlord in connection with any event of default by Tenant under this Lease or
holding over of possession by Tenant after the expiration or earlier termination
of this Lease, including without limitation all costs, expenses and actual
accountants, appraisers, attorneys and other professional fees, and any
collection agency or other collection charges, shall be due and payable by
Tenant to Landlord on demand, and shall bear interest at the rate of ten percent
(10%) per annum. Should either Landlord or Tenant bring any action in connection
with this Lease, the prevailing party shall be entitled to recover as a part of
the action its reasonable attorneys' fees, and all other costs. The prevailing
party for the purpose of this paragraph shall be determined by the trier of the
facts.
SECTION 14.7. WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH ACKNOWLEDGES
THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT
TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND
KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER
(AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR
AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY
CLAIM OF INJURY OR DAMAGE.
SECTION 14.8. SATISFACTION OF JUDGMENT. The obligations of Landlord do not
constitute the personal obligations of the individual partners, trustees,
directors, officers or shareholders of Landlord or its constituent partners.
Should Tenant recover a money judgment against Landlord, such judgment shall be
satisfied only out of the proceeds of sale received upon execution of such
judgment and levied thereon against the right, title and interest of Landlord in
the Building and out of the rent or other income from such property receivable
by Landlord or out of consideration received by Landlord from the sale or other
disposition of all or any part of Landlord's right, title or interest in the
Building, and no action for any deficiency may be sought or obtained by Tenant.
SECTION 14.9. LIMITATION OF ACTIONS AGAINST LANDLORD. Any claim, demand or
right of any kind by Tenant which is based upon or arises in connection with
this Lease shall be barred unless Tenant commences an action thereon within one
(1) year after the date that the act, omission, event or default upon which the
claim, demand or right arises, has occurred.
ARTICLE XV. END OF TERM
SECTION 15.1. HOLDING OVER. This Lease shall terminate without further
notice upon the expiration of the Term, and any holding over by Tenant after the
expiration shall not constitute a renewal or extension of this Lease, or give
Tenant any rights under this Lease, except when in writing signed by both
parties. If Tenant holds over for any period after the expiration (or earlier
termination) of the Term without the prior written consent of Landlord, such
possession shall constitute a tenancy at sufferance only; such holding over with
the prior written consent of Landlord shall constitute a month-to-month tenancy
commencing on the first (1st) day following the termination of this Lease. In
either of such events, possession shall be subject to all of the terms of this
Lease, except that the monthly Basic Rent shall be one hundred fifty percent
(150%) of the Basic Rent for the month immediately preceding the date of
termination for the initial two (2) months of holdover, and for each month of
holdover thereafter shall be one hundred seventy-five percent (175%) of the
Basic Rent for the month immediately preceding the date of termination. If
Tenant fails to surrender the Premises upon the expiration of this Lease despite
demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless
from all loss or liability, including without limitation, any claims made by any
succeeding tenant relating to such failure to surrender. Acceptance by Landlord
of rent after the termination shall not constitute a consent to a holdover or
result in a renewal of this Lease. The foregoing provisions of this Section are
in addition to and do not affect Landlord's right of re-entry or any other
rights of Landlord under this Lease or at law.
SECTION 15.2. MERGER ON TERMINATION. The voluntary or other surrender of
this Lease by Tenant, or a mutual termination of this Lease, shall terminate any
or all existing subleases unless Landlord, at its option, elects in writing to
treat the surrender or termination as an assignment to it of any or all
subleases affecting the Premises.
SECTION 15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the
Expiration Date or upon any earlier termination of this Lease, Tenant shall quit
and surrender possession of the Premises to Landlord in as good order, condition
and repair as when received or as hereafter may be improved by Landlord or
Tenant, reasonable wear and tear and repairs which are Landlord's obligation
excepted, and shall, without expense to Landlord, remove or cause to be removed
from the Premises all personal property and debris, except for any items that
Landlord may by written authorization allow to remain. Tenant shall repair all
damage to the Premises resulting from the removal, which repair shall include
the patching and filling of holes and repair of structural damage, provided that
Landlord may instead elect to repair any structural damage resulting from such
removal at Tenant's expense. If Tenant shall fail to comply with the provisions
of this Section, Landlord may effect the removal and/or make any repairs, and
the cost to Landlord shall be additional rent payable by Tenant upon demand. If
Tenant fails to remove Tenant's personal property from the Premises upon the
expiration of the Term, Landlord may remove, store, dispose of and/or retain
such personal property, at Landlord's option, in accordance with then applicable
laws, all at the expense of Tenant. If requested by Landlord, Tenant shall
execute, acknowledge and deliver to Landlord an instrument in writing releasing
and quitclaiming to Landlord all right, title and interest of Tenant in the
Premises.
ARTICLE XVI. PAYMENTS AND NOTICES
All sums payable by Tenant to Landlord shall be paid, without deduction or
offset, in lawful money of the United States to Landlord at its address set
forth in Item 12 of the Basic Lease Provisions, or at any other place as
Landlord may designate in writing. Unless this Lease expressly provides
otherwise, as for example in the payment of rent pursuant to Section 4.1, all
payments shall be due and payable within five (5) days after demand. All
payments requiring proration shall be prorated on the basis of a thirty (30) day
month and a three hundred sixty (360) day year. Any notice, election, demand,
consent, approval or other communication to be given or other document to be
delivered by either party to the other may be delivered in person or by courier
or overnight delivery service to the other party, or may be deposited in the
United States mail, duly registered or certified, postage prepaid, return
receipt requested, and addressed to the other party at the address set forth in
Item 12 of the Basic Lease Provisions, or if to Tenant, at that address or, from
and after the Commencement Date, at the Premises (whether or not Tenant has
departed from, abandoned or vacated the Premises), or may be delivered by
telegram, telex or telecopy, provided that receipt thereof is telephonically
confirmed. Either party may, by written notice to the other, served in the
manner provided in this Article, designate a different address. If any notice or
other document is sent by mail, it shall be deemed served or delivered
twenty-four (24) hours after mailing. If more than one person or entity is named
as Tenant under this Lease, service of any notice upon any one of them shall be
deemed as service upon all of them.
ARTICLE XVII. RULES AND REGULATIONS
Tenant agrees to observe faithfully and comply strictly with the Rules and
Regulations, attached as Exhibit E, and any reasonable and nondiscriminatory
amendments, modifications and/or additions as may be adopted and published by
written notice to tenants by Landlord for the safety, care, security, good
order, or cleanliness of the Premises. Landlord shall not be liable to Tenant
for any violation of the Rules and Regulations or the breach of any covenant or
condition in any lease by any other tenant or such tenant's agents, employees,
contractors, quests or invitees. One or more waivers by Landlord of any breach
of the Rules and Regulations by Tenant or by any other tenant(s) shall not be a
waiver of any subsequent breach of that rule or any other. Tenant's failure to
keep and observe the Rules and Regulations shall constitute a default under this
Lease. In the case of any conflict between the Rules and Regulations and this
Lease, this Lease shall be controlling.
ARTICLE XVIII. BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this Lease the
firm(s), if any, whose name(s) is (are) stated in Item 10 of the Basic Lease
Provisions, and agree that Landlord shall be responsible for the payment of
brokerage commissions to those broker(s) unless otherwise provided in this
Lease. Landlord and Tenant warrant that they have had no dealings with any other
real estate broker or agent in connection with the negotiation of this Lease,
and each party agrees to indemnify and hold the other party harmless from any
cost, expense or liability (including reasonable attorneys' fees) for any
compensation, commissions or charges claimed by any other real estate broker or
agent employed or claiming to represent or to have been employed by the
indemnifying party in connection with the negotiation of this Lease. The
foregoing agreement shall survive the termination of this Lease. If Tenant fails
to take possession of the Premises or if this Lease otherwise terminates prior
to the Expiration Date as the result of failure of performance by Tenant,
Landlord shall be entitled to recover from Tenant the unamortized portion of any
brokerage commission funded by Landlord in addition to any other damages to
which Landlord may be entitled.
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer of Landlord's interest in the Premises, the
transferor shall be automatically relieved of all obligations on the part of
Landlord accruing under this Lease from and after the date of the transfer,
provided that any funds held by the transferor in which Tenant has an interest
shall be turned over, subject to that interest, to the transferee and Tenant is
notified of the transfer as required by law. No holder of a mortgage and/or deed
of trust to which this Lease is or may be subordinate, and no landlord under a
so-called sale-leaseback, shall be responsible in connection with the Security
Deposit, unless the mortgagee or holder of the deed of trust or the landlord
actually receives the Security Deposit. It is intended that the covenants and
obligations contained in this Lease on the part of Landlord shall, subject to
the foregoing, be binding on Landlord, its successors and assigns, only during
and in respect to their respective successive periods of ownership.
ARTICLE XX. INTERPRETATION
SECTION 20.1. GENDER AND NUMBER. Whenever the context of this Lease
requires, the words "Landlord" and "Tenant" shall include the plural as well as
the singular, and words used in neuter, masculine or feminine genders shall
include the others.
SECTION 20.2. HEADINGS. The captions and headings of the articles and
sections of this Lease are for convenience only, are not a part of this Lease
and shall have no effect upon its construction or interpretation.
SECTION 20.3. JOINT AND SEVERAL LIABILITY. If more than one person or
entity is named as Tenant, the obligations imposed upon each shall be joint and
several and the act of or notice from, or notice or refund to, or the signature
of, any one or more of them shall be binding on all of them with respect to the
tenancy of this Lease, including, but not limited to, any renewal, extension,
termination or modification of this Lease.
SECTION 20.4. SUCCESSORS. Subject to Articles IX and XIX, all rights and
liabilities given to or imposed upon Landlord and Tenant shall extend to and
bind their respective heirs, executors, administrators, successors and assigns.
Nothing contained in this Section is intended, or shall be construed, to grant
to any person other than Landlord and Tenant and their successors and assigns
any rights or remedies under this Lease.
SECTION 20.5. TIME OF ESSENCE. Time is of the essence with respect to the
performance of every provision of this Lease.
SECTION 20.6. CONTROLLING LAW. This Lease shall be governed by and
interpreted in accordance with the laws of the State of California.
SECTION 20.7. SEVERABILITY. If any term or provision of this Lease, the
deletion of which would not adversely affect the receipt of any material benefit
by either party or the deletion of which is consented to by the party adversely
affected, shall be held invalid or unenforceable to any extent, the remainder of
this Lease shall not be affected and each term and provision of this Lease shall
be valid and enforceable to the fullest extent permitted by law.
SECTION 20.8. WAIVER AND CUMULATIVE REMEDIES. One or more waivers by
Landlord or Tenant of any breach of any term, covenant or condition contained in
this Lease shall not be a waiver of any subsequent breach of the same or any
other term, covenant or condition. Consent to any act by one of the parties
shall not be deemed to render unnecessary the obtaining of that party's consent
to any subsequent act. No breach by Tenant of this Lease shall be deemed to have
been waived by Landlord unless the waiver is in a writing signed by Landlord.
The rights and remedies of Landlord under this Lease shall be cumulative and in
addition to any and all other rights and remedies which Landlord may have.
SECTION 20.9. INABILITY TO PERFORM. In the event that either party shall be
delayed or hindered in or prevented from the performance of any work or in
performing any act required under this Lease by reason of any cause beyond the
reasonable control of that party, then the performance of the work or the doing
of the act shall be excused for the period of the delay and the time for
performance shall be extended for a period equivalent to the period of the
delay. The provisions of this Section shall not operate to excuse Tenant from
the prompt payment of rent or from the timely performance of any other
obligation under this Lease within Tenant's reasonable control.
SECTION 20.10. ENTIRE AGREEMENT. This Lease and its exhibits and other
attachments cover in full each and every agreement of every kind between the
parties concerning the Premises and the Building, and all preliminary
negotiations, oral agreements, understandings and/or practices, except those
contained in this Lease, are superseded and of no further effect. Tenant waives
its rights to rely on any representations or promises made by Landlord or others
which are not contained in this Lease. No verbal agreement or implied covenant
shall be held to modify the provisions of this Lease, any statute, law, or
custom to the contrary notwithstanding.
SECTION 20.11. QUIET ENJOYMENT. Upon the observance and performance of all
the covenants, terms and conditions on Tenant's part to be observed and
performed, and subject to the other provisions of this Lease, Tenant shall
peaceably and quietly hold and enjoy the Premises for the Term without hindrance
or interruption by Landlord or any other person claiming by or through Landlord.
SECTION 20.12. SURVIVAL. All covenants of Landlord or Tenant which
reasonably would be intended to survive the expiration or sooner termination of
this Lease, including without limitation any warranty or indemnity hereunder,
shall so survive and continue to be binding upon and inure to the benefit of the
respective parties and their successors and assigns.
ARTICLE XXI. EXECUTION AND RECORDING
SECTION 21.1. COUNTERPARTS. This Lease may be executed in one or more
counterparts, each of which shall constitute an original and all of which shall
be one and the same agreement.
SECTION 21.2. CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a
corporation or partnership, each individual executing this Lease on behalf of
the corporation or partnership represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of the corporation or
partnership, and that this Lease is binding upon the corporation or partnership
in accordance with its terms. Tenant shall, at Landlord's request, deliver a
certified copy of its board of directors' resolution or partnership agreement or
certificate authorizing or evidencing the execution of this Lease.
SECTION 21.3. EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of
this Lease to Tenant shall be for examination purposes only, and shall not
constitute an offer to or option for Tenant to lease the Premises. Execution of
this Lease by Tenant and its return to Landlord shall not be binding upon
Landlord, notwithstanding any time interval, until Landlord has in fact executed
and delivered this Lease to Tenant, it being intended that this Lease shall only
become effective upon execution by Landlord and delivery of a fully executed
counterpart to Tenant.
SECTION 21.4. RECORDING. Tenant shall not record this Lease without the
prior written consent of Landlord. Tenant, upon the request of Landlord, shall
execute and acknowledge a "short form" memorandum of this Lease for recording
purposes.
SECTION 21.5. AMENDMENTS. No amendment or termination of this Lease shall
be effective unless in writing signed by authorized signatories of Tenant and
Landlord, or by their respective successors in interest. No actions, policies,
oral or informal arrangements, business dealings or other course of conduct by
or between the parties shall be deemed to modify this Lease in any respect.
SECTION 21.6. EXECUTED COPY. Any fully executed photocopy or similar
reproduction of this Lease shall be deemed an original for all purposes.
SECTION 21.7. ATTACHMENTS. All exhibits, amendments, riders and addenda
attached to this Lease are hereby incorporated into and made a part of this
Lease.
ARTICLE XXII. MISCELLANEOUS
SECTION 22.1. NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees
that the terms of this Lease are confidential and constitute proprietary
information of Landlord. Disclosure of the terms could adversely affect the
ability of Landlord to negotiate other leases and impair Landlord's relationship
with other tenants. Accordingly, Tenant agrees that it, and its partners,
officers, directors, employees and attorneys, shall not intentionally and
voluntarily disclose the terms and conditions of this Lease to any other tenant
or apparent prospective tenant of the Landlord, either directly or indirectly,
without the prior written consent of Landlord, provided, however, that Tenant
may disclose the terms to prospective subtenants or assignees under this Lease.
SECTION 22.2. GUARANTY. As a condition to the execution of this Lease by
Landlord, the obligations, covenants and performance of the Tenant as herein
provided shall be guaranteed in writing by the Guarantor(s) listed in Item 7 of
the Basic Lease Provisions, if any, on a form of guaranty provided by Landlord.
SECTION 22.3. CHANGES REQUESTED BY LENDER. If, in connection with obtaining
financing for the Building, the lender shall request reasonable modifications in
this Lease as a condition to the financing, Tenant will not unreasonably
withhold or delay its consent, provided that the modifications do not materially
increase the obligations of Tenant or materially and adversely affect the
leasehold interest created by this Lease.
SECTION 22.4. MORTGAGEE PROTECTION. No act or failure to act on the part of
Landlord which would otherwise entitle Tenant to be relieved of its obligations
hereunder or to terminate this Lease shall result in such a release or
termination unless (a) Tenant has given notice by registered or certified mail
to any beneficiary of a deed of trust or mortgage covering the Premises whose
address has been furnished to Tenant and (b) such beneficiary is afforded a
reasonable opportunity to cure the default by Landlord (which in no event shall
be less than sixty (60) days), including, if necessary to effect the cure, time
to obtain possession of the Premises by power of sale or judicial foreclosure
provided that such foreclosure remedy is diligently pursued. Tenant agrees that
each beneficiary of a deed of trust or mortgage covering the Premises is an
express third party beneficiary hereof, Tenant shall have no right or claim for
the collection of any deposit from such beneficiary or from any purchaser at a
foreclosure sale unless such beneficiary or purchaser shall have actually
received and not refunded the deposit, and Tenant shall comply with any written
directions by any beneficiary to pay rent due hereunder directly to such
beneficiary without determining whether an event of default exists under such
beneficiary's deed of trust.
SECTION 22.5. COVENANTS AND CONDITIONS. All of the provisions of this Lease
shall be construed to be conditions as well as covenants as though the words
specifically expressing or imparting covenants and conditions were used in each
separate provision.
SECTION 22.6. SECURITY MEASURES. Tenant hereby acknowledges that Landlord
shall have no obligation whatsoever to provide guard service or other security
measures for the benefit of the Premises. Tenant assumes all responsibility for
the protection of Tenant, its agents, invitees and property from acts of third
parties. Nothing herein contained shall prevent Landlord, at its sole option,
from providing security protection for the Premises or any part thereof, in
which event the cost thereof shall be included within the definition of Building
Costs.
LANDLORD: TENANT:
THE IRVINE COMPANY, ALYN CORPORATION,
a Michigan corporation a Delaware corporation
By /s/Clarence W. Barker By /s/ Robin A. Carden
--------------------- -------------------
Clarence W. Barker, Robin A. Carden,
President, Irvine Industrial Company, President
a division of The Irvine Company
By /s/ John C. Tsu By /s/ Walter R. Menetrey
--------------------- ----------------------
John C. Tsu, Walter R. Menetrey,
Assistant Secretary Executive Vice President
<PAGE>
INDUSTRIAL LEASE
(Single Tenant; Net; Stand-Alone)
BETWEEN
THE IRVINE COMPANY
AND
ALYN CORPORATION
<PAGE>
EXHIBIT B
IRVINE INDUSTRIAL COMPANY
HAZARDOUS MATERIALS SURVEY FORM
The purpose of this form is to obtain information regarding the use of
hazardous substances on Irvine Industrial Company property. Prospective tenants
and contractors should answer the questions in light of their proposed
operations on the premises. Existing tenants and contractors should answer the
questions as they relate to ongoing operations on the premises and should update
any information previously submitted.
If additional space is needed to answer the questions, you may attach
separate sheets of paper to this form. When completed, the form should be sent
to the following address:
_________________________________________
_________________________________________
_________________________________________
_________________________________________
(insert address of Property
Management Company)
Your cooperation in this matter is appreciated. If you have any questions,
please do not hesitate to call [insert name of Property Manager] at [insert
phone number] for assistance.
1. GENERAL INFORMATION
Name of Responding Company:_______________________________________________
Check all that apply: Tenant ( ) Contractor ( ) Prospective ( )
Existing ( )
Mailing Address:__________________________________________________________
Contact Person & Title:___________________________________________________
Telephone Number: ( ) _____-__________
Address of Leased Premises:_______________________________________________
Length of Lease or Contract Term:_________________________________________
Describe the proposed operations to take place on the property, including
principal products manufactured or services to be conducted. Existing tenants
and contractors should describe any proposed changes to ongoing operations.
2. STORAGE OF HAZARDOUS MATERIALS
2.1 Will any hazardous materials be used or stored on-site?
Wastes Yes ( ) No ( )
Chemical Products Yes ( ) No ( )
Biological Hazards/ Yes ( ) No ( )
Infectious Wastes Yes ( ) No ( )
Radioactive Materials Yes ( ) No ( )
2.2 List any hazardous materials to be used or stored, the quantities
that will be on-site at any given time, and the location and method
of storage (e.g., bottles in storage closet on the premises).
Location and Method
Waste/Products of Storage Quantity
_______________ ____________ _____________
_______________ ____________ _____________
_______________ ____________ _____________
_______________ ____________ _____________
2.3 Is any underground storage of hazardous substances proposed
or currently conducted on the premises? Yes ( ) No ( )
If yes, describe the materials to be stored, and the size and
construction of the tank. Attach copies of any permits obtained for
the underground storage of such substances._________________________
_____________________________________________________________________
3. SPILLS
3.1 During the past year, have any spills occurred on the
premises? Yes ( ) No ( )
If so, please describe the spill and attach the results
of any testing conducted to determine the extent of
such spills.
3.2 Were any agencies notified in connection with such spills?
Yes ( ) No ( )
If so, attach copies of any spill reports or other correspondence with
regulatory agencies.
3.3 Were any clean-up actions undertaken in connection with
the spills? Yes ( ) No ( )
If so, briefly describe the actions taken. Attach copies of any
clearance letters obtained from any regulatory agencies involved
and the results of any final soil or groundwater sampling done
upon completion of the clean-up work.
4. WASTE MANAGEMENT
4.1 List the waste, if any, generated or to be generated at
the premises, whether it is as hazardous waste,
biological or radioactive hazard, its hazard class and
the quantity generated on a monthly basis.
Waste Hazard Quantity/Month
_______________ ____________ _____________
_______________ ____________ _____________
_______________ ____________ _____________
_______________ ____________ _____________
4.2 Describe the method(s) of disposal for each waste. Indicate where and
how often disposal will take place.__________________________________
_____________________________________________________________________
4.3 Is any treatment or processing of hazardous, infectious or radioactive
wastes currently conducted or proposed to be conducted at the
premises? Yes ( ) No ( )
If yes, please describe any existing or proposed treatment methods.__
_____________________________________________________________________
4.4 Attach copies of any hazardous waste permits or licenses issued to
your company with respect to its operations on the premises.
5. WASTEWATER TREATMENT/DISCHARGE
5.1 Do you discharge industrial wastewater to:
___ storm drain? ___ sewer?
___ surface water? ___ no industrial discharge
5.2 Is your industrial wastewater treated before discharge?
Yes ( ) No ( )
If yes, describe the type of treatment conducted.
5.3 Attach copies of any wastewater discharge permits issued to
your company with respect to its operations on the premises.
6. AIR DISCHARGES
6.1 Do you have any air filtration systems or stacks that
discharge into the air? Yes ( ) No ( )
6.2 Do you operate any equipment that require air emissions
permits? Yes ( ) No ( )
6.3 Attach copies of any air discharge permits pertaining to
these operations.
7. HAZARDOUS MATERIALS DISCLOSURES
7.1 Does your company handle an aggregate of at least 500 pounds,
55 gallons or 200 cubic feet of hazardous material at any given
time? If so, state law requires that you prepare a hazardous
materials management plan. Yes ( ) No ( )
7.2 Has your company prepared a hazardous materials management
plan ('business plan') pursuant to state and Orange
County Fire Department requirements? Yes ( ) No ( )
If so, attach a copy of the business plan.
7.3 Are any of the chemicals used in your operations regulated
under Proposition 65? Yes ( ) No ( )
If so, describe the actions taken, or proposed actions to
be taken, to comply with Proposition 65 requirements.
7.4 Is your company subject to OSHA Hazard Communication Standard
Requirements? Yes ( ) No ( )
If so, describe the procedures followed to comply with these
requirements.
8. ENFORCEMENT ACTIONS, COMPLAINTS
8.1 Has your company ever been subject to any agency enforcement
actions, administrative orders, or consent decrees?
Yes ( ) No ( )
If so, describe the actions and any continuing compliance
obligations imposed as a result of these actions.
8.2 Has your company ever received requests for information,
notice or demand letters, or any other inquiries
regarding its operations? Yes ( ) No ( )
8.3 Have there ever been, or are there now pending, any lawsuits
against your company regarding any environmental or
health and safety concerns? Yes ( ) No ( )
8.4 Has an environmental audit ever been conducted at your
company's current facility?
Yes ( ) No ( )
If so, discuss the results of the audit.
8.5 Have there been any problems or complaints from neighbors at
your company's current facility? Yes ( ) No ( )
__________________________________
__________________________________
By:_______________________________
Name:__________________________
Title:_________________________
Date:________________________
<PAGE>
EXHIBIT C
LANDLORD'S DISCLOSURES
SPECTRUM
The capitalized terms used and not otherwise defined in this Exhibit
shall have the same definitions as set forth in the Lease. The provisions of
this Exhibit shall supersede any inconsistent or conflicting provisions of the
Lease.
1. Landlord has been informed that the El Toro Marine Corps Air Station
(MCAS) has been listed as a Federal Superfund site as a result of chemical
releases occurring over many years of occupancy. Various chemicals including jet
fuel, motor oil and solvents have been discharged in several areas throughout
the MCAS site. A regional study conducted by the Orange County Water District
has estimated that groundwaters beneath more than 2,900 acres have been impacted
by Trichloroethlene (TCE), an industrial solvent. There is a potential that this
substance may have migrated into the ground water underlying the Premises. The
U.S. Environmental Protection Agency, the Santa Ana Region Quality Control
Board, and the Orange County Health Care Agency are overseeing the
investigation/cleanup of this contamination. To the Landlord's current actual
knowledge, the ground water in this area is used for irrigation purposes only,
and there is no practical impediment to the use or occupancy of the Premises due
to the El Toro discharges.
<PAGE>
EXHIBIT D
TENANT'S INSURANCE
The following standards for Tenant's insurance shall be in effect at
the Premises. Landlord reserves the right to adopt reasonable nondiscriminatory
modifications and additions to those standards. Tenant agrees to obtain and
present evidence to Landlord that it has fully complied with the insurance
requirements.
1. Tenant shall, at its sole cost and expense, commencing on the date
Tenant is given access to the Premises for any purpose and during the entire
Term, procure, pay for and keep in full force and effect: (i) commercial general
liability insurance with respect to the Premises and the operations of or on
behalf of Tenant in, on or about the Premises, including but not limited to
personal injury, owned and nonowned automobile, blanket contractual, independent
contractors, broad form property damage (with an exception to any pollution
exclusion with respect to damage arising out of heat, smoke or fumes from a
hostile fire), fire and water legal liability, products liability (if a product
is sold from the Premises), liquor law liability (if alcoholic beverages are
sold, served or consumed within the Premises), and severability of interest,
which policy(ies) shall be written on an "occurrence" basis and for not less
than the amount set forth in Item 13 of the Basic Lease Provisions, with a
combined single limit (with a $50,000 minimum limit on fire legal liability) per
occurrence for bodily injury, death, and property damage liability, or the
current limit of liability carried by Tenant, whichever is greater, and subject
to such increases in amounts as Landlord may determine from time to time; (ii)
workers' compensation insurance coverage as required by law, together with
employers' liability insurance; (iii) with respect to improvements, alterations,
and the like required or permitted to be made by Tenant under this Lease,
builder's all-risk insurance, in an amount equal to the replacement cost of the
work; (iv) insurance against fire, vandalism, malicious mischief and such other
additional perils as may be included in a standard "all risk" form in general
use in Orange County, California, insuring Tenant's leasehold improvements,
trade fixtures, furnishings, equipment and items of personal property of Tenant
located in the Premises, in an amount equal to not less than ninety percent
(90%) of their actual replacement cost (with replacement cost endorsement); and
(v) business interruption insurance in amounts satisfactory to cover one (1)
year of loss. In no event shall the limits of any policy be considered as
limiting the liability of Tenant under this Lease.
2. In the event Landlord consents to Tenant's use, generation or
storage of Hazardous Materials on, under or about the Premises pursuant to
Section 5.3 of this Lease, Landlord shall have the continuing right to require
Tenant, at Tenant's sole cost and expense (provided the same is available for
purchase upon commercially reasonable terms), to purchase insurance specified
and approved by Landlord, with coverage not less than Five Million Dollars
($5,000,000.00), insuring (i) any Hazardous Materials shall be removed from the
Premises, (ii) the Premises shall be restored to a clean, healthy, safe and
sanitary condition, and (iii) any liability of Tenant, Landlord and Landlord's
officers, directors, shareholders, agents, employees and representatives,
arising from such Hazardous Materials.
3. All policies of insurance required to be carried by Tenant pursuant
to this Exhibit D containing a deductible exceeding Ten Thousand Dollars
($10,000.00) per occurrence must be approved in writing by Landlord prior to the
issuance of such policy. Tenant shall be solely responsible for the payment of
all deductibles.
4. All policies of insurance required to be carried by Tenant pursuant
to this Exhibit D shall be written by responsible insurance companies authorized
to do business in the State of California and with a Best's rating of not less
than "A" subject to final acceptance and approval by Landlord. Any insurance
required of Tenant may be furnished by Tenant under any blanket policy carried
by it or under a separate policy, so long as (i) the Premises are specifically
covered (by rider, endorsement or otherwise), (ii) the limits of the policy are
applicable on a "per location" basis to the Premises and provide for restoration
of the aggregate limits, and (iii) the policy otherwise complies with the
provisions of this Exhibit D. A true and exact copy of each paid up policy
evidencing the insurance (appropriately authenticated by the insurer) or a
certificate of insurance, certifying that the policy has been issued, provides
the coverage required by this Exhibit D and contains the required provisions,
shall be delivered to Landlord prior to the date Tenant is given the right of
possession of the Premises. Proper evidence of the renewal of any insurance
coverage shall also be delivered to Landlord not less than thirty (30) days
prior to the expiration of the coverage. Landlord may at any time, and from time
to time, inspect and/or copy any and all insurance policies required by this
Lease.
5. Each policy evidencing insurance required to be carried by Tenant
pursuant to this Exhibit D shall contain the following provisions and/or clauses
satisfactory to Landlord: (i) a provision that the policy and the coverage
provided shall be primary and that any coverage carried by Landlord shall be
noncontributory with respect to any policies carried by Tenant except as to
workers' compensation insurance; (ii) a provision including Landlord, the
Additional Insureds identified in Item 11 of the Basic Lease Provisions, and any
other parties in interest designated by Landlord as an additional insured,
except as to workers' compensation insurance; (iii) a waiver by the insurer of
any right to subrogation against Landlord, its agents, employees, contractors
and representatives which arises or might arise by reason of any payment under
the policy or by reason of any act or omission of Landlord, its agents,
employees, contractors or representatives; and (iv) a provision that the insurer
will not cancel or change the coverage provided by the policy without first
giving Landlord thirty (30) days prior written notice.
6. In the event that Tenant fails to procure, maintain and/or pay for,
at the times and for the durations specified in this Exhibit D, any insurance
required by this Exhibit D, or fails to carry insurance required by any
governmental authority, Landlord may at its election procure that insurance and
pay the premiums, in which event Tenant shall repay Landlord all sums paid by
Landlord, together with interest at the maximum rate permitted by law and any
related costs or expenses incurred by Landlord, within ten (10) days following
Landlord's written demand to Tenant.
<PAGE>
EXHIBIT E
RULES AND REGULATIONS
This Exhibit sets forth the rules and regulations governing
Tenant's use of the Premises leased to Tenant pursuant to the terms, covenants
and conditions of the Lease to which this Exhibit is attached and therein made
part thereof. In the event of any conflict or inconsistency between this Exhibit
and the Lease, the Lease shall control.
1. Tenant shall not place anything or allow anything to be
placed near the glass of any window, door, partition or wall which may appear
unsightly from outside the Premises.
2. The walls, walkways, sidewalks, entrance passages, courts
and vestibules shall not be obstructed or used for any purpose other than
ingress and egress of pedestrian travel to and from the Premises, and shall not
be used for loitering or gathering, or to display, store or place any
merchandise, equipment or devices, or for any other purpose. The walkways,
entrance passageways, courts, vestibules and roof are not for the use of the
general public and Landlord shall in all cases retain the right to control and
prevent access thereto by all persons whose presence in the judgment of the
Landlord shall be prejudicial to the safety, character, reputation and interests
of the Building and its tenants, provided that nothing herein contained shall be
construed to prevent such access to persons with whom Tenant normally deals in
the ordinary course of Tenant's business unless such persons are engaged in
illegal activities. No tenant or employee or invitee of any tenant shall be
permitted upon the roof of the Building.
3. No awnings or other projection shall be attached to the
outside walls of the Building. No security bars or gates, curtains, blinds,
shades or screens visible from the exterior of the Premises shall be attached to
or hung in, or used in connection with, any window or door of the Premises,
without the prior written reasonable consent of Landlord. Neither the interior
nor exterior of any windows shall be coated or otherwise sunscreened without the
express written reasonable consent of Landlord.
4. The toilet rooms, urinals, wash bowls and other plumbing
apparatus shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein. The expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose employees or
invitees, caused it.
5. No exterior storage shall be allowed at any time without
the prior written approval of Landlord. The Premises shall not be used for
cooking or washing clothes without the prior written consent of Landlord, or for
lodging or sleeping or for any immoral or illegal purposes.
6. Tenant shall not make, or permit to be made, any noise
constituting a nuisance to the occupants of this or neighboring buildings or
premises or those having business with them, whether by the use of any musical
instrument, radio, phonograph, noise, or otherwise. Tenant shall not use, keep
or permit to be used, or kept, any foul or obnoxious gas or substance in the
Premises or permit or suffer the Premises to be used or occupied in any manner
offensive or objectionable to Landlord or other occupants of this or neighboring
buildings or premises by reason of any odors, fumes or gases.
7. No animals shall be permitted at any time within
the Premises.
8. Tenant shall not use the name of the Building or the
Project in connection with or in promoting or advertising the business of
Tenant, except as Tenant's address, without the written consent of Landlord.
Landlord shall have the right to prohibit any advertising by any Tenant which,
in Landlord's reasonable opinion, tends to impair the reputation of the Project
or its desirability for its intended uses, and upon written notice from Landlord
any Tenant shall refrain from or discontinue such advertising.
9. Canvassing, soliciting, peddling, parading, picketing,
demonstrating or otherwise engaging in any conduct that unreasonably impairs the
value or use of the Premises or the Project are prohibited and each Tenant shall
cooperate to prevent the same.
10. No equipment of any type shall be placed on the Premises
which in Landlord's reasonable opinion exceeds the load limits of the floor or
otherwise threatens the soundness of the structure or improvements of the
Building.
11. No air conditioning unit or other similar apparatus shall
be installed or used by any Tenant without the prior written reasonable consent
of Landlord.
12. No aerial antenna shall be erected on the roof or exterior
walls of the Premises, or on the grounds, without in each instance, the prior
written reasonable consent of Landlord. Any aerial or antenna so installed
without such written consent shall be subject to removal by Landlord at any time
without prior notice at the expense of the Tenant, and Tenant shall upon
Landlord's demand pay a removal fee to Landlord of not less than $200.00.
13. The entire Premises, including vestibules, entrances,
doors, fixtures, windows and plate glass, shall at all times be maintained in a
safe, neat and clean condition by Tenant. All trash, refuse and waste materials
shall be regularly removed from the Premises by Tenant and placed in the
containers at the locations designated by Landlord for refuse collection. All
cardboard boxes must be "broken down" prior to being placed in the trash
container. All styrofoam chips must be bagged or otherwise contained prior to
placement in the trash container, so as not to constitute a nuisance. Pallets
may not be disposed of in the trash container or enclosures. The burning of
trash, refuse or waste materials is prohibited.
14. Tenant shall use at Tenant's cost such pest
extermination contractor as Landlord may direct and at such intervals as
Landlord may reasonably require.
15. No person shall enter or remain within the Project
while intoxicated or under the influence of liquor or drugs.
Landlord reserves the right to amend or supplement
the foregoing Rules and Regulations and to adopt and promulgate additional
reasonable rules and regulations applicable to the Premises. Notice of such
rules and regulations and amendments and supplements thereto, if any, shall be
given to the Tenant.
<PAGE>
EXHIBIT X
WORK LETTER
TENANT IMPROVEMENTS
The tenant improvement work by Landlord shall consist of repainting the
Premises and installing new carpet in the Premises ("Tenant Improvements"). All
materials and finishes utilized in completing the Tenant Improvements shall be
Landlord's building standard, Landlord's total contribution for the Tenant
Improvements, inclusive of Landlord's construction management fee, shall not
exceed Sixty-Five Thousand Dollars ($65,000.00). Any excess cost shall be borne
solely by Tenant and shall be paid to Landlord within ten (10) days following
Landlord's billing for such excess cost.
Landlord shall permit Tenant and its agents to enter the Premises
thirty (30) days prior to the Commencement Date of the Lease in order that
Tenant may perform any work to be performed by Tenant hereunder through its own
contractors, subject to Landlord's reasonable prior written approval, and in a
manner and upon terms and conditions and at times satisfactory to Landlord's
representative. The foregoing license to enter the Premises prior to the
Commencement Date is, however, conditioned upon Tenant's contractors and their
subcontractors and employees working in harmony and not interfering with the
work being performed by Landlord. If at any time that entry shall cause
disharmony or interfere with the work being performed by Landlord, this license
may be withdrawn by Landlord upon twenty-four (24) hours written notice to
Tenant. That license is further conditioned upon the compliance by Tenant's
contractors with all requirements imposed by Landlord on third party
contractors, including without limitation the maintenance by Tenant and its
contractors and subcontractors of workers' compensation and public liability and
property damage insurance in amounts and with companies and on forms
satisfactory to Landlord, with certificates of such insurance being furnished to
Landlord prior to proceeding with any such entry. The entry shall be deemed to
be under all of the provisions of the Lease except as to the covenants to pay
Basic Rent and/or Operating Expenses. Landlord shall not be liable in any way
for any injury, loss or damage which may occur to any such work being performed
by Tenant, the same being solely at Tenant's risk. In no event shall the failure
of Tenant's contractors to complete any work in the Premises extend the
Commencement Date of the Lease.
<PAGE>
FIRST AMENDMENT TO LEASE
I. PARTIES AND DATE.
The First Amendment to Lease (the "First Amendment") dated
_________________, 1997 is by and between THE IRVINE COMPANY
("Landlord"), and ALYN CORPORATION, a Delaware corporation ("Tenant").
II. RECITALS.
On July 1, 1997, Landlord and Tenant entered into a lease
("Lease") for space in a building located at 17021 Von Karman Avenue,
Irvine, California ("Premises").
Landlord and Tenant each desire to modify the Lease to extend
the Lease Term and make such other modifications as are set forth in
"III. MODIFICATIONS" next below.
III. MODIFICATIONS.
Item 5 is hereby deleted in its entirety and the following
shall be substituted in lieu thereof:
"5. Lease Term: The Term of this Lease shall
expire at midnight on January 31, 2008.
Effective as of February 1, 2003, Item 6 shall be deleted in
its entirety and the following shall be substituted in lieu
thereof:
"6. Basic Rent: Forty-Five Thousand Six Hundred Eighty
Dollars ($45,680.00) per month.
Basic Rent is subject to adjustment as follows: The Basic Rent
shall be increased, as of February 1, 2004 and every twelve
(12) months thereafter (the "Rental Adjustment Date(s)"), by
the percentage increase, if any, in the United States
Department of Labor, Bureau of Labor Statistics, Consumer
Price Index for all Urban Consumers, Los
Angeles-Anaheim-Riverside Area Average, all items
(1982-84=100) (the "Index"). The adjustment shall be
calculated by comparing the Index published for the third
month preceding the applicable Rental Adjustment Date with the
Index published for the third month preceding the last prior
Rental Adjustment Date (or December, 2002 in the case of the
first rental adjustment), and the Basic Rent then in effect
shall be increased by the amount of the percentage increase,
if any, between those published Index amounts. In no event
shall the Basic Rent be reduced by reason of such computation.
If at any Rental Adjustment Date the Index shall not exist,
Landlord may substitute another reasonable index published by
any governmental agency. Landlord shall use diligent efforts
to calculate and give Tenant notice of any such increase in
the Basic Rent on or near each Rental Adjustment Date, and
Tenant shall commence to pay the increased Basic Rent
effective on the applicable Rental Adjustment Date. In the
event Landlord is unable to deliver to Tenant the notice of
the increased Basic Rent at least five (5) days prior to any
Rental Adjustment Date, Tenant shall commence to pay the
increased Basic Rent on the first day of the month following
the delivery of such notice (the "Payment Date"), provided
Landlord's notice has been given at least five (5) days in
advance. Tenant shall also pay, together with the first
payment of the increased Basic Rent, an amount determined by
multiplying the amount of the increase in Basic Rent times the
number of months that have elapsed between the Rental
Adjustment Date and the Payment Date.
Notwithstanding the foregoing, the parties agree that as of
any Rental Adjustment Date, the revised Basic Rent due to all
cumulative increases pursuant to this paragraph shall neither
(i) exceed the amount obtained by increasing the initial Basic
Rent from February 1, 2003 to said Rental Adjustment at the
rate of seven percent (7%) per annum, compounded annually, nor
(ii) be less than the amount obtained by increasing the
initial Basic Rent from February 1, 2003 to said Rental
Adjustment Date at the rate of three percent (3%) per annum,
compounded annually.
I. GENERAL.
Effect of Amendments. The Lease shall remain in full force
and effect except to the extent that it is modified by this
Amendment.
Entire Agreement. This Amendment embodies the entire
understanding between Landlord and Tenant with respect to the
modifications set forth in "III. MODIFICATIONS" above and can
be changed only in writing signed by Landlord and Tenant.
Counterparts. If this Amendment is executed in counterparts,
each is hereby declared to be an original; all, however, shall
constitute but one and the same amendment. In any action or
proceeding, any photographic, photostatic, or other copy of
this Amendment may be introduced into evidence without
foundation.
Defined Terms. All words commencing with initial capital
letters in this Amendment and defined in the lease shall have
the same meaning in this Amendment as in the Lease, unless
they are otherwise defined in this Amendment,
Corporate and Partnership Authority. If Tenant is a
corporation or partnership, or is comprised of either or both
of them, each individual executing this Amendment for the
corporation or partnership represents that he or she is duly
authorized to execute and deliver this Amendment on behalf of
the corporation or partnership and this Amendment is binding
upon the corporation or partnership in accordance with its
terms.
Attorneys' Fees. The provisions of the Lease respecting
payment of attorneys' fees shall also apply to this Amendment.
I. EXECUTION.
Landlord and Tenant executed this amendment on the date as set forth in
"I. PARTIES AND DATE." above.
LANDLORD: TENANT:
THE IRVINE COMPANY ALYN CORPORATION
a Delaware corporation
By /s/Clarence W. Barker By /s/ Walter R. Menetrey
------------------ ------------------
Clarence W. Barker, Walter R. Menetrey,
President, Irvine Industrial Company, Executive Vice President
a division of The Irvine Company
By /s/ John C. Tsu By /s/ Richard L. Little
------------------ ----------------------
John C. Tsu, Richard L. Little,
Assistant Secretary Chief Financial Officer
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-8 (No. 333-38821) of
Alyn Corporation of our report dated January 16, 1998 appearing on Page F-2 of
this Form 10-K.
PRICE WATERHOUSE LLP
Costa Mesa, California
March 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(In thousands, except per share data). THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTSOF ALYN
CORPORATION FOR THE TWELVE MONTH PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1998
<CASH> 13,126
<SECURITIES> 0
<RECEIVABLES> 94
<ALLOWANCES> 24
<INVENTORY> 173
<CURRENT-ASSETS> 13,594
<PP&E> 13,302
<DEPRECIATION> 828
<TOTAL-ASSETS> 31,127
<CURRENT-LIABILITIES> 1,876
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 23,750
<TOTAL-LIABILITY-AND-EQUITY> 31,127
<SALES> 305
<TOTAL-REVENUES> 364
<CGS> 323
<TOTAL-COSTS> 323
<OTHER-EXPENSES> 8,163
<LOSS-PROVISION> 95
<INTEREST-EXPENSE> (807)
<INCOME-PRETAX> (7,303)
<INCOME-TAX> 12
<INCOME-CONTINUING> (7,315)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,315)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
